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23 March 2004

Death,Tax and Red Tape

By Zaman Toleafoa

Benjamin Franklin clearly hadn’t thought things through when he said, “nothing is certain but death and taxes.” There is a third thing. And it’s a biggie. It’s called red tape – and more and more New Zealand businesses feel that it is stifling their growth.

But what exactly is red tape, otherwise known as compliance regulations, and why does it strike such a chord? Are businesses right to be concerned? And is there anything they can do about it?

A photo of Mr Townend holding a copy of the Compliance and Your Business book

Jeremy Townend, a Bank of New Zealand senior business manager in Wellington, says that compliance regulations can be defined as the rules and regulations imposed by central and local governments on businesses to ensure a safe, equal and transparent business environment.

Mr Townend says compliance can be ‘loosely’ defined into three key categories: tax, employment, and environment.

“Things like health and safety, ACC, corporate governance and the like can all fit into these categories in one way or another. I’m formerly an accountant so I can see where they all fit in the grand scheme of things, but many businesses don’t,” says Mr Townend.

Therein lies part of the problem. Do a search on the Internet and there are countless examples of the impact of compliance regulations on businesses. But, there’s very little on explaining exactly what compliance regulations are.

Help is at hand. A new book on the market, Compliance and Your Business, not only clearly explains what compliance regulations are, it also helps business owners to navigate their way around the litany of laws that structure our business environment.

The book is published by Brookers and was sponsored by Bank of New Zealand and full-service commercial law firm Minter Ellison Rudd Watts.

Jeremy Townend says the book, makes meeting compliance requirements easier.

“It helps identify what businesses’ obligations are under New Zealand law and it makes it easy for them to understand what they need to do to meet them,” says Mr Townend.

But helping business owners identify their compliance requirements doesn’t answer the question as to why we need business compliance laws in the first place.

Which brings us to the New Zealand political system. Simple fact. There are more than 7,000 Acts and regulations in place in New Zealand. And they’re a living beast - introduced, removed, or modified almost on a daily basis. It’s a large part of what we pay our politicians to do.

Why do we need them? (Compliance regulations that is, not politicians.)

“Compliance regulations ensure there is a uniformity of standards,” says Robert Falvey from the Auckland office of Minter Ellison Rudd Watts.

“These standards protect the consumer because they know that the product or service they are purchasing is of a certain quality. These standards protect staff because they ensure that businesses don’t cut costs when it comes to staff safety and welfare.”

Mr Falvey, who specialises in helping businesses meet their compliance requirements, says that compliance obligations also ensure one other important thing: businesses avoid incurring expensive legal advice to help get them out of trouble.

“As the costs of litigation and legal advice can be expensive, the government is using compliance costs to put ‘an ambulance at the top of the cliff’. They’re reducing the chances of people and employees being ripped off or injured by unscrupulous businesses.

“Compliance is minimising the need for the public to hold a business accountable through the courts.”

The ‘Business New Zealand – KPMG Compliance Cost Survey’, a report commissioned by Business New Zealand and KPMG, asked 760 small- to medium-sized business enterprises what their biggest compliance burden was. Perhaps not surprisingly, 35.5 percent of respondents selected tax as their top compliance cost, followed by health and safety (22.8 percent), employment relations (10.5%), and ACC (7.9%).

What makes these figures interesting, according to the report, is that in past surveys businesses have ranked tax as their highest cost by large margins. These figures are now much more even. The authors of the report say the ‘recent changes to employment legislation, particularly health and safety, has had a dramatic impact on reordering the issues of priority.’

In other words, the introduction of further regulations, such as the recent Holidays Act 2003 which comes into force on 1 April 2004, and the Employment Relations Act, means businesses are now spending more time on other compliance regulations other than just tax.

So have compliance regulations and costs been growing in New Zealand? Our business community says “yes”.

Almost all respondents to the ‘Business New Zealand – KPMG Cost Survey’ considered that over the past 12 months compliance costs had either increased or not changed. The area in which respondents perceived the largest increases in compliance costs was workplace health and safety (over 83% of respondents), followed by ACC and employment relations.

Of course, as compliance obligations increase, so does time and money spent on them. The Business New Zealand and KPMG survey states that the average business spends 1,312 hours on compliance per annum. And it’s rising. The average respondent’s annual compliance bill came to $52,724, which includes costs for out-of-house advisers.

Robert Falvey says there’s little doubt compliance costs are increasing.

“We are working in a global marketplace. This means that the standards for doing business around the world are getting better all the time.

“For New Zealand to be able to compete in this global environment, the government needs to set the bar (i.e. compliance regulations) high so that our business practices and standards are on a par with any other trading nations in the world.”

But wait a minute, aren’t compliance regulations just a part of doing business? Should we really be encouraging businesses to roam free in the great tradition of the ‘laissez-faire’ economy?

One medium-sized business owner, who doesn’t want to be identified (and will be called John Doe), says absolutely not.

“Look, I absolutely understand the need to pay compliance costs. My problem is that they have a policy of ‘one size fits all’, when in reality my business has different needs and requirements from other businesses,” says the business owner.

“I’d much prefer for them to look at my business first and then decide what I need to comply with, rather than taking a blanket approach to it.”

Mr Townend, who is Mr Doe’s business manager, elaborates.

“There’s no doubt businesses know that there are compliance costs that they need to meet – that’s part of doing business. What many businesses struggle with is knowing what rules and regulations are applicable to them. In a sense they don’t know what they don’t know.”

Mr Townend says part of the problem is a lack of resources to help businesses understand what regulations they need to meet.

“Many small-to-medium-sized business owners cannot afford to have full-time staff dedicated to meeting compliance obligations. They rely on information provided by outside sources and the problem is that much of that information is incomplete, or simply too difficult to understand.”

It may be of little comfort to business in New Zealand then that a 2001 OECD survey found New Zealand to have the lowest compliance costs of the ten countries it measured. But those findings have been disputed by Business New Zealand, which says most of the countries surveyed were European or Scandinavian. Those countries are regarded as being highly regulated and costly to do business with. Apart from Australia, the survey did not include any of New Zealand’s top ten trading partners.

One thing both Business New Zealand and the OECD survey agree on is that the smaller the enterprise, the higher the relative cost of compliance.

According to the OECD survey, costs for smaller enterprises are around three times higher on a per employee basis than medium-sized enterprises, and five times higher than large enterprises - a point also raised by Business New Zealand in their KPMG survey.

Which brings us back to that book, Compliance and Your Business, which focuses on small- to medium-sized business owners. Mr Townend says people may find it odd that a bank is ‘championing’ the cause for cutting red tape, but he says Bank of New Zealand is serious about making the business environment easier for businesses.

‘We can’t grow our business unless our customers grow their business. It’s proven that red tape can stifle innovation, entrepreneurship and growth, so if we can help to alleviate this, the New Zealand economy wins, small and medium-sized businesses win, and Bank of New Zealand wins.”

Mr Falvey, whose firm, Minter Ellison Rudd Watts, provided expert advice for the book, says there’s nothing else like it on the market.

“The writers have gone to extreme lengths to ensure the language and format of the book is easy to read and makes sense. Believe me, when you’ve got a number of lawyers involved, that’s not always easy to do.”

Bank of New Zealand was principal sponsor of the book Compliance and Your Business. Bank of New Zealand business customers receive 10% off the cost of the book and should contact their business manager for more information. The book is available at all major book stores.

ENDS

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