There can be no denying that late payment is a big issue for SMEs.
In fact, for some small businesses, it isn’t just a case of late payment but often “no payment”. The Association of Independent Professionals and the Self-Employed (IPSE) recently confirmed that 43% of the self-employed (many of whom may be operating on a limited company basis) have never been paid for work that they have undertaken and invoiced for.
Indeed, even those with respectable payment terms of 30 days may still not pay their suppliers within the agreed terms. This point was far from uniquely demonstrated by Grainer & Worrall Engineering who paid suppliers within agreed payment terms in just 4% of cases for the six months from June to December 2017.
The impact of late payment
Almost a quarter of insolvencies (23%) are caused by late payment issues. Even for those companies that manage to absorb late payment, the loss of income can stop small businesses from investing and growing, it can also damage productivity and generally has a very negative impact. Of course, that’s to say nothing of the often severe mental health implications that late payment can have on both business owners and sometimes other members of staff.
60% of AAT’s 140,000 members either work for or run their own SME and its 4,250 licensed accountants provide tax and accountancy services to more than 400,000 British SMEs. It’s a big issue for AAT members and an even bigger issue for members clients.
Similarly, with so many AAT members working for large organisations – 80% of the FTSE 100 has an AAT apprentice in their finance function – raising further awareness and agitating for change in those big organisations is key.
The Prompt Payment Code was introduced in 2012 to try and address this problem. This voluntary code requires large companies to pay their suppliers within a maximum of 60 days. Only 2,000 companies have signed the voluntary code but even some of these signatories are in breach of it because they have payment terms beyond 60 days. There is very little enforcement of the code and no financial penalties are imposed for a failure to comply.
Earlier this month, the new Small Business Minister, Kelly Tolhurst MP, who has thankfully already expressed some interest in getting to grips with this thorny issue, launched a public call for evidence on the subject.
AAT has today responded to the Department for Business, Energy & Industrial Strategy (BEIS) call for evidence by highlighting that the past decade or so has seen a stream of tweaks, voluntarism and reliance on big employers to do the right thing, all of which have failed to address the problem of late payments.
AAT therefore believes that the time has come for Government to legislate to solve the problem once and for all, and has made three key recommendations to solve the problem. These are:
- that the Prompt Payment Code should be made compulsory for companies with more than 250 staff
- that payment terms should be halved from a maximum of 60 days to a maximum of 30 days
- that a clear, simple financial penalty regime for non-compliance should be introduced and enforced by the Small Business Commissioner
These recommendations have already won the support of a diverse range of SMEs.
For example, Peter Humphrey of Kesblade Ltd, a property management firm based in Rochester, said;
“At some stage, late payment will be a problem for most small businesses and despite voluntary attempts to fix the problem through the Prompt Payment Code and Small Business Commissioner, the problem remains stubbornly high. I’d certainly support AAT’s recommendations for the Code to be put on a statutory footing for all companies with 250+ employees, for payment terms to be no longer than 30 days and for fines to be introduced for companies who fail to do this. This would help tens of thousands of SMEs and could hardly be considered a burden for large companies.”
Leanne McConnell of Virtually Perfect, an Eastbourne based SME, is another business owner keen to see reform. Speaking to AAT last week she said;
“My business partner and I have sometimes had difficulties getting money owed which probably wouldn’t have happened if there was a legal requirement to pay within 30 days and the realistic threat of a meaningful fine if it wasn’t paid. That’s why I support the AAT recommendations for change and really hope the Government is listening.”
Meaningful action is required
AAT has focused on the impact that developments to the Prompt Payment Code are likely to have on AAT’s members, members clients and employers and with this in mind will continue to press for change at every available opportunity. It’s important we do so for the millions of organisations like Zip Us In who alerted us to their views on the subject just a few days ago.
Kate Bell, founder and Director of Zip Us In, an SME owner based in Salisbury, highlighted her concerns as follows;
“As a start-up company, late payment caused me several difficulties but even now, as a firmly established and successful company, late payment can have a big impact on me and my company. AAT’s recommendations to halve maximum payment terms from 60 to 30 days and to require all companies with 250+ employees to sign the Prompt Payment Code are definitely steps in the right direction. Enforcement is also key because although imposing obligations is great if companies meet these obligations, there needs to be strong enforcement action against those that don’t – an initial warning followed by a fine for non-compliance would seem like a sensible option.”
Previous efforts to tackle the scourge of late payment have made little difference, the time for meaningful Government action in this area is long overdue and so, with the clock ticking, AAT is urging the small business Minister and her department to give serious consideration to AAT’s recommendations and to act without further delay.
Phil Hall is AAT's Head of Public Affairs and Public Policy.