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Government proposes shake-up of late payment laws | accountingweb
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Government proposes shake-up of late payment laws

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Significant changes to payment reporting processes are being floated to make big firms pay their suppliers on time, as the problem threatens hundreds of thousands of jobs.

8th Feb 2023
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Big firms have been urged to pay their invoices on time or face further intervention from the government under new proposals designed to tackle late payments for small businesses.

Business secretary Grant Shapps announced the Payment and Cash Flow Review in December and it was recently followed by a full consultation outlining steps lawmakers could take to rein in persistent late payers.

The government estimates more than £23.4bn is currently owed in outstanding invoices to UK businesses, prompting Shapps to remind big businesses of their “duty to ensure smaller suppliers are paid promptly”.

A recent review of practices suggests there have been some behavioural improvements thanks to a new code and the establishment of the Small Business Commissioner to hold non-compliant businesses to account.

Businesses at risk

But the real-world effectiveness of both has been questioned, with the Federation of Small Businesses (FSB) recently announcing that as many as 400,000 businesses could go to the wall as a direct result of late payments.

Xero’s small business insight report also revealed the average length of time small businesses wait to be paid rose 0.5 days to 30.4 days in November, while late payments also jumped by the same amount to 8.1 days.

According to a government analysis of SMEs, late payment is considered a problem by 56% of those who gave trade credit, with varying repayment terms causing issues for businesses of all sizes.

“Most small businesses do not have large balance sheets and cannot accommodate long payment terms or delays when receiving payment within their cashflow cycle,” said Carly Davies, debt control manager at Cartmell Shepherd solicitors. “This can lead to cashflow problems, putting their firms at risk and preventing them from growing.”

Sun setting on current laws

Existing commercial debt repayment laws contain a sunset clause that expires next year, prompting a review of the legislation and a call for the government to push the deadline past April 24 to ensure small businesses get continued protection.

The government believes an extension will help businesses maintain good relations with their suppliers as it seeks to update and enshrine the laws permanently.

The review also seeks information on the role of technology-enabled accountancy platforms and how they could help firms get paid faster, as well as how banks and lenders can aid small businesses with cashflow matters or access extra finance.  

“Small businesses rely heavily on cashflow and may not hold or have access to reserves that larger businesses can call upon in hard times,” said MKB Law expert Laura McGuckin.  “If a small business is not paid on time, it can cause insolvency issues and greatly affect their growth and performance.”

An in-depth examination of the Prompt Payment Code will also take place, with potentially significant changes mooted.

Value added

The present guidelines currently require businesses to report on the proportion of payments made under certain criteria (paid in 30 days or fewer; between 31 and 60 days; in 61 days or longer), and where the money did not come within the agreed time.

However, there is no requirement to report on the value of those metrics, which may be changed following the consultation. 

The existing rules may incentivise companies to prioritise settling large numbers of low-value invoices to boost their “volume of transactions paid within terms” figures, officials believe, which would skew the true picture of the problem.

“Including the requirement to report the total value of payments not made within agreed terms could further increase transparency of payment practices by removing this obscurity,” the report states.

Other feedback the government is considering includes forced disclosures from large firms to show they are driving a prompt payment culture across all their subsidiaries, and supplier payment reporting subject to some kind of audit or other assurance.

The regulations may go further, building in a legal requirement for qualifying businesses to include their payment practices and performance information in their directors’ report. 

Officials believe this “could have a self-governing effect on reporting businesses” by reaffirming awareness of the importance of reporting at board level” and among the audience for a company’s directors’ report, including its shareholders.

“Given the current economic crisis that the UK is currently experiencing, it is up to the government to place a strong focus on delivering the review, to help SMEs combat the financial strain they may be under, which could in turn save their business,” McGuckin said.

Encouraging cultural change

While the late payment problem cannot be entirely addressed by means of legislation, the government will intervene if it feels big firms aren’t doing enough, said small business minister Kevin Hollinrake MP, who launched the consultation.

“I know the joy and freedoms of owning and running your own business, but I also know what it's like to lay awake at night and worry about paying the bills,” said Hollinrake.

He urged SMEs to respond to the consultation with their own experiences and outline areas they feel can be improved.

Also making its way through Parliament is the Procurement Bill, which sets out the requirement for 30-day payment terms to apply in public-sector supply chains. It aims to level the playing field for SMEs and encourage more businesses with smaller budgets to bid for public-sector contracts.

Keep talking

The advice to businesses suffering from frequently delayed payments is to investigate why it is a common occurrence and inform the other party of their legal obligations.

“When the economy slows down, the likelihood of late and missed payments goes up,” said Fraser McKeating, managing associate at Lewis Silkin law firm. “Conducting a review of existing commercial contracts to understand the risks and seeking more favourable terms may stand businesses in much better stead during a recession and beyond.”

With good communication, parties may be willing to agree to an extension or an alternative repayment schedule, in order to facilitate payment, he said.

