22 December 2020
Late payment legislation and the pandemic
With insolvency on the rise due to the COVID pandemic-related lockdowns in the UK, it is important for businesses to do everything possible to keep cash flow stable. It is estimated that around 23% of insolvencies in the UK are due to late payments causing cash flow problems. This will only get worse if not addressed, especially after the events of this year. Read our latest article below to find out the latest on incoming legislation...
What is the proposed legislation?
Labour peer Lord Mendelsohn has introduced a Private Members’ Bill to the House of Lords which aims to give strengthened powers to the Small Business Commissioner and address the ongoing issues with late payments. The bill would legislate a 30-day limit on all invoice payments and the Small Business Commissioner would be able to impose large fines on repeated late payers.
It is felt that late payment is crippling small businesses, so at a time where investment in the economy is needed more than ever, something had to be done about it. The bill also aims to ban what are termed ‘predatory’ payment practices such as charges for joining and maintaining a position on approved supplier lists or prompt-payment discounts.
What are the relevant statistics?
In a 2016 report published by The Federation of Self-Employed and Small Businesses (FSB), it was estimated that a £2.5bn boost to the British economy could have been achieved if all payments had been made on time and 50,000 businesses would have been able to continue operating. The average value of a late payment invoice, according to the same report, was £6,142 and 37% of businesses reported running into cash flow problems as a result of late payments with 30% forced to turn to short-term borrowing to cover it, such as an overdraft.
According to figures published by Tide in 2020, the average value of a late payment invoice has gone up to £8,500. A further report published in November 2019 by Intuit Quickbooks suggests that a third of all payments to small businesses are late and SMEs spend so much time chasing these late payments it adds up to more than a working week each year and a total of 56.4 million hours a year across the UK.
What has been done to address the problem in the past?
The Association of Accounting Technicians (AAT) has attempted to address the problem by making three recommendations. The AAT’s first recommendation is that signing up to the Prompt Payment Code should be compulsory for firms with over 250 staff. The Prompt Payment Code “sets the gold standard in payment terms and plays an important role in bringing about a culture change in payment practices”.
Signatories to the Prompt Payment Code undertake to pay suppliers on time, give clear guidance to suppliers and encourage good practice. Paying suppliers on time means that payments are made within the terms agreed at the outset and not trying to change these terms retrospectively. Giving clear guidance to suppliers means that they will be provided with clarity on payment processes which can be accessed easily. There should also be a system in place for dealing with complaints and disputes and suppliers should also be promptly notified of any reason why their invoice terms will not be met. Code signatories should also encourage suppliers they work with to sign up to the code.
The AAT’s second recommendation is that payment terms should be reduced by half to a maximum of 30 days rather than 60 days.
The AAT’s third recommendation is for the introduction of a financial penalty regime for firms which persistently pay late which is clear and simple and is enforced by the Small Business Commissioner. The AAT have confirmed that they welcome and support Lord Mendelsohn’s Private Members’ Bill since it includes all their recommendations.
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