Rachel Wilcox 5 Jun 2018 04:26pm

Will the measures against late payments work?

Late payment is endemic and a huge cost to the UK economy. So what hope is there that new government measures will make a difference? Rachel Willcox investigates

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Caption: Illustration: Studio Takeuma
Paul Uppal, the newly-appointed small business commissioner, had been in the job for less than a month when, on 15 January, construction giant Carillion collapsed leaving behind debts to suppliers running into billions of pounds. The fallout was a baptism of fire for Uppal, charged with flying the flag for the UK’s army of SMEs and with a remit of addressing the thorny issue of late payment.

Revelations that the construction group had payment terms for suppliers of 120 days while also being a signatory to the government’s Prompt Payment Code prompted branding of government late payment initiatives as toothless.

Late payment is one of the most pressing concerns facing the UK’s SMEs. Analysis by online accounting software provider Xero found that over half of invoices were paid late in 2017. The Federation of Small Businesses (FSB) claims that late payment in the UK causes the closure of an estimated 50,000 businesses and costs the economy £2.5bn every year.

And despite government rhetoric, the FSB says the level of late payment in the UK remains broadly unchanged from five years ago. Attempts by government to tackle the issue since the 1990s – hinging largely on voluntary codes of conduct or promises to name and shame serial offenders – are clearly having limited impact on business behaviour.

The Prompt Payment Code, introduced in 2009, promised a gold standard in payment terms. Signatories commit to pay suppliers on time, within the terms agreed at the outset of the contract, within a maximum of 60 days, and to work towards 30 days as the norm. Suppliers can challenge the status of a signatory, which is then investigated by the Chartered Institute of Credit Management (CICM) and can be referred to the Code Compliance Board to determine what action might be required by the signatory or whether its status should be rescinded.

Philip King is chief executive of the CICM, which administers the Prompt Payment Code on behalf of the Department for Business, Energy and Industrial Strategy (BEIS). King admits that the publicity surrounding Carillion has been damaging “to the extent that organisations and commentators misunderstood how the code works”.

But, King maintains: “When we get involved, things get resolved quite quickly. Quite often it’s a process issue. Part of our remit is to educate businesses on how they can behave better. Often it’s not that they’re trying to exploit a supplier, it’s that there are inefficiencies in their processes.”

That position is borne out by a recent survey of finance executives commissioned by e-procurement software provider Wax Digital: 31% cited invoice processing timescales as a reason for late payment; 26% blamed internal errors; and one in four cited supplier errors such as inaccurate wording, missing purchase orders or incorrect values on invoices.

But inefficiencies are only part of the story. What’s also clear is that a culture of paying late has become the norm. Bullying of small suppliers by large companies is rife, and smaller creditors don’t want to risk taking any formal action. Carillion’s prompt payment status was last challenged in June 2016, suggesting reluctance among SMEs to criticise and a dearth of understanding of how the Prompt Payment Code works – possibly even supporting claims that the code is unfit for purpose.

“This is symptomatic of a broader disease of the inequity in the commercial relationship between larger and smaller businesses,” Uppal told economia. “If small companies don’t feel they can say no to the terms being dictated by larger companies, that’s effectively abuse.”

Small business minister Andrew Griffiths says the amount owed to smaller businesses in late payments has more than halved in the past five years, “but we want to go even further, which is why as part of our modern Industrial Strategy we will be gathering views around the country about how we can stamp out late payments and help businesses continue to thrive”. In the meantime, even King accepts that it’s time to take large companies to task over tardy payment practice. “I think we’ll see some shift in the code,” he says.

In principle, that should be made easier as data on larger companies’ payment practices starts to emerge following new reporting requirements in the Small Business, Enterprise and Employment Act 2015. Launched last April, the Payment Practices and Performance Reporting regulations call on companies that meet at least two of three threshold criteria – £36m turnover, £18m balance sheet total and 250 employees – to publish twice-yearly the average time they take to pay invoices and the percentage not paid within agreed terms. Suppliers can use the Payment Practices Reporting website (, to glean a snapshot of larger businesses’ payment behaviour. But although fines can be imposed for a failure to report, there is no requirement for any of the reporting companies to improve their performance.

King warns that producing the data has proved a far bigger headache than the government anticipated, partly because the metrics being tracked by companies may not tally with the reporting requirement. “Transparency is always good but to take it at face value can be misleading. Companies can pay late on 30-day terms or on time on 90-day terms,” King warns.

Duncan Swift, a partner at Moore Stephens and vice president at R3, the Association of Business Recovery Professionals, says the snapshot data promised by the new reporting rules is easily massaged. “Too many larger corporates don’t live up to the promises they make. No code will serve as a deterrent unless someone independent publishes rolling payment figures and is able to perform spot checks.”

The Office of the Small Business Commissioner was created to offer SMEs more ammunition in the fight against late payment, with advice on resolving payment issues and a complaints handling service to pursue disputes with larger organisations on their behalf. However, like the Prompt Payment Code, it relies on suppliers to blow the whistle on larger companies. The fact that case officers’ recommendations are not legally binding begs the question of what material difference the service will make.

Clive Lewis, ICAEW’s head of enterprise, warns that it will take time for the benefits of government initiatives to trickle through. “Once we have information on companies’ payment practices, SMEs must use that information to their benefit.” And yet too many would rather have a bad business relationship than no relationship at all, Lewis warns.

Small businesses can get carried away by the kudos of securing a big customer, but punitive payment terms can be terminal. “Some small companies are so busy fighting fire they forget due diligence. There’s a lot of ignorance about invoice finance to get cash in when you sell goods. It’s not necessarily any more expensive than the cost of credit control or writing off bad debt,” Lewis says.

The government’s own track record on payments prompts questions over its commitment to tackling the problem. FSB research published in April found that nine out of 10 public sector suppliers have been paid late. The FSB wants the government to introduce penalties for public organisations that fail to pay on time and says they should be forced to automatically pay interest on payments made later than contract terms.

Nauzer Siganporia, an audit partner at HW Fisher, isn’t alone in thinking that such sanctions should also be applied to the private sector, and yet there’s reluctance on the part of government to come down hard on perpetrators, particularly with Brexit looming. “I suspect government doesn’t have the appetite for this because they don’t want to irritate big business,” Siganporia says.

The FSB, meanwhile, wants cross-party support for stronger rules that create a whole-board approach to late payments. “This should be done by giving a non-executive director on boards a specific responsibility for good supply chain practice, including overseeing the firm’s statutory duty to report on payment practices,” FSB national chairman Mike Cherry says.

Given the scale of the problem, Uppal’s team of eight and annual budget of £1.3m is, by his own admission, modest. He also concedes that sanctions in the form of fines for serial offenders is the only tactic likely to change behaviour. His focus is on raising the profile of the service, keeping the spotlight on the problem and hoping that better payment practices trickle down to SME buyers too. “If you have the money in your account you’re just passing on the problem to someone else. Eventually it will come and bite you on the backside. It’s about breaking that cycle.”

ICAEW’s Business Advice Service provides resources for start-ups, SMEs and enterprise here. More details on the government’s Prompt Payment Code are here.