Micro, Small and Medium Enterprises (known as “SMEs”) do experience a greater burden from regulation than larger enterprises. Covid-19 has also added to that burden. In response, to these concerns there is commitment in the Programme for Government to – “Convene a SME and State Bodies Group to be chaired jointly by the Minister for Finance and the Minister for Business to coordinate the Government’s ongoing response to COVID-19 for SMEs”. In addition, Department of Enterprise, Trade and Employment (Dept/ETE) recently published a SME Test to encourage Government Departments and State Offices to reduce the burden of regulation on SMEs to the maximum possible extent. Of course, SMEs will only benefit if Government Departments and State Offices take action to implement the action recommended in the SME Test. The Dept/ETE document is entitled ‘Ireland’s SME Test: The “Think Small First” Principle’
This blog look at both the new SME Test and other procedures such as Regulatory Impact Assessment (RIA) that impact on SMEs.
What are SMEs?
The Central Bank publishes data on SMEs in the context of its survey on the access to finance of enterprises, i.e. the SAFE survey. In that survey, SMEs are defined by their employment size. Three categories of SME are identified:
- Micro firms, with less than 10 employees;
- Small firms with 10 to 49 employees, and
- Medium firms are those with 50 to 249 employees.
All firms with more than 250 employees are considered to be Large enterprises.
Why give SMEs special attention?
The OECD, in a report published on Ireland’s SMEs in 2019, concluded that – “…a favourable regulatory environment is especially important for smaller enterprises, which have less resources at their disposal to deal with administrative burdens, red tape and regulatory complexities”
The European Commission has produced some interesting evidence to show that SMEs do face a bigger burden that larger enterprises. Specifically, it estimated that – “On average, where a big company spends one euro per employee to comply with a regulatory duty a medium-sized enterprise might have to spend around four euros and a small business up to ten euros”
How can the SME Test help?
The SME Test, published by Dept/ETE, now challenges Government Departments and State Offices to take action to help SMEs to reduce their regulatory burden. Specifically, it suggests that Government Departments and State Offices should arrange for –
“…less stringent compliance requirements for smaller companies including simplification of regulatory adherence using templates, reduced thresholds for SMEs and use of plain English in forms, and the use of exemptions where possible”. They should also consider having early consultation with SMEs. This should help to identify within the wide-range of SMEs, the variation of the impact of regulations, depending on the size or the type of business.
A number of areas have already been identified where SMEs can be assisted by Government Departments and State Offices:-
- Exemptions: Direct exemptions where businesses below certain thresholds do not have to comply with certain rules, or indirect exemptions where exemptions depend on criteria strongly correlated with size such as a particular economic sector or legal type of business formation;
- Deadline variation and flexibility: Temporal reductions to assist ease of compliance by SMEs, including longer intervals for certain obligations, a lower frequency for audits and longer transitional periods for new regulations, and
- Simplification: Introduction of simpler formal requirements for SMEs. This can be combined with an information drive to inform SMEs of their obligations. And separately, Local Enterprise Offices can signpost businesses to the relevant information or agency responsible.
What are the SME Test’s Steps?
There are four steps in the SME Test. The steps are summarised in Box A.
Why are Regulatory Impact Assessments highlighted in the SME Test
RIAs are an important tool for identifying where new regulation could have adverse impacts on SMEs and remedying the main problems. The current RIA Regime was introduced by the then Government sixteen years ago, in June 2005. For ease of reference, Box B below summarises the genesis of RIAs in Ireland, as well as the key steps that are required to be undertaken when doing a RIA.
While there has been no change in the guidelines, the SME Test highlights the aspects of the RIA guidelines that particularly affect the position of SMEs. Of course, it is the responsibility of each Government Departments and State Offices to make sure that the circumstances of SMEs are taken into account when RIAs are being carried out.
The RIA Guidelines 2009 contain a number of relevant considerations for SMEs https://www.gov.ie/en/publication/public-spending-code/ , attachment 5. For example, the RIA Guidelines point out that RIAs need to assess the impact of competition, given that regulations can create barriers to entry such as limiting the number of suppliers in a market. Moreover, the RIA Guidelines suggest that the following questions might be addressed by Government Departments and State Offices when dealing with SMEs:
- Is the regulation likely to alter market structure?
- Is the regulation likely to increase some firms’ market power?
- Is the regulation likely to reduce the competitive position of small enterprise relative to large?
- Are some firms affected substantially more than others?
Can the Test help SMEs?
The SME Test does ask the right questions. The main objective is to identify measures that can help to minimise any negative impacts of regulation on smaller businesses. But the real challenge is the extent to which Government Departments and State Offices actually take into account the regulatory needs of SMEs when they are putting forward legislative proposals. Serious analysis and a lot of time needs to be invested in the process to produce practical measures that can meet the needs of today’s SMEs. Examples include designing less stringent compliance requirements for smaller companies; reducing thresholds for SMEs and introducing exemptions where possible. Of course, in the final analysis, the main thrust of the SME Test is not to avoid regulating smaller businesses, but instead, to ensure an ease of use, understanding and application of regulation in the case of SMEs.
Tom and 3 other trainers from Government Departments will be delivering a training session on Regulatory Impact Assessments on the 3rd November 2021. Follow this link for further information.
Tom Ferris is a Consultant Economist specialising in Better Regulation. He lectures on a number of PAI courses and blogs regularly for PAI. He was formerly the Senior Economist at the Department of Transport, Ireland.