Marcella O'Reilly was angry. The owner of a ladies' clothing shop in Kildare, she opened her rates bill one day in early 2017 to find they had doubled. She sat down and recorded a Facebook video.
“I was just really annoyed. This was coming at the end of the recession and it was just a kick in the teeth,” she says.
Three days later, Marcella had organised a community meeting in Athy attended by about 220 small business owners, all, like her, fuming at the weight of the local authority charges. Her video would attract about 70,000 views. Almost overnight, she had become something of a local protest leader, though she had never intended to do so.
“The thing about insurance is it fluctuates. It can be up and down but, with the rates, that’s your bill and you’re stuck with it for at least eight years. And if it’s doubled, it’s doubled.”
Marcella has since sold her clothing shop, not because of the rates but because of a new business opportunity. But her anger has not dissipated; it is merely circulating among other business owners in Kildare and in towns and cities around Ireland.
Rates, calculated on the basis of property value, are just one of a number of business costs identified as causing considerable hardship by an Oireachtas business committee report published earlier this week.
Tight margins
As Marcella explains, a sudden rise in a bill – the potential outcome of an ongoing national revaluation process – cannot necessarily be absorbed by businesses with tight margins and specific budgets.
Official figures supplied to the committee showed 52 per cent of Kildare rate-payers have benefited from a reduction, compared to 42 per cent who were confronted with increases.
Marcella decided to test the experience in Athy, going door to door to about 200 businesses. Only about seven, she said, had escaped.
“A few of the owners got very, very upset and said that they were going to close,” she remembers.
“It’s a very antiquated system. It’s been around for hundreds of years and it’s about [the idea of] the town centre being the most valuable area. But that’s not the way anymore.”
Between October and last May, the Oireachtas Joint Committee on Business, Enterprise and Innovation, increasingly aware of such concerns, began to trawl through the kind of cost issues many believe are crippling small and medium sized Irish businesses. The need to do something is fuelled by the looming spectre of Brexit and by the capacity for online sales to damage traditional retailers.
As well as commercial rates, the committee found insurance, access to banking services, the cost of credit and labour, crime and skills shortages are all factors undermining this lower, but critically important, tier of the business world.
Because the revaluation of rates does not lead to any reduction in the money ultimately owed to local authorities, the committee report notes, there are inevitably “winners and losers”. If those attending the meeting in an Athy hotel room were all self-identified “losers”, their stories are not uncommon. Ibec, the business lobby, told the committee that its members had seen significant increases – in some cases between 200 and 300 per cent.
“The revaluation process appears to have impacted different sectors to varying degrees,” the report said. While retailers reported very large increases, hotels and guesthouses were seeing reductions of 30 per cent and more. Retail Ireland said it was not a case of “big versus small but rather retail versus non retail”.
The final phase of the ongoing revaluation will not be completed until 2021. At that stage, it will have taken 20 years.
There is also an issue around the non-payment, or non-collection, of rates. In March 2018 a report by the local government auditor found total arrears of €297 million. That compares to overall income, which is put at about €1.5 billion.
Ibec told the committee during its testimony that a rebalancing should take place so that local authority funding was bolstered more by central funding, local property tax and service charges.
Offering incentives
In its recommendations, the committee said a model used by some councils – of offering incentives in order to increase payments – should be more broadly adopted.
A particular bone of contention for SMEs is that while "bricks and mortar" retailers pay rates bills, rival internet companies do not. At the launch of the report on Wednesday, Senator Aidan Davitt said taxing internet sales somehow must play a role in addressing the burden. The current rates model, he said, was "fundamentally broken", noting that about 40 per cent of women's clothing is now sold online. "There is going to have to be a serious shift," he said.
It is a sentiment welcomed by Marcella O’Reilly who, after 18 years in her clothing store, can testify to the web erosion of sales.
“They can have their warehouse in the middle of nowhere and charge you very low rates but they are competing with somebody on the high street who is being crucified,” she says.
The committee does not have the power to bring about change, only to influence it. Its report has 20 recommendations and, at its launch, a handful of members spoke about the need to avoid it being a “dust gathering” document. The focus is very much on modest businesses and there were several calls for the committee to shepherd its findings into policy.
"Small and medium enterprises are the backbone of our economy. That's what's driving employment; that's what's driving growth," said committee chairwoman and Fianna Fáil TD Mary Butler after the report's launch. With a background working in family shops, she could identify with the difficulties reported by businesses coming to committee members from their constituencies as well as during work they did on Brexit two years ago.
“You take a small little shop that might employ three or four people in a small community. We hear about when big companies went broke during the recession, but small and medium enterprises were absolutely on their knees and a lot of them worked through it. They made the cuts, they made the hard choices; staff were put on less hours, profits were down.”
