The government has, this week, unveiled new measures to support small businesses and the self-employed by tackling “the scourge of late payments”. New legislation being brought in the coming weeks will require all large businesses to include payment reporting in their annual reports – putting the onus on them to provide clarity in their annual reports about how they treat small firms. This will mean company boards and international investors will be able to see how firms are operating. Enforcement will also be stepped up on the existing late payment performance reporting regulations which require large companies to report their payment performance twice yearly.
The announcement by Business Secretary John Reynolds also sets down an intention to consult on tough new laws which will hold larger firms to account and get cash flowing back into businesses – this is seen as key to supporting growth.
How are requirements changing?
Under current laws, responsible directors at non-compliant companies who don’t report their payment practices could face criminal prosecutions including potentially unlimited fines and criminal records.
A new Fair Payment Code will replace the old Prompt Payment Code, and will be open to signatories this autumn. Businesses will need to prove they have met good payment standards before being awarded official code status.
This will be designed to push businesses to pay faster more often, to be awarded either gold, silver or bronze status. The Code will also shine a light on those responsible businesses doing the right thing by their suppliers and small firms.
It comes as part of our wider work to support SMEs to help go for growth with reform to business rates, getting more small firms exporting and our new industrial strategy.
A consultation which will be launched in the coming months, which will also consider a range of further policy measures that could help address poor payment practices. These new proposals, subject to consultation, will be bought forward on audit and audit committees, in order to help rebuild small businesses’ trust that they will be paid on time and to deliver on Labour’s manifesto commitment to tackle late payments.
Prime Minister Keir Starmer said:
We’re determined to back small businesses by unlocking their barriers to growth, and stamping out late payments is at the heart of this.
We know how important it is for business owners to have the peace of mind and certainty around their cashflow to keep their businesses alive. Late payments cost businesses tens of thousands of pounds and is one of the biggest reasons businesses collapse.
After years of delay, we’re bringing forward measures that small businesses have long been calling for to tackle late payments once and for all.
Business Secretary Jonathan Reynolds said:
Late payments are simply unacceptable and this government is determined to level the playing field for small business. When the cashflow runs dry, small firms go under which is why we need to hold larger business to account with their payment practices and foster an environment that supports growth and jobs.
Slashing trade barriers, reforming business rates, getting more SMEs exporting – this government is committed to small firms. We know there’s a lot more to be done, but today we are calling time on late payers once and for all.
New research published by the Department for Business and Trade has found payment problems multiply the further down the supply chain you go. With delays to payments increasing with each business along a supply chain, this results in smaller businesses generally experiencing more issues with late invoices than larger firms.
These new findings underpin the need to move quickly to crack down on late payments. The research also found that there was a clear imbalance between big and small firms, and that administrative errors are a major factor in creating slow payments with 24% of firms saying that invoices being incorrectly handled added to delays.
The government will work closely with industry to discuss what further measures can be considered to crack down on late payments while ensuring we strike the right balance and avoid excessive burdens on businesses.
The Small Business Commissioner, Liz Barclay, said:
I am delighted to announce a new Fair Payment Code will be launched this autumn. The new code will reward businesses that treat their suppliers fairly and pay them quickly. It will also include an ambitious new Gold Award which aims to make 30-day payments the new standard for which businesses can aim.
We need sustainable, resilient businesses at all levels of the supply chains, to achieve the growth the economy needs. That means paying everyone from the largest supplier to the sole trader quicker, so they have the confidence to invest, improve productivity and grow. Fair payment terms and on time payments are the key.
FIS Reaction
FIS has welcomed the announcements. The organisation had already been in touch to express concern that legislation due to be laid before Parliament before the snap election was called in June had been delayed. In their letter to Construcion Minister Sarah JOnes MP, FIS made the following statement:
<in construction> Large firms help enable projects, but it is the supply chain of SMEs who will need to find and invest in the 66% growth in the workforce we will need to deliver the homes that Labour is expecting. These SMEs find themselves at the mercy of inept and at times immoral procurement practices, contractual processes that leave them picking up the full risk of mistakes and omissions by others and credit and payment terms that make it almost impossible to plan and invest effectively as businesses.
SMEs are constantly paid late with appalling credit terms that often see them exposed to 90 days + of cost on a job before they receive a penny. With little protection available from insurance, this is offset by trade and charge card credit on materials. These SMEs have no protection from upstream failure and a raft of these in recent months has rocked our supply chain. Tracking payment practices (value not volume) is not enough (we need to look at how the supply chain is protected with bonds and project bank accounts), but a worsening payment trend can give the supply chain vital warning of a looming failure.”.
In her response, the Minister provided some reassurance that the new Government do understand the severity of the situation.
The Government is committed to creating a better business environment for small businesses. This includes taking action on late payments, to ensure small businesses and the self-employed are paid on time, and to increase transparency in relation to payment performance. Whilst the draft Statutory Instrument introduced earlier this year had to be withdrawn, the Government is fully aware of the importance of these changes to the payment reporting requirements to subcontractors in the construction sector. Therefore, it intends to reintroduce this legislation at the earliest opportunity. The legislation is now expected to be re-laid before Parliament in 2024, enabling commencement in 2025.
You can see a full copy of the Minister’s letter (in which she also expresses gratitude for the proposals set down in FIS Manifesto) here here.
Read FIS Manifesto for the new Government: A Blueprint for a better Construction here
