New late payment measures fail to excite

James Salmon, Operations Director – 12th October 2023.

While I was away on leave, the government announced “new” measures to tackle the late payment culture that is holding back small businesses and the economy.

These new measures are set to be part of the Prompt Payment & Cash Flow Review, that is due to be published in the near future.

The “new” measures set to be announced within the review are:

• Extending the Reporting on Payment Practices and Performance Regulations 2017. Following consultation, Government will propose legislation to extend payment performance reporting obligations and also include new metrics for reporting, including a value metric, so businesses and other interested parties can see the value of unpaid invoices, including invoices paid late, and a disputed invoices metric.  The government will also introduce reporting on retention payments for businesses in the construction sector.
• The government will also provide greater advice to small businesses on negotiating payment terms that better suit them, and on how going digital can help them get paid quicker and manage their cash flow.
• The government will – subject to being able to squeeze new legislation into the parliamentary timetable – broaden the powers of the Small Business Commissioner: Introducing broader responsibilities, enabling the Commissioner to undertake investigations and publish reports where necessary on the basis of anonymous information and intelligence.
• The government claim these stronger measures will benefit UK businesses by fostering a stronger payment culture and providing businesses with more predictable and reliable cash flow, allowing businesses to spend and invest with greater certainty.

Excuse this writers skepticism but we see nothing meaningful here that will impact the late payment practices throughout the British business landscape.

SMEs make up 99 per cent of firms in the UK and are the lifeblood of our economy. But late payments are choking of that lifeblood. It’s only right that SME’s should be paid promptly for their goods and services.  SMEs that are paid on time can do more business, scale up and make more profits, delivering growth for the economy.

We at CPA have long argued that stronger measures are needed and that primarily businesses pay late as late payment of suppliers is currently the cheapest form of cash flow that businesses can use. When suppliers are keen to maintain goodwill, the late payment usually comes free.

CPA argues that the late payment culture will only change when late payment of suppliers becomes the most expensive form of capital. Financial chiefs will quickly change payment practices if late payments hit them in the pocket.

This can be achieved with a simple series of measures.

1. Late payment compensation levels were set decades ago and haven’t been updated for inflation. the current levels of £40 for debts up to a £1000, £70 for debts between £1000 and £10,000 and £100 for debts over £10,000 are woefully inadequate. These rates should be increased to properly compensate late paid suppliers and deter late payers. We would suggest changing the levels to £60, £120 and £200.
2. Still there is the issue of enforce-ability. Take away the pressure of goodwill from small business suppliers and mandate by legislation that all medium and large businesses who pay late must automatically as part of their payment process, add late payment compensation and interest to the payment they make to their suppliers.
3. Provide a simplified process for suppliers to claim late payment compensation and interest via the county courts from small businesses who have paid them late.
4. Current legislation still allows large companies to withhold payments contractually by setting credit terms of up to 60 days.  The perils of unpaid invoices could be reduced by reducing the maximum permissible terms to 30 days, thus speeding up the payment to suppliers.

Introduce the above three measures and the damaging effects of the late payment culture in the UK could be seriously reduced. There would still be the issue of late payments between small businesses and consumers.

Last year Small and Medium-sized Enterprises (SMEs) were due late payments worth on average an estimated £22,000. Late payment of invoices and long payment terms are among the biggest killer of small businesses and one of their major barriers to their growth.  When Small business owners  are forced to spend half their time chasing late payments they are distracted from carrying out productive work and cash flow problems caused by late payments can choke even the best businesses into insolvency.

If the UK can improve its payment culture, speed up the credit cycle and better support SME’s  we could tackle the productivity problems of the nation and boost considerably GDP.