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Spiralling legal consultants’ fees hit small firms with almost £6bn in annual compliance costs

31 August 2011

Just a month before a raft of legal changes take place, research from the Forum of Private Business (FPB) shows small firms pay almost £6bn per year to outside consultants in exchange for support on complying with regulations – more than a third of their £16.8bn annual red tape bill. With the latest ‘common commencement date’ for new regulations coming on 1 October, more than two thirds of respondents (67%) to the Forum’s latest Referendum survey have seen consultancy costs rise since 2009.

FPB chief executive, Phil Orford
FPB chief executive, Phil Orford

The FPB has found that small firms pay external contractors £5.8bn for regulatory compliance services, while internal time costs total £11bn. On average each firm hands over £4,900 per year to companies offering legal guidance, including advice on employment, health and safety and tax – more than double the £2,100 average annual bill in 2009 when the previous ‘cost of compliance’ research took place.

The Forum’s research shows that the combined amount paid each year by small firms to consultants and accountants for tax advice is in excess of £3.3bn, external health and safety support costs almost £986m per year and employment law consultancy services come to £752m.

“Small businesses face a constant struggle to control costs – particularly in the current economic climate – but are being thwarted by the mounting tide of red tape they have to negotiate every day,” said the Forum’s Chief Executive Phil Orford (pictured).

“With just a month to go before October’s common commencement date there is no hiding from the fact that red tape compliance costs – including steep consultancy fees – are hindering job creation and, by extension, economic growth.

“Unlike large companies, small firms simply do not have internal resources dedicated to complying with regulations, so either the business owner or a key senior manager is forced to devote a large amount of time to this task – an average of almost 40 hours each month – or they have to pay for an outside consultant, which can be extremely expensive.”

Mr Orford added: “Compared to other industries, at present we are seeing a relatively robust services sector, including business services, which suggests that more struggling small firms are seeking out external support. Perhaps some companies providing commercially-driven business services are exploiting this demand by charging high fees. It is always advisable to shop around for a better deal.

“There are also steep legal costs incurred when businesses are charged with breaching regulations. The answer is that prevention is better than cure – it is so important put in place internal processes geared towards complying with the law in the first place.”

There is also evidence that steep employment, health and safety, tax and other consultancy fees are barriers to job creation because they increase as a business grows. In particular, taking on more staff leads to more employment law red tape – and greater compliance costs.

In all, firms with fewer than 10 employees pay an average of £4,346 per year for the services of outside consultants, those with 10-49 staff face average annual bills of £7,277 and firms with over 50 employees pay contractors an average of £10,815 each year.

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