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Mark LittlewoodMark Littlewood is Director General of the Institute of
Economic Affairs. Follow him on Twitter.

Over the last ten months I’ve been acting as an independent
adviser to the government’s Red Tape Challenge, which seeks to extinguish
unnecessary, burdensome regulations that impede growth.

It’s been a long drawn-out business, but since the reshuffle
the coalition has certainly upped the volume on their professed desire to cut
back on the vast swathes of red tape and regulation stifling businesses and deterring
enterprise.

Today, Michael Fallon, the new Tory minister for Business
and Enterprise, has unveiled government plans to make life easier for so-called
“challenger” businesses.

“Challenger” businesses might sound like something out of a
Star Trek movie. (The government used to refer to them as “disruptive business
models”, perhaps giving the unfortunate impression that such companies were
like an unruly schoolchild causing mayhem for the rest of the class.)

But the sort of businesses Mr Fallon is referring to are
those that emerge – often at great speed out of a clear, blue sky – and pose a
fundamental challenge to the orthodox order.


If you thought online banking was an innovation, you are way
behind the times. Peer-to-peer lending platforms, such as Zopa, effectively cut
out the middle man by directly matching up those who want a return on their
cash (and might otherwise place it in a traditional bank account) with those
who want to borrow. Or if you fancy playing your own real life version of
Dragon’s Den, you can visit the innovative Crowd Cube website, which features a
wide range of business ideas seeking investment in return for equity.

No one can yet be certain if these new, imaginative
approaches will revolutionise the way we handle our personal finances in years
to come. But they might. The problem they face – along with radical new
ventures in other sectors – is considerable confusion over laws and regulations
written for a more, traditional old fashioned way of doing business. For
example, should Zopa, or those lending money through Zopa, be considered
“professional money launderers”. If so, they suddenly become subject to a wide
range of anachronistic obligations drawn up to tackle a totally different
problem – that of highly unscrupulous loan sharks.

Entrepreneurs often dislike regulations which impede the
growth of their businesses. But they possibly dislike a lack of clarity in the
rules even more. So, the government’s pledge to place greater obligations on
the Regulatory Policy Committee to assist innovative challenger businesses in
fighting their way through the regulatory jungle is a step in the right
direction.

An area where I advised the government to go much further
was in employment law liberalisation. Just last week, Vince Cable brought
forward new proposals to try and cut down on the number of employment disputes
which end in full blown tribunals, an expensive and drawn-out way to resolve a
disagreement.

My hope was that the government might go further in this
area and allow new, start-up businesses to take on a certain number of staff
for a limited period of time as self-employed consultants. If you’re trying to
build the next Facebook or Google – or even if your goals are a little more
modest – you will need over your first few years to show considerable
flexibility and imagination in the individuals you employ. Perhaps one part of
your business plan proves wholly unfruitful and those working on it are no
longer needed, whereas another part of the venture meets with considerable
success and needs to rapidly expand with a new mix of skills and experience
amongst the staff.

Making it clear and unambiguous that, say, the first dozen
employees of any new company would be treated as consultants rather than
employees for legal purposes would allow cutting edge entrepreneurs the
flexibility they often need in pursuing high risk, high return business ideas.

The government has not embraced my idea – but has conceded
that it highlights that businesses may not be aware of the range of options
they have when taking on new staff and they promise to address this as part of
the upcoming Employment Law Review. 

Promising bonfires of red tape in opposition is very easy.
In government, ministers often lack the courage or the political will to pursue
the venture with any real vigour.

On the deregulatory agenda, as with many other areas of
coalition policy, the government does seem to be facing down the right road –
but not moving down that road as rapidly as it might.

The Red Tape Challenge
was launched by the Prime Minister in April 2011 and is systematically
examining some 6,500 substantive regulations that the Government inherited with
the aim of scrapping or significantly reducing as many of them as possible. It
gives business and the public the chance to have their say, by theme, on the
regulations that affect their everyday lives. It has also asked the public what
red tape holds back Disruptive Business Models and Civil Society Organisations.
The Government announced on 10 September 2012 that at least 3,000 of the
regulations examined will be scrapped or reduced. More information on the Red
Tape Challenge is at www.redtapechallenge.cabinetoffice.gov.uk.

The results of the
Challenger Businesses theme can be found in
Removing Red Tape for
Challenger Businesses, which can be found
here.

Mark Littlewood’s
independent report can be found here.

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