Late payments cost the UK economy £11bn a year and lead to the closure of 38 businesses every day. Now, the government has promised the toughest reforms in a generation tackle the problem.
Large companies that persistently fail to pay their suppliers on time could be fined under reforms proposed by the Department for Business and Trade in July, which, if enacted, would amount to the most significant overhaul of the UK’s late-payment regime in 25 years.
But after years of weak enforcement, many companies remain sceptical that the proposals will deliver real change.
‘SME are negotiating from a position of weakness’
‘Anything the government can do to make sure that terms are enforceable and are adhered to is going to improve the working capital requirements of SMEs,’ says Bobby Lane, CEO of outsourcing firm Factotum. ‘Unfortunately, this has been talked about for years, but nothing meaningful has ever been done. The reality is that SMEs have very little leverage when it comes to enforcing payment terms with larger companies – they’re negotiating from a position of weakness.’
Multiple changes
The proposed package of measures includes capping payment terms at 60 days – with a future reduction to 45 days after five years being considered – and mandatory statutory interest on overdue invoices to encourage prompt payment.
The government also plans to amend The Late Payment of Commercial Debts (Interest) Act 1998 to make the payment period mandatory by removing the ‘not grossly unfair’ exemption. This has allowed businesses to ignore the law and made it ‘pretty ineffective because there are various ways in which you can work around it’, says David Lowe, a partner at law firm Gowling WLG.
Every business is going to have to change its contracts to account for the new terms
By also removing the ability for businesses to negotiate a lower compensation rate than the statutory one, says Lowe, every business will have to change its contracts to account for the new rates and payment terms.
Additional reporting
The government wants to improve scrutiny of large companies’ payment practices at board level by making it a legal requirement for audit committees to review payment data prior to government submission and inclusion in directors’ reports.
And, in a further boost to transparency, the Reporting on Payment Practices and Performance Regulations 2017 will be amended to include additional reporting requirements around statutory interest liabilities.
But the SMEs will reap little benefit from the measures unless they are backed up with enforcement and the ability to hold large customers’ feet to the fire if they withhold payment.
‘Businesses are afraid to chase late payment because they think they will lose contracts, or they will be deemed a problematic business partner,’ Stuart Miller at Xero says. ‘For accountants, it is about understanding what these new rules are if they come into force and finding ways to get paid faster.’
Stick over carrot
To grapple with this, the government will give the Small Business Commissioner (SBC) power to fine businesses that persistently pay their suppliers late, with rates based on businesses’ unpaid statutory interest liability. The SBC will also be able to investigate poor payment practice, provide legally binding arbitration in disputes and investigate the accuracy of the payment reporting data that large businesses provide.
‘That will make a real difference because it will become a more meaningful right that small businesses can complain to the SBC,’ Lowe says. ‘But how much enforcement action will depend on how well funded the SBC is. There is a risk that you might have a commissioner who has got the right to fine and enforce but only picks off the worst offenders.’
‘How the proposals operate in the real world can be quite different’
SMEs also remain to be convinced. Melanie Proffitt FCCA, CFO at a company running luxury hotels, says that although the proposals ‘look nice when they are written down, how they operate in the real world can be quite different.
‘I am not convinced that, as a supplier who is doing business with large corporations, you are going to want to highlight your customers being bad even if the SBC is enforcing it,’ she says.
The implications for accountants are significant. They will be looking for greater certainty around payment timings, as well as reviewing and structuring supplier or customer contracts to take advantage of the new rules, says Oliver Finch at Menzies.
‘They will need to review systems and processes to ensure customers have seamless integration from one to the other, consider digital tools for invoicing, debtor chasing and sending payment reminders to reduce admin and payment delays,’ Finch says.
Lucy Cohen, CEO at Mazuma, agrees, adding that while the cost of setup and the change in behaviour might feel onerous, ‘the return on that in terms of increased cashflow should be relatively quick.’
‘Big businesses are adept at finding loopholes; without robust oversight, change may be limited’
No guarantee
While the proposals go further than any previous governments’, there is no guarantee of what will be taken forward and implemented. Over the past 25 years, only relatively small changes have been introduced following consultations.
Lowe predicts that the government may introduce a mandatory payment term of 60 days where the supplier is an SME, and for any other business they stick with the old law. ‘The government will do something, but I don’t think it is going to do as much as it says it is,’ he adds.
Finch believes that the plan is a ‘positive step and has the potential to make a real difference for small businesses, but it could go further,’ he says. ‘Big businesses are adept at finding loopholes; without robust oversight, change may be limited.’
The proposals
- Audit committee and board-level scrutiny of large company payment practices
- Maximum payment terms
- A deadline for disputing invoices
- Mandatory statutory interest
- Additional reporting on statutory interest
- Financial penalties for persistent late payers
- Additional powers for the Small Business Commissioner, including assurance of payment reporting data
- Use of retention clauses in construction contracts