“All businesses are feeling the pressure of rising prices and so keeping communication lines open is likely to help unexpected difficulties as a result of market volatility later down the line,” he said.

Replies (10)

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By Hugo Fair
08th Feb 2023 15:00

What a muddled story - both the journalistic content and, less surprisingly, the politicians' stance.

There is a world of difference between "more than £23.4bn is currently owed in outstanding invoices" and "late and missed payments" ... to pick just two extracts from the near the start & the end of the article.

What %age of outstanding invoices are overdue for payment (i.e. beyond agreed payment terms)?

It is *possible* to legislate for that, but it won't have much of the desired effect (as purchasers will just play harder ball when negotiating the T&Cs).
And I can understand the desire to penalise those who stomp on agreed T&Cs - but who's going to pay for policing it + who'll receive the penalties?

There are areas where the supplier/purchaser balance is economically unbalanced (supermarkets for one), but that's why (in theory) we have competition legislation.
The rest is just the cut'n'thrust of competitive capitalism, within which the supplier can negotiate and choose to surcharge late payers (or to refuse them future business).

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By spilly
08th Feb 2023 23:09

And will this criteria also apply to HMRC?
Particularly when they still take sooooo long to sort out repayment of CT arising from losses carried back.

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By johnjenkins
09th Feb 2023 11:00

Same old chestnut rolled out to make it look like the Government is doing something.

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By moverend
09th Feb 2023 11:30

Could the public sector perhaps take a lead on this - speaking to clients they are often listed as one of the worst offenders!!

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By SJH-ADVDIPMA
09th Feb 2023 11:39

A large corporate i worked in, withheld cash for many months past due (4 mths), in the lead-up to the end of the financial year, so that employees/directors could achieve their cash targets, to receive that element of their performance bonus. Quite unethical. They trumpet the die/esg religion nowadays, it wouldnt surprise me if they still did that unethical practice though.

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By andyscotland
09th Feb 2023 12:29

Part of the problem can be that although there is a statutory right to interest & admin costs, it still relies on the supplier requesting it. And that can be problematic for a relationship, so suppliers can be reluctant to ask for & enforce it even if they are aware of their rights.

If the govt really wanted to help they could legislate to put the boot on the other foot.

Medium and large companies should be responsible for identifying late payments and automatically paying the interest & compensation, without any input from the supplier. They should also have to pay additional compensation if they fail to automatically detect & pay the first round.

This is the same mechanism OFGEM introduced to enforce energy suppliers automatically compensating consumers if they failed to meet service standards, because they were relying on consumers not knowing or not bothering to chase their entitlements.

It would be incredibly easy for software used by larger entities to automatically add the compensation amounts to an aged creditors report, and automatically post entries when finally paid.

And also easy for an auditor to review the records and confirm whether that had been done properly.

In any situation where there is a power imbalance, it makes sense to attach the obligations to the larger & more powerful entity. Both simpler and more reasonable to ask them to take care of it.

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By AndrewV12
09th Feb 2023 12:46

Why are we still talking about this in 2023,

Big Business creating their own rules regardless of legalisation and prompting.

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By rememberscarborough
09th Feb 2023 15:23

Working in the construction industry a valuation was carried out 30 days after the start of the project. The client's QS then had a week to certify this and their architect a further week after that (total 14 days). Payment was then due to the main contractor 28 days after that i.e. 72 days after the start of the job and then they had another seven days to pay subcontractors i.e. day 79.

So a small subbie starts on day one and is not paid until day 80. All totally legal and above board but you can see the issue.

Also, had a great blue chip client who paid on 14 days as regular as clockwork. They were then taken over by an American PE organisation who immediately changed the terms to NINETY days and then slashed the margins. No wonder the company I worked for went to the wall soon after....

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Replying to rememberscarborough:
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By andyscotland
10th Feb 2023 13:14

I think there's two things there.

First is if it's a small labour-only subbie & a big main contractor then frankly that should be down to the main contractor's cashflow/reserves to manage. If the main contractor is happy with the subbie's work, they should pay them promptly, regardless of the timing of client payments. That would be the case for an employee's salary, and indeed for purchases of materials which will be due based on the supplier's credit terms from date of supply regardless of whether the client has paid yet. I don't see why a subcontractor's fee should be different.

Second is if there's a genuine reason why the subbie should have to wait - eg. they are themselves billing agreed stage payments based on work signed off by the client - then fine, but payments should be made promptly once the conditions for payment have been met.

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Replying to andyscotland:
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By johnjenkins
10th Feb 2023 13:45

Could, would, should. Unfortunately those that pull the strings will always have the upper hand.
Laws won't make any difference.
Now if you really want to do it properly so that everybody gets paid on time, then you have to have a fund (independently run - yes I know, who regulates them?) whereby all monies from main contractor or client goes into. That takes away any control and stops manipulation. This would work well in the construction industry.

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