Keith Nuthall, journalist

Businesses and public authorities across the EU are facing tougher laws on late payments, with the European Commission proposing a new regulation enforcing maximum 30-day terms. Under the legislation, if approved by the European Parliament and the EU Council of Ministers, later payments would automatically accrue a penalty of interest at 8% above European Central Bank (ECB) base rates. The laws cover every commercial or business organisation and are designed to help the EU’s small and medium-sized enterprises (SMEs) get paid faster.

A European Commission note argues: ‘By being paid on time, companies will save each year at least five man-days currently lost to chasing debtors, equal to 340.2 million man-hours, or almost €9bn for the entire EU economy. This time and money could instead be used by a business owner more productively, such as for example to acquire new skills, invest in the company, recruit staff or expand the business.’

‘Late payments inhibit SMEs’ ability to invest and, notably, transition to a sustainable economy’

Paul Gisby, Accountancy Europe’s director for SME matters, says: ‘We welcome any measures to tackle late payments from larger partners to SME suppliers and service providers. Such practices inhibit SMEs’ ability to invest and, notably, transition to a sustainable economy. The regulation contains some promising measures, such as a 30-day maximum payment term and compulsory interest payments. However, many SMEs may still hesitate to disturb ongoing, profitable business relationships with larger companies. The regulation’s effectiveness will therefore depend on robust enforcement by national authorities.’

Relief package

The reforms are part of a broader ‘SME relief package’ of reforms, announced by Commission president Ursula von der Leyen, which also includes a proposal for a head office tax directive for SMEs, enabling small businesses trading across the EU to pay tax in a single member state. Another proposal is to allow EU SMEs to complete administrative procedures across all member states without having to resubmit documents in all countries of operations; it would involve making procedures such as declarations and certificates for the posting of workers both simpler and digital-based.

The European Small Business Alliance has welcomed the proposals, especially mandatory interest for late payments, as ‘only 30% of small businesses suffering from late payment take advantage of the compensation due to them for fear of repercussions’ from late payers. However, ‘a 30-day limit, removing legal gaps, automating payments and ushering in a stricter enforcement regime will go a long way to putting the system back on the side of small business’.

However, Eurochambres (the association of European chambers of commerce) warns that the existing legislation’s flexibility ‘should not be compromised by introducing excessive restrictions and that additional reporting requirements must be avoided’, when logging payment data, for instance. It says that while the move and associated SME reforms proposed by the Commission are ‘a small step in the right direction’, SMEs have ‘continued to struggle with high inflation, energy crisis, and are still held back by unnecessary obstacles and regulatory burdens’.

‘For many SMEs, the proposals may threaten their viability’

Viability threat

But not everyone supports the proposals. European retail and wholesale sector association EuroCommerce says it is ‘very concerned that this proposal will severely affect the established practices of retailers and wholesalers who rely on negotiating payment terms that offer advantages to all parties, particularly for products that sell over longer periods or seasonal products, such as paint, clothing and fragrances’.

EuroCommerce director general Christel Delberghe says: ‘Taking away the chance for buyers who operate with low margins to make sales over a period of time to meet their costs risks distress rather than relief.’ According to the association, 25% of EU SMEs are retail and wholesale businesses ‘and for many, this proposal may threaten their viability’.

In the consultation on the proposal, the European Federation of Accountants and Auditors for SMEs (EFAA) supported a maximum fixed payment term for all B2B commercial transactions. It also backed forcing public works contractors to prove to procurers that they are paying subcontractors on time. Its consultation response added: ‘EFAA suggests that affected subcontractors should be able to directly contact the public body and inform it of the existing delay in payment. In this case, the public body should request the general contractor to make a statement.’

EU companies trading outside the EU will not necessarily be covered by the law’s commitments – commercial partners will decide whether it applies or not, according to an EU official. She adds that European Economic Area states (EU members plus Norway, Iceland and Liechtenstein) would have a commitment to write the directive into their national laws, as would Switzerland, under bilateral agreements that it implements EU single market rules.

‘Everyone in the supply chain will benefit from faster payments’

Loss of business

There are concerns that less flexibility on payment terms could result in larger companies preferring to obtain goods and services in-house rather than through external suppliers, so that SMEs end up losing business. However, the EU official says: ‘Everyone in the supply chain will benefit from faster payments, because any company is at a given moment debtor and creditor. A company will have to pay faster but will also be paid faster.’

She adds that a European Commission impact assessment has concluded it is ‘unlikely for larger companies to obtain goods or services in-house. Supply chains – especially in certain ecosystems – rely on the input of SMEs who possess unique skills and knowhow.’

While the Commission has proposed fast payment terms, it is unlikely to secure approval on this legislation quickly, with council and parliament debates likely to stretch into 2024.