Government cracks down on late payments in a bid to help small businesses

The government has unveiled plans to tackle what it calls the ‘scourge of late payments’ faced by small businesses in the UK.

The measures include a ‘Fair Payment Code’ designed to encourage swifter payment, new legislation introducing mandatory payment reporting for large businesses, and enhanced enforcement of the existing payment reporting regulations.

What to expect from the changes

A brief overview of the changes is as follows:

New ‘Fair Payment Code’

A new ‘Fair Payment Code’ has been introduced to replace the existing Prompt Payment Code.

While the existing code encourages signatories to pay their suppliers on time, the new code is more ambitious and will reward businesses for fair payment practices with a gold, silver, or bronze ranking. A gold ranking will require businesses to pay their suppliers in 30 days, halving the current requirement of 60 days detailed in the Prompt Payment Code.

Enhanced enforcement of existing late payment performance reporting regulations

The government has stated its intention to tighten enforcement of the Prompt Payment Reporting Regulations.

The Prompt Payment Reporting Regulations are separate from the Prompt Payment Code and the Fair Payment Code that will replace it. They require large businesses to report their payment performance twice a year on the gov.uk website. If they don’t, their directors face criminal prosecution.

New laws requiring large businesses to include information on payments in their annual reports

New legislation is due to be passed requiring large businesses to include payment reporting in their annual reports. This increased transparency will allow third parties, including suppliers, to see how a company treats small firms.

Consultation

In addition to its current measures, the government has announced its intention to consult on tough new laws to hold larger firms accountable for not paying invoices on time. It also plans to consider further policy measures to address poor payment practices.

What do the changes mean for your business?

The government hopes the Fair Payment Code’s tiered system will incentivise larger businesses to pay invoices within 30 days and it will allow suppliers to see at a glance a business’s payment rating. Increased transparency will enable small businesses to get a feel for a potential customer’s payment practices and make informed decisions about who they do business with.

The measures will have no impact on the payments due from other small businesses or consumers. Their success relies heavily on the compliance of larger businesses and an efficient enforcement regime. In the absence of effective monitoring coupled with tangible penalties for those businesses that continue to disregard their payment obligations, the government’s plans may fall short of providing the protection and support SMEs so desperately need.

Ian Carson, Head of Disputes at Harper James commented:

The government’s commitment to tackling late payments will no doubt be welcomed by the millions of SMEs around the UK struggling with unpaid invoices. Only time will tell whether the plans will make a material difference and have the desired effect of improving cash flow and facilitating expansion. Much will depend on the willingness of those large businesses affected by the changes to comply with them, the effectiveness of any enforcement regime and the commercial realities of the supplier or customer relationship.