Is the Fair Payment Code the answer to late payments?

Late payments and unfavourable payment terms are the scourge of small businesses, and have a significant knock-on effect for the UK economy.

Small businesses have fewer resources to fall back on during lean times, so are more likely to experience cash flow issues due to payment problems.

Intuit Quickbooks says late payments cost SMEs around £22,000 a year, along with 56m hours of lost productivity. FSB research has found it forces the closure of 50,000 businesses every year.

Given that SMEs account for around 60% of UK employment and 48% of business turnover, according to official government statistics, late payments significantly impact the British economy and growth.

The recently announced ‘New Fair Payment Code’ was proposed as part of a package of government measures, and is intended to address the big issue of late payments between businesses.

The government has announced:

• New legislation which will require all large businesses to include payment reporting in their annual reports to highlight how they treat small firms.
• Tougher enforcement of existing late payment performance reporting regulations, which will see large companies report their payment performance twice a year.
• Consultation on these laws to help hold larger firms to account.

But how effective is the new code likely to be? We spoke to accountants and bookkeepers with small business clients for their views.

As members will be well aware, late payments are a long-standing problem for small businesses. AAT has been campaigning on the issue for a while now, so here’s how we reacted to news of the measures. Timely, fair and full payment remains a top priority for us.

Build fair payment terms into regulatory frameworks

Ellis Harris-Boulter MAAT, Founder and Director, FieCo Accountancy and Marketing, AAT Tutor

The 2008 Prompt Payment Code was somewhat lacklustre until 2021 reforms strengthed the requirements for businesses. The Fair Payment Code is undoubtedly a more robust and ambitious attempt to curb late payments, and is a positive step from the government. However, I’m unconvinced that it’ll have any material effect on late payments.

The code remains voluntary, even for the largest companies, which are some of the worst offenders. I don’t believe that the new law requiring large companies to report publicly on payment practices will inspire a revolution in the bureaucracy that seems to prevent them from paying suppliers reasonably.

The small business commissioner states that there are “over 5,000 signatories to the existing code.” Compare this to 5.5m private sector businesses in the UK, and it’s not even a drop in the ocean.

Whilst small businesses rely on their larger, late-paying customers, they’re not even enforcing their right to charge interest for fear of being replaced. So I find it unlikely that they’ll feel much more power if they’re a part of the 5% of suppliers outside of the Fair Payment Code tiers.

Potential solutions could include:

• Mandate the Fair Payment Code for medium and large businesses, enforcing registration like registration to the Information Commissioner’s Office.
• Attach hefty fines and publicise companies in breach. The fines generated could be invested in free legal advice for sole traders and small businesses to support them through legal warning letters and credit recovery.
• Provide mechanisms for small businesses to report repeat late-payers.
• Build fair payment into regulatory requirements. For example, the FCA could require those with a banking licence to pay supplier invoices within X days, or accounting bodies could require licenced accountants to meet payment deadlines.

Verdict: The Fair Payment Code won’t make a huge difference as it’s voluntary but attaching fines for late payers and building fair payment terms into regulatory requirements may help.

I’m not hopeful about the Fair Payment Code

Wendy Mitchell, Certified Bookkeeper and Finance Manager, School for CEOs

For small companies with tight profit margins, having cash flow restricted due to late payers has a detrimental effect. It affects their suppliers (often also small or micro businesses), staff trust and morale, not to mention the business owner’s own stress levels.

I have seen late payers cause:

• business owners delaying paying their suppliers resulting in damaged relationships and loss of reputation,
• late or part-paying staff salaries resulting in awful staff morale and loss of trust
• owners funding the business themselves to the point of taking on personal debt. I have worked with a client pushed to the brink of going under due to their large client taking months to pay.

I’m not hopeful about the impact of the Fair Payment Code, after all the Prompt Payment Code which has been around for 15 or so years, hasn’t had a noticeable effect.

Reporting on payment terms for large companies could be a solution; no one likes to be named and shamed. I feel there is a lack of publicity around the issue and the code. Why should people know and care about it? It needs to be better publicised.  

There could be a way for small businesses to ‘award’ larger businesses who pay promptly, similar to how TrustPilot works, like a review platform which indicates how businesses perform as a paying customer.

Verdict: Implement a TrustPilot-style review platform to indicate how businesses perform when paying suppliers.

Fair payment terms are a CSR issue and should be part of ESG reporting

Helen Perry, Assistant Accountant, Lineview Solutions

The main issue is definitely one of cash flow. I have worked with SMEs for several years now and late payments can have a massive impact. For service-related SMEs in particular, it is not as simple as putting the customer on stop/withdrawing services, as that can have a great impact on supplier-customer relations, as well as delaying projects and having staff free who should be working on those projects.

In my position, I work for an SME with huge multinational customers, so the balance of power is such that the customer rather than the supplier dictates the payment terms. In some cases, alternatives are agreed in contract but this isn’t fed through to the payment team – which is usually highly automated and can’t make changes.

I’m not convinced that the Fair Payment Code is going to make a big difference, at least not initially. I’d suggest that this is a Corporate Social Responsibility (CSR) issue, and should be part of ESG reports. If there is no incentive, then companies are likely to stick to current practices and those which best affect their own cash flow.

Verdict: Fair payment terms are a CSR issue and should be part of ESG reporting.

Would you like to contribute to future articles like this one? If so, please get in touch with Annie Makoff-Clark at [email protected].

Annie Makoff is a freelance journalist and editor.