While there may be a perception that all is well, [with] unemployment falling to near “zero” levels, Ms Butler said there are still issues out there.
Chief among them is insurance. At the report's launch, Peter Boland of the Alliance for Insurance Reform (AIR) said many of its members had been refused cover in recent months.
This is a new development, an unwelcome harbinger of what many fear might be coming for small enterprises. More specifically, the problems are getting worse and the solutions no closer.
“I would like to add the word ‘urgency’,” he said in reference to the committee’s approaches to the issue. “We get the sense at times that what’s happening outside this room, outside of the committee, on insurance is working to a five to 10-year timeframe and that is not going to help our members.
“We are starting to get reports of businesses being declined insurance altogether...these will be businesses that will be closing.” Mr Boland said the infamous track-record of motor insurance was now spreading to public liability cover.
The steep upward trajectory in premium pricing is by now a familiar story in Ireland. The committee heard numerous examples of its ill effect. RGDATA, the organisation representing retail grocers, said a “typical” policy had increased from less than €10,000 a few years ago to as much as €100,000 today. The restaurant sector spoke of average “unsustainable” increases of 45 per cent.
AIR, quoting its own survey taken at the beginning of the year, said one-fifth of respondents had experienced premium rises of over 70 per cent and almost half of more than 30 per cent.
“Starkly, 45 per cent of those that responded believe insurance costs are a threat to their organisation,” the committee report noted. AIR believes the matter is a “societal threat”, affecting not just businesses but charities and voluntary organisations. It claims 35,000 members.
The Convenience Store and Newsagents Association and the Restaurant Association of Ireland said their members had begun looking outside Ireland for better prices.
Claims
Kevin Thompson, head of Insurance Ireland, the umbrella organisation for the industry, appeared before the committee on two occasions. He said he was "keenly aware" of the concerns, acknowledging a large rise in premium costs.
However, Mr Thompson said the driving factor for those increases was the cost incurred in paying out claims in Ireland. This is, by now, a well-rehearsed position in the debate on motor cover – with the finger of blame being pointed squarely at the legal system.
The multitude of problems identified in the Irish insurance market is currently under examination by the Cost of Insurance Working Group, run out of the Department of Finance.
According to the business committee’s report, the value of personal injury awards was identified as “a significant issue affecting the cost of insurance”. Quoting Courts Service statistics, it found a 15 per cent increase in the number of personal injury suits filed in 2016 compared to 2015.
Circuit Court awards had increased in value by about 48 per cent in the four years to 2016.
Even with the existence of the Personal Injury Assessment Board (PIAB) – a State run, first-port-of-call arbitrator for claims aimed at avoiding litigation – many cases proceed to court where expensive legal fees help further inflate prices.
Stakeholders also pointed to the Book of Quantum, the document that acts as a rough guide to compensation payments, and its apparent disregard by the courts in many injury claims. The level of these is often incomparable to those of other jurisdictions, the report said.
The committee has recommended that, in cases where an award surpasses the recommendations of the Book of Quantum, the judge should have to explain that decision in writing, a suggestion unlikely to play well with an independent judiciary.
Volatility
There have also been moves to address the investigation of fraudulent claims and the committee has recommended the creation of special Garda insurance fraud unit, something the Minister of State at the Department of Justice, Michael D’Arcy, overseeing the insurance working group, has previously said could only be considered by a new Garda commissioner and which would likely involve a depletion in front-line officers.
The myriad problems of insurance cover are not easy to unpick. In a statement after the report’s publication, Insurance Ireland predictably welcomed the suggestion that judges should have to explain why Book of Quantum compensation levels are not followed.
A similar approach in the UK, it said, helps reduce the “volatility in award levels” and reduces claims inflation. It has also called for the benchmarking of claims against international standards.
While the committee also dealt with the cost of criminal behaviour on businesses – overwhelmingly theft and security costs – and issues around a skills shortage (especially in sectors like restaurants and construction) and labour costs, another major focus was banking services and the cost of credit.
As bank branches increasingly shed their former skin of over-the-counter services and customer interaction, many small businesses find dealing in cash to be troublesome. One industry source told The Irish Times that it is not uncommon now for business owners to pay their staff, completely legitimately, in cash – a cheaper option than lodging it. Businesses are paying between 0.5 and 0.6 per cent on lodgements, a high cost when margins are low.
Bank of Ireland told the committee its service models had changed, but only as a result of changes in consumer behaviour. AIB, while not restricting cash services over the counter, has closed 70 branches in the past 10 years.
