How strengthening of the Prompt Payment Code can help your business
Small businesses make up approximately two-thirds of UK private sector employment, and account for more than half of overall business turnover.
Late payments impact their bottom line, which ultimately holds back investment or job creation and can lead to job losses and business closures. According to the Federation of Small Businesses (FSB), around 50,000 businesses close every year due to late payments, damaging Britain’s prosperity.
In our July 2019 owner-managed business update we outlined steps businesses could take to ensure that their cash keeps flowing, including credit checks, payment reporting, and also voluntary payment codes such as The Prompt Payment Code (the Code), created by the UK Government in 2008.
Late payment remains a huge issue for SMEs and smaller owner-managed businesses, particularly as a consequence of the Covid-19 pandemic and its impact on the economy. As acknowledged by the FSB National Chairman, Mike Cherry, "A late payment crisis was massively stifling the UK economy before Covid hit. The pandemic has deepened it."
The Government estimates that there is currently over £23bn worth of late invoices owed to firms across Britain, which it says is impacting on businesses’ cash flow and ultimate survival post-Covid.
Despite almost 3,000 companies signing up to the Code, poor payment practices still lead to many payments delayed far beyond the target required for 95% of invoices for companies to avoid being publicly struck off the Code until substantial changes to their payment practices have been made.
What are the changes?
In an attempt to tackle these late payments and protect jobs, the Government announced the following reforms to the Code on 19 January 2021, to take immediate effect:
- A company's CEO or Finance Director (or the business owner where it is a small business) is required to personally sign the Code to ensure responsibility for payment practices is taken at the highest level of an organisation.
- Introduction of 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.
- Administrators of the Code will be able to investigate breaches based on third-party information. The Government has also pledged to investigate breaches of the code, making any confirmed breaches public.
In addition, effective from 1 July 2021 there will be a new requirement for signatories to pay 95% of invoices from small businesses (those with less than 50 employees) within 30 days.
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. By signing up to the Prompt Payment Code and sticking to its rules, large firms can help Britain to build back better, protecting the jobs, innovation and growth which small businesses drive right across the UK."
What are the consequences for signatories?
Businesses that have signed up to the Code and show payment of less than then required 90% of invoices within 60 days will be suspended until they achieve at least that percentage. When a signatory’s payment practice is challenged, Code administrators will investigate and attempt to achieve a satisfactory outcome, including through the use of mediation. However, if a suspended signatory does not engage with Code administrators, or achieve compliance within a reasonable timescale, that signatory will be permanently removed from the Code.
A list of temporarily suspended signatories is available on the Small Business Commissioner website, which adds an element of reputational damage for any non-complying business that have volunteered to adhere to the code.
What does the future look like?
These changes are linked to the Government attempt to strengthen the powers of the Small Business Commissioner (SBC) to ensure larger companies pay their smaller partners on time. Responses and reforms from the consultation on the powers of the SBC, which closed on 24 December 2020, will be published in due course. Some of the new powers proposed include legally binding payment orders, launching investigations and levying fines, which could further assist small businesses in the near future.
Furthermore, on 16 March 2021 the Government announced the appointment of Liz Barclay as Small Business Commissioner, a post created in 2016 to help small businesses secure payments them and enforce a new culture of prompt payment. Ms Barclay will lead the national effort to clampdown on delayed invoices, said "We need a real culture change around business payments in the UK to take pressure off our phenomenal entrepreneurs. By working with businesses and ensuring their concerns are listened to I hope to be able to deliver a payment regime that keeps cash flowing and works for everyone".
What else can businesses do?
Many companies have spent the last year overwhelmed with responding to the challenges of the Covid-19 pandemic. However, a review of terms and conditions as a priority could be the best investment to strengthen any business' position when trying to maximise recoveries from any late payments and protect themselves from any perceived bad debt.
If this is something that Trowers can assist with then please do get in touch.