Late payments crisis destroys small businesses as Government reviews payment reporting

aat comment

AAT calls on the Government to change its approach to late payments before more companies go to the wall.

Research published last year by Pay.UK and the Chartered Institute of Credit Management (CICM) indicated that more than half of all small businesses were affected by late payments in 2020 and that they were collectively owed over £17bn. Last month, a Federation of Small Business (FSB) survey suggested that over 400,000 small businesses will collapse in 2022 due to late payment.

Whilst small businesses are being destroyed by the late payment culture at many larger organisations, the Government is reviewing the payment reporting regulations it introduced in 2017.

What are the Payment Practices and Performance Regulations?

The Payment Practices and Performance Regulations require any medium or large company, public, private or quoted, to report their payment practices via a Government portal every six months.

The Government’s objectives for these regulations were to “increase transparency and public scrutiny of large businesses’ payment practices and performance, and to give small business suppliers better information so they can make informed decisions about who to trade with, negotiate fairer terms, and challenge late payments.”

Regulations fail to deliver

The problem of late payments has grown rather than decreased since the introduction of these regulations in 2017. This was already the case prior to the pandemic, and the pandemic has exacerbated the problem.

The objective of transparency is greatly undermined by the fact many companies are purposefully avoiding reporting their payment performance.

In addition, the Department for Business, Energy & Industrial Strategy (BEIS) does not publish any statistics as to how many of the UK’s five million-plus SMEs access the portal for information. Given the reluctance to make such information publicly available, combined with anecdotal evidence from AAT members, it is reasonable to assume the intended audience is rarely accessing that information.

The payment reporting regulations make no real difference because, while there is an obligation to report, there is no obligation to address any poor payment practices. A quick check of the BEIS pay reporting database reveals that numerous companies continue to pay the vast majority of their suppliers outside agreed payment terms. With several such as Randstad Middle East Ltd and KCA Technical Support Ltd staggeringly failing to pay 100% of their invoices within agreed timescales over a six-month period – both pre-pandemic examples so immune to suggestions that the pandemic was to blame.

Expecting a transformation of payment culture simply from imposing reporting requirements, without any form of sanction or consequence is wholly unrealistic.

Reputational risk?

The Government has grossly overestimated big business concerns about reputational damage from reporting bad payment practices in the same way that most of the very largest businesses in the UK have virtually zero concern over reputational damage from exorbitant executive pay.

Self-interest and shareholder interests trump any short-lived media focus on a company’s payment practices, as was amply demonstrated by the performance of several FTSE 100 companies during the pandemic.

For big business, delaying payment to suppliers can bring considerable financial benefits from a cash flow perspective. This, combined with a lack of consequences, means it is no surprise that reporting information to an obscure government database, rarely used by suppliers and only occasionally referenced in the media, has not delivered the slightest change in payment practices – let alone the culture change required of UK businesses.

AAT’s stance on late payment

For many years AAT has campaigned against the UK’s serious late payment culture. We’ve argued for three key recommendations:

  1. AAT has campaigned for the maximum payment terms under the Prompt Payment Code to be reduced from 60 to 30 days. This ultimately proved successful with this change coming into effect last year.
  2. AAT, along with various organisations, has repeatedly pushed for the Small Business Commissioner to have the power to impose financial penalties on serial late payers. This is now belatedly being addressed.
  3. Lastly, AAT has always stated that Government should legislate to ensure all companies have to pay 95% of their invoices within 30 days of receipt.

AAT’s response

The law obliges the Government to assess the effectiveness of the Payment Practices & Performance Regulations after five years. This assessment is now due. They must produce a report by 6 April 2022.

In 2018, AAT was highly critical of the Payment Practices and Performance Regulations in its submission to Government on the culture of late payment in the UK. Nothing has subsequently happened to prompt a change of view. In fact, there is now an evidence base to reinforce AAