For many small and medium sized businesses (SMEs) who are supplying larger corporations, late payment of their invoices can be a significant issue. While reasonable cashflow tends to be less of a problem for large enterprises, many SMEs’ day-to-day running often depends on being paid on time by their larger customers.
The UK Government acknowledges that late payment of commercial debts remains an important matter for the country’s economy: It can lead to many SMEs working in a state of “cash-flow insecurity”, which in turn might deter them from hiring new employees, buying better machinery or making other investments to grow their business.
“Prompt Payment Codes” are available in the UK and companies can voluntarily sign up to them, signalling their willingness to pay suppliers within 30 to 60 days after receiving their invoices. But as with many voluntary Codes, not all businesses feel inclined to take them fully on board, not least because of the business’ own cashflow requirements.
In reaction to that, Section 3 of the Small Business, Enterprise and Employment Act 2015 (“Act”) comes into force on 26 May 2015 and introduces provisions to address the situation:
Following the age-old method of publicly “naming and shaming” a culprit to encourage compliance, large companies will be required to register every 6 months information about their payment practices onto a public online register as of April 2016.
- For present purposes, a large company is a quoted company with more than 250 employees, a turnover above £25.9 million and a balance-sheet total above £12.9 million. The definition of “quoted” does not include companies listed on the Alternative Investment Market.
- The legislation applies equally to large private limited companies and large LLPs.
In his statement on 20 March 2015, the Minister for Business, Enterprise and Energy, Matthew Hancock MP, said that large companies would have to upload and update the following information onto the new register every 6 months:
- Standard payment terms and any changes made to them;
- Average time to pay their suppliers;
- Proportion of invoices paid beyond agreed terms;
- Proportion of invoices paid (i) within 30 days, (ii) paid within 31 to 60 days and (iii) paid later than 60 days. All payments beyond 60 days will be regarded as amounting to bad practice.
- Amount of late payment interest owed and paid;
- Whether financial incentives were required to join or remain on supplier list;
- Dispute resolution processes;
- Availability of e-invoicing, supply chain finance and preferred supplier lists; and
- Membership of a Payment Code.
Section 3(7) of the Act states that noncompliance with the registration and reporting requirements can attract a fine of up to £5,000 as per Level 5 of the Standard Scale.
What can we make of this new provision?
Prompt payment of any debts owed by a solvent business to another business is generally desirable from a point of business ethics and fair commercial practice. However, it should also be asked whether public money is well invested in creating more red tape and a new administration which serves only as a pillory for tardy payers, much like debtor’s prison in the 19th century. Like with debtor’s prison, it is not guaranteed that a company will pay its bills faster only because it is “named and shamed” on a special register. Unless the sanctions for late payment of debt itself are considerable or the “naming and shaming” would lead to a clear decline in smaller companies doing business with the tardy large one, one might argue that there is too little incentive for large businesses to change their payment practices significantly.
In addition, it needs to be seen how many large businesses will end up under this new legislation and whether this justifies the costs of setting up the new register and operating it.
That being said, the Government has one sound point: According to statistical data from late 2014, the UK’s economy suffers from approximately £33-41 billion of late debts, a great proportion of which is borne by SMEs. SMEs employ about 14 million people in the UK, contributing roughly 49% of the Gross Value Added to the UK’s economy. Looking at those numbers, large companies might understand the rationale for the Government’s actions and we look forward to seeing the new rules work in practice to assess their efficiency.
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