In his 2019 Spring Statement, the Chancellor announced a commitment to further action to tackle the issue of late payments being made to small businesses by large businesses.
Scope of the problem
Late payments are a common problem for SMEs. Research conducted by the Federation for Small Businesses in 2016 found that poor payment practices:
- contribute to cashflow and solvency difficulties;
- can cause a slowdown in profit growth; and
- impact the larger UK economy.
In its report, the FSB estimated that:
- in 2014, 50,000 SMEs went out of business due to late payments; and
- SMEs are owed, on average, £6,142 in late payments.
Current remedies
Successive UK governments have introduced various measures over the years to tackle the problem. These include:
- legislation allowing suppliers to claim interest on late payments;
- the Prompt Payment Code (a voluntary code under which signatories commit to pay on time);
- rules requiring medium and large businesses to report publicly twice a year on their payment practices through the government's Duty To Report website;
- introduction of a Small Business Commissioner to help small businesses resolve payment disputes. This includes a complaints procedure with powers to "name and shame" late payers.
Company directors have a statutory duty to promote the company's success having regard to a number of prescribed matters. Those matters include "the need to foster the company's business relationships with suppliers, customers and others".
Regulations, introduced in 2018, require large companies to include in their annual reports a statement of how directors have had regard to this matter. The government considers that this will involve a consideration of the company's payment practices. However, it will be some time before the impact of the 2018 regulations can be assessed as they apply to financial years starting on or after 1 January 2019.
More to be done
In late 2018 the UK government issued a call for evidence on Creating a Responsible Payment Culture. According to this, the amount owed to smaller businesses in late payments had more than halved between 2012 and 2017.
However, the government says more needs to be done.
Change, it says, needs to come from the top.
The call for evidence (which closed at the end of November 2018):
- sought feedback from businesses about their experience of payment practices; and
- considered the best way to ensure all companies have responsible payment practices in their supply chains.
One of the changes mooted was to require boards to give one of their non-executive directors specific responsibilities for the company's prompt payment performance.
The government also asks whether greater use of technology could reduce delays in the payment process.
You can read more about the consultation in our previous blog.
What is going to change in the short term?
The government is due to publish its response to the call for evidence shortly.
However, the Chancellor provided a preview in his Spring Statement. He announced that there will be new rules requiring audit committees to review their company's payment practices and report on them in the annual accounts.
What does this mean for suppliers and customers?
The UK government's direction of travel is clearly a continued attempt to tackle poor payment behaviour, largely through increased transparency.
Any new rules are likely to be the subject of further consultation so it may be a while before further changes are seen.
In the meantime, for advice or information about your responsibilities and rights in relation to payment practices and terms (whether as a customer or supplier), please get in touch with your usual Brodies contact.
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