According to government figures, late payments cost small businesses £22,000 a year on average and leads to 50,000 business closures a year. The research also showed that payment problems multiply, the further down the supply chain you go. With delays to payments increasing with each business along a supply chain, this results in smaller businesses generally experiencing more problems with late payment of invoices than larger firms. 

The research also found that there was an imbalance between big and small firms, and that administrative errors are a major factor in creating slow payments with 24% of firms saying that invoices being incorrectly handled added to delays.

As a result, the UK government has announced a package of measures to deal with late payment.  It intends to consult in the coming months about new laws “which will hold larger firms to account and get cash flowing back into businesses”. Currently we don’t have more detail on this.

In addition, the government intends to introduce new legislation which will require all large businesses to include payment reporting in their annual reports.  The aim is to put the onus on them to provide clarity in their annual reports about how they treat small firms. This will mean company boards and international investors will be able to see how firms are operating.

The government also intends to enhance enforcement regarding the existing late payment performance reporting regulations which require large companies to report their payment performance twice yearly on gov.uk. Under current laws, directors of non-compliant companies who do not report their payment practices could face criminal prosecutions including potentially unlimited fines and criminal records.  The government has also updated its guidance on payment performance reporting.

The consultation will also consider a range of further policy measures that could help address poor payment practices.

The Prompt Payment Code is a voluntary code of practice for businesses, administered by the Office of the Small Business Commissioner on behalf of Department for Business and Trade (DBT). It was established in December 2008 and sets standards for payment practices between organisations of any size and their suppliers. The government intends to replace it with a new Fair Payment Code, which will be open to signatories this autumn. Businesses will need to show they have met good payment standards before being awarded official code status.

Will any of this work?

While it is clear that late payments do cause a significant problem, it remains to be seen if any of these proposals will make a difference.  That said, SMEs already have the right to charge interest on late payments, but rarely do so, because they’re keenly aware that doing so may lead to termination of the client relationship. In addition, some “Big Brands” can make it very difficult to submit invoices in the first place, by delaying or withholding approvals to pro forma invoices and/or employing byzantine billing processes, which can delay the point at which an invoice is issued by several months.  Against that backdrop, it’s difficult to see how any new legislation will make any material difference to poor payment practices. As ever, the devil will be in the detail, and we will share details of the consultation once it is published.