According to the European Commission, in the EU, on average, one out of two invoices in commercial transactions are paid late (or not at all). Payment delays compromise the cash flow of SMEs and hamper the competitiveness and resilience of supply chains.
The Commission says that the current EU legal framework on combatting late payments in commercial transactions is not adequate. It has identified several main shortcomings in the existing Directive on late payments - in particular the lack of preventive measures and effective enforcement, as well as redress mechanisms easily accessible to SMEs. In addition, several concepts in the Directive are unclear and it lacks a maximum payment term in B2B transactions. To address these shortcomings, the Commission has decided to revise the rules.
Its proposed new Regulation on combatting late payments in commercial transactions will repeal the 2011 Directive on late payments and will replace it with a Regulation.
The Regulation streamlines the current provisions and introduces a single maximum payment term of 30 days for all commercial transactions, including B2B and transactions between public authorities and businesses
Significantly, the new rules propose to make the payment of interest automatic and compulsory until payment of the debt. Unlike the current Directive, under the new proposal the creditor cannot waive its right to claim interest for late payment. A contractual provision or practice to the contrary would be unfair, and therefore null and void of any legal effect.
Therefore, the person owed the money no longer (in theory) has the burden of claiming interest. This becomes an automatic obligation of the debtors when they pay late. The rate of late payment interest is +8% above the ECB reference rates. For those member states whose currency is not the euro, the reference rate is set by the national Central Bank. In addition, the new rules raise the flat fee compensation from 40 EUR (or equivalent) to 50 EUR (or equivalent) per commercial transaction paid late.
Member States will be required to set up enforcement authorities to monitor and ensure the application of the rules as well as promoting the voluntary use of ADR.
The Commission points out that late payments are a worldwide problem. Many EU partner countries already have legislation about late payments (including the UK). Therefore, it considers that the risk that in international transactions companies would circumvent EU legislation by systematically referring to non-EU regulations is limited.
Once adopted by the European Parliament and the Council, the new rules will apply one year after the entry into force of the Regulation. Commercial transactions carried out after the date of application of the Regulation shall be subject to the provisions of the Regulation, including when the underlying contract was concluded before that date.
The UK government has also been considering this issue and has consulted on both extending the Reporting on Payment Practices and Performance Regulations 2017 beyond 2024, as well as the role of the Small Business Commissioner. We await the outcome of those consultations.
Businesses in the UK may also be affected by other regimes, such as the voluntary Prompt Payment Code where signatories have committed to pay suppliers in accordance with contractual payment terms and industry-specific regimes such as the Grocery Suppliers Code of Practice.
If you need us to review your payment terms, get in touch!