While the Late Payment of Commercial Debt (Interest) Act 1998 has partially shrunk the length of time which businesses have to wait until cash actually hits their coffers, the late payment experience is testament to the fact that this legislation, solely, is not enough.
Is there a solution?
In November, we reported that beefing up the “Prompt Payment Code” was seen as a method of partially alleviating the problem. But will it be an entire solution?
Responsibility for the code has been transferred to the Office of the Small Business Commissioner. Currently, the almost 3000 businesses which are signatories to the code, many of whom are large enterprises, are obliged, firstly, to pay suppliers within the terms agreed at the outset of its contract; secondly, give clear guidance to suppliers on their payment procedures; and thirdly, to encourage good practice by requesting that lead suppliers encourage the code’s adoption throughout their own supply chains.
On 19 January 2021, the Government announced modifications to the code. This should be seen as a further attempt to ensure that larger businesses pay smaller ones timeously. If this works, then it should go a long way towards ensuring that smaller businesses have a positive cash flow with the likelihood of their failing being significantly reduced.
So, what are the modifications? For smaller businesses (defined as having 50 or fewer employees), the required payment period has been slashed from 60 to 30 days. For larger companies, while the payment period remains at 60 days, 95% of invoices should have been paid within this timeframe. In addition, the CEOs or financial directors of company signatories will have to take personal responsibility, confirming that, by signing the code, they acknowledge that, in addition to abiding by its terms, they further recognise that suppliers can charge interest on late payments and that code breaches can be investigated. Breaches of the Code will continue to be publicised.
While the current Code’s signatories will be prepared to adopt its new terms, what about the vast number of businesses who are not signatories and probably do not even know of its existence? And let’s not minimise the problem – with the Federation of Small Business reporting that, each year, 50,000 businesses fail due to late payment, not only does this have a devastating effect on the economy, but on job losses too. Also, if you bear in mind that small enterprises account for approximately half of UK business turnover, it is likely that small ventures are themselves the culprits.
The contention is that emboldening the Code will enhance its profile and, in so doing, go some way to transforming the late payment culture. While CEOs or FDs of the Code’s signatories have to personally commit to it, as well as to its enhancements, will this be enough? Perhaps not. However, the Business Secretary has declared that, “I am determined to bolster the role of the Small Business Commissioner with powers to issue legally binding payment orders, launch investigations and levy fines”.
It may well be that the publicity which could be generated by this will raise the profile of the harm which late payment causes and, possibly, offer at least a partial solution to the mischief.