Government announces “crack down” on late payments between businesses

Prompt payment of invoices is critical to any business, and particularly true for small and medium enterprises (SME) who rely on this to support future business activities. Research by the Smart Data Foundry found that late payments cost SMEs an average of £22,000 per year and is a contributory factor to many of the SME business closures each year with almost half of invoices not paid on time.

With the new Labour Government’s manifesto pledge to work towards a growth strategy it is no surprise that cracking down on late payments will be an early focus.

The existing legislative and policy frameworks already provide some support for prompt payments – with public sector bodies on 30 day payment terms as standard, and legislative provisions for default interest (where a contract does not include any interest terms).

On 19 September, the government unveiled a range of new measures to improve cash flow through the whole economy. The announcement includes:

A consultation on new laws to hold larger firms who do not pay on time to account;
new legislation to require large businesses to include information on payments in their annual reports;
the tightening of enforcement on existing late payment performance reporting regulations;
a consultation on further policy measures to address poor payment practices; and
a new Fair Payment Code to replace the current Prompt Payment Code, which will require businesses to prove that they have high payment standards.

If these measures are successful larger businesses will share similar accountability to those public sector bodies for their payment times by including this as part of their annual reports (in a similar model to CSR and other supply chain initiatives).

However, it remains to be seen whether this approach will materially change the current culture. The current Prompt Payment Code – a voluntary code of practice established in 2008 in an attempt to change the culture of poor payments – appears to have had little impact – despite having over 4000 signatories as of March 2023. Most SMEs are reluctant to enforce provisions that they do have in their contracts because of the risk of upsetting the commercial relationship with their customers, and larger customers will retain the commercial position to secure better payment terms where it suits their business.

Cultural change takes time, but in the current economic climate for SMEs even a small improvement in payment days will have a big impact on cash-flow and enabling growth.

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