Government tightens prompt payment code to require 30-day payments
Companies that have signed up to the Prompt Payment Code will be obliged to pay small businesses within 30 days, under new reforms announced by the UK Government today.
Despite almost 3,000 companies signing the Code, the government said poor payment practices are still rife, with many payments delayed well beyond the current 60-day target required for 95% of invoices. Currently, £23.4 billion worth of late invoices are owed to firms across Britain, impacting on businesses’ cash flow and ultimate survival.
To help tackle the problem, businesses owners, finance directors or CEOs will be required to take personal responsibility by signing the Code, acknowledging that suppliers can charge interest on late invoices under the Code and that breaches will be investigated. Code signatories will be required to redouble their efforts to ensure payments are made on time and breaches will continue to be publicised by the government in order to encourage compliance.
The move comes as the government seeks to strengthen the powers of the Small Business Commissioner (SBC) to ensure larger companies pay their smaller partners on time. New powers proposed in a recently closed consultation include legally binding payment orders, launching investigations and levying fines.
Small business minister Paul Scully said: “Our incredible small businesses will be vital to our recovery from the coronavirus pandemic, supporting millions of livelihoods across the UK.
“Today, we are relieving some of the pressure on small business owners by introducing significant reforms to the UK payments regime – pushing big businesses to pay their suppliers on time.”
According to the Federation of Small Businesses (FSB), around 50,000 businesses close every year due to late payments, damaging Britain’s prosperity and threatening jobs.
Small businesses account for two-thirds of UK private sector employment and more than half of business turnover. Late payments impact their bottom line, which can hold back investment or job creation and, in the worst cases, lead to job losses and business closures.
The reforms will help to build a culture of prompt payment between companies and challenge UK businesses to change their practices and stand by small partners at a critical time for the UK’s economic recovery.
The changes coming into effect immediately are:
- requiring a company’s CEO or finance director, or the business owner where it is a small business, to personally sign the Code to ensure responsibility for payment practices is taken at the highest level of an organisation
- introducing a new logo for signatories to use in external communications to show their commitment to the Code, making it more damaging to a company’s reputation to breach it
- acknowledgement as a condition of signing the Code that suppliers can charge interest on late invoices
- enabling administrators of the Code to investigate breaches based on third-party information
In addition, the new requirement for signatories to pay 95% of invoices from small businesses (those with less than 50 employees) within 30 days will be effective from 1 July 2021. The target for larger businesses will remain 95% of invoices within 60 days.
Interim small business commissioner Philip King said: “I am delighted to launch the reformed Prompt Payment Code. In addition to their current public commitment to pay 95% of all payments to their supply chain within 60 days, signatories of the reformed Code have committed to paying 95% of their small business suppliers within 30 days. I commend those signatories who make further individual commitments to go further and settle invoices sooner.
“Late payment causes real hardship to small businesses, and the issue is more prevalent than ever due to the continued impact of the pandemic. Code signatories of all sizes demonstrate their commitment to ending the culture of late payment and helping to increase business confidence. I encourage businesses of all sizes to implement ethical business practices and sign up to become a Code signatory and join us on our journey to aid business recovery post-COVID-19.”
FSB national chairman, Mike Cherry, said: “A late payment crisis was massively stifling the UK economy before COVID hit. The pandemic has deepened it. FSB has campaigned for good payment practice to become the norm across the UK economy, not least through a toughening of the Prompt Payment Code and the adoption of 30 days as the new maximum payment period.
“It’s good to see the progress announced today by BEIS and especially the outgoing Small Business Commissioner that has driven this agenda. It’s now time for swift delivery, and for all existing and future PPC signatories to implement 30 days as the new maximum.
“It’s now time for swift delivery, and for all existing and future PPC signatories to implement 30 days as the new maximum. Ending our pernicious poor payment culture for good over the coming months will be fundamental to turning our hopes of economic recovery into reality.”
The PPC currently has over 2,800 signatories, who are required to pay 95% of their invoices within 60 days or else be publicly struck off the Code until substantial changes to their payment practices have been made.
When a company is struck off the Code for poor practice, this is publicly announced by the Small Business Commissioner’s Office. A record of signatories and struck-off companies is maintained on the Prompt Payment Code and SBC websites.
The changes to the Code sit alongside a consultation on the powers of the Small Business Commissioner, which closed on 24 December 2020. The government will publish consultation responses and take forward proposed reforms in due course.
Hannah Vickers, chief executive of the Association for Consultancy and Engineering (ACE), welcomed the changes: “We have long campaigned for reform of the payment culture in this country, and our members will be delighted with today’s news which is a positive step in the right direction.
“While we will, of course, need to wait to see how effective these changes are in practice, it represents the right shift in tone on a crucial issue for SMEs. To put it bluntly, they cannot be expected to help society bounce back from the pandemic if they are spending most of their time chasing payments owed to them.
“We will be closely monitoring the impact of these new measures over the coming weeks and months, but it is vital that as much money as possible is flowing through the supply chain at this critical moment in time, and today’s announcements will hopefully ensure that this is the case.”