Late payment is a key issue for all businesses, but especially small businesses, as it adversely affects cashflow, which as we know is the life blood of any business.
An absence of regular and consistent cash flow can have serious implications on a businesses’ ability to trade and in the worst cases, can result in insolvency.
The problem of late payment is not new. The Federation of Small Business (the “FSB”) has been reporting on the issue for over 10 years, but the problem in the UK is particularly acute especially in comparison to other European countries.
The FSB has previously reported that improving payment terms could potentially save 50,000 UK small businesses from closing down annually and add £2.5bn to the UK economy.
Challenges for small businesses in getting paid on time include:
- The failure of ‘big business’ to adhere to payment terms. In March 2023, Good Business Pays undertook a review of the banking sector. In an industry generally known for fast payment, the worst performing UK bank was taking on average 51 days to pay suppliers (against an industry average of 5-11 days).
- The failure of previous Governments to take more urgent steps to ensure prompt payment through the introduction of legislation and ensure compliance with existing legislation.
- The failure to have in place appropriate terms and conditions for managing on time payments and/or sufficient resources for monitoring debt collection.
- The costs of pursing debtors through the court system that is overstretched.
Labour’s manifesto commitment
Prior to its entry into Government, Labour committed in its manifesto to the promotion of economic growth for the benefit of all UK businesses, but acknowledged the unique challenges faced by small business, entrepreneurs and the self-employed.
These entities were rightly identified as the “lifeblood of communities and high streets across the country.” As part of its plan for the economy, Labour confirmed that it would “take action on late payments to ensure small businesses and the self-employed are paid on time.”
Beyond that broad statement, the manifesto gave very little detail as to how this might be achieved. However, Labour produced a report in November 2023 setting out the potential direction of travel: Labour: The Beating Heart of our Economy: Labour’s Plan for Small Business.
It provides that Labour proposes to legislate to tackle late payments by requiring the audit committees of big business to report on their payment practices in their annual reports. By doing so, Labour believes that this will potentially unlock “£20bn in unpaid invoices”.
Labour’s plan broadly follows the recommendations made by various SME organisations, including Good Business Pays, who published a report in June 2023 stating that the current approach to payment practices reporting is not providing enough accuracy or transparency to those that manage or invest in companies.
It suggests that the Board, Non-Executive Directors and Investors should have more visibility over their business’ payment performance. Labour’s proposal aims to achieve that outcome.
In 2022, roughly 5,000 companies complied and reported on their payment practices, but Good Business Pays believe that this represents less than half the number of UK companies that should be reporting with estimates ranging between 10,000 and 13,000 companies who are failing to do.
Many UK companies are therefore currently breaking the law by not reporting.
Current reporting regime
The current reporting requirement is set out in the Reporting on Payment Practices and Performance Regulations 2017 (the “2017 Regulations”), which had been due to expire in April this year but have now been extended to April 2031.
Who needs to report?
The 2017 Regulations require all large UK companies to report publicly on their payment policies, practices and performance every six months.
Currently only those companies and LLPs which exceed two or all of the large company thresholds set out in the Companies Act 2006 on both of their last two balance sheet dates are required to report: i.e. (a) an annual turnover of more than £36m, (b) a balance sheet total in excess of £18m and (c) in excess of 250 employees.
What needs to be reported?
Companies and LLPs subject to the 2017 Regulations are required to publish information about their payment practices and performance in relation to qualifying contracts for each reporting period. The report must be published within 30 days of the end of the applicable reporting period.
The scope of the information to be provided is mandated by the 2017 Regulations and the report needs to be approved by a named company director or a designated member.
What if a business does not comply?
The failure to report not only carries the risk of reputational damage, but also the risk of criminal sanction. A criminal offence will be committed by both the business and every director of the company, or designated member of the LLP, if the business fails to publish its report within the 30 day period.
Failure to comply is punishable on summary conviction by way of fine.
Morr & Co’s thoughts on Labour’s proposal
It is not yet clear which companies are likely to be caught by the proposed legislation, but it is anticipated that it is likely to apply, at least initially, to the same companies as the 2017 Regulations. But the Government could decide to increase the scope.
Are the proposed changes likely to have a significant impact?
It will certainly improve transparency as businesses will be able to see at a glance how a ‘big business’ is performing in terms of managing payments. This will hopefully aid businesses in identifying poor payers and enable them to potentially put in place protections to improve the prospects of prompt payment or in appropriate cases, avoid contracting with those entities altogether.
It is also likely to bring about improved scrutiny at board level and will hopefully result in improved practices. The general consensus is that debt management is often not something that is considered, if at all, at board level and it ought to form part of good corporate governance.
There is also a potential benefit for ‘big business’. Poor payment practices can often be a good indicator of financial stress within a business and it is therefore important that information is shared and is not just seen as a credit control issue.
What should you be thinking about to ensure prompt payment?
- Carry out your research before contracting. Large companies are required to report their payment practices online under the 2017 regulations. If you are regularly trading with a large company, you can check how they are performing in terms of managing supplier payments.
- If you have terms and conditions, make sure they are being used and sent to customers when entering into contracts. If possible, obtain confirmation that they have been read and understood.
- If you are being asked to contract on the basis of someone else’s terms and conditions, make sure you have read them and understand how they will operate and what the payment terms are. There may be a possibility for negotiation to ensure the transaction works for both parties.
- Check your terms and conditions are fit for purpose. Ensure they make it clear when payment is expected and the potential consequences of failing to make payment on time.
- Consider making provision for interest or fixed penalty fees for late payment.
- Considering including an ability to recover administrative and/or legal costs which may be incurred in recovering debts.
- Consider percentage payments to begin work with the remainder due in instalments or on completion.
- Consider if there is option to bill on an interim basis rather than bill at the conclusion of the contract?
- If you find yourself in a position where a company is not paying, take prompt action. The quicker action is taken the more likely it is that you will be paid. It is important to have clear debt recovery process in place within your business. Follow up invoices with regular reminders as soon as they become overdue and resist the temptation to send ‘chasers’ by email or letter only. There is no substitute for picking up the phone and speaking to someone.
How can Morr & Co help?
If you require assistance and advice with a commercial dispute or have any questions about this article, please call our Dispute Resolution team on 01737 854500 or email [email protected] and a member of our expert team will get back to you.