According to the Federation of Small Businesses, 62% of small businesses report being adversely affected by late payments and it is estimated that 50,000 small businesses close every day due to late payments. These problems have become more acute during the pandemic.

Both the EU and the UK government have taken action over the years to improve the speed at which invoices are settled, and the UK government has now signalled its intention to introduce further measures following Brexit.

At first a quick summary of the current position. The Late Payment of Commercial Debts (Interest) Act 1998 created a statutory framework to deal with late payments. It adds an implied term in business-to-business contracts, setting an interest rate of at least 8% a year on unpaid invoices for goods or services, plus a fixed sum and reasonable costs of recovering the debt. The Act was amended by regulations implementing two EU directives in 2002 and 2013. The regime was also changed in 2018, with new regulations expanding the powers of trade bodies to challenge grossly unfair payment terms and practices on behalf of suppliers.

The legislation has had limited success across all sectors, including advertising and marketing. This was mainly due to the greater bargaining power of larger clients over smaller agencies, so many client/agency agreements 'contract-out' of the legislation. In addition, most agencies won’t take legal action against a client to recover a debt, including interest on late payment, unless the relationship has already broken down, in which case interest can be a valuable bargaining chip. The government therefore created the Small Business Commissioner (SBC) to support small businesses in payment disputes with large companies, as well as to encourage a culture change. Separately, a Prompt Payment Code was established, which is a voluntary Code whereby signatories agree to:

1. Pay suppliers on time within the terms agreed at the outset of the contract, without attempting to change payment terms retrospectively, and without changing practice on length of payment for smaller companies on unreasonable grounds.

2. Give clear guidance to suppliers: providing suppliers with clear and easily accessible guidance on payment procedures; ensuring there is a system for dealing with complaints and disputes which is communicated to suppliers; and advising them promptly if there is any reason why an invoice will not be paid to the agreed terms.

3. Encourage good practice by requesting that lead suppliers encourage adoption of the Code throughout their own supply chains. Of course, this would mean agencies adopting the Code in their dealings with production companies and other suppliers (such as their poor lawyers, trying to eek out a modest stipend).

Signatories also undertake to pay 95% of invoices within 60 days (unless there are exceptional circumstances); to work towards adopting 30 days as the norm; and to avoid any practices that adversely affect the supply chain.

The Code currently has more than 2800 signatories, including a few major clients, such as Lloyds Bank and Tesco, although not that many, as yet. You can check to see if your client is on them on this list. Oversight of the Code now rests with the SBC.

On 19 January 2021, the Department for Business, Energy & Industrial Strategy announced changes to the Code. The following changes come into effect immediately:

1. A company's CEO or finance director, or the business owner where it is a small business, must personally sign the Code, to ensure responsibility for payment practices is taken at the highest level of an organisation.

2. There is a new logo for signatories to use in external communications, to show their commitment to the Code, making it more damaging to a company's reputation to breach it.

3. Signatories must acknowledge, as a condition of signing the Code, that suppliers can charge interest on late invoices.

4. Administrators of the Code can now investigate breaches based on third-party information.

In addition, from 1 July 2021 signatories will be required to pay 95% of invoices from small businesses (those with fewer than 50 employees) within 30 days. The target for larger businesses will remain 95% of invoices within 60 days.

A consultation on the powers of the SBC took place last autumn. One issue arising was whether the SBC should be able to investigate suspected poor or unfair payment practices on its own initiative or at the request of a third party (as well as following a complaint by an affected small business). As a result, there may be more changes on the way to the late payments regime.

Why does this matter? Currently, £23.4 billion worth of late invoices are owed to firms across Britain, affecting businesses’ cash flow and ultimate survival. At a time when the economy is suffering, the government wants to support businesses as much as possible, especially small businesses, which provide two thirds of jobs in the UK.

For larger agencies dealing with clients in the EU, it is also worth considering whether the member state where the client is established allows parties to contract out of the late payment legislation, and what payment terms should apply. 

Ultimately, however, the regime remains essentially voluntary. It remains to be seen whether large companies commitment to corporate social responsibility will trump their instinct to stock-pile as much as cash as possible. Unfortunately, the Covid-19 pandemic is likely to be pulling them in both directions at once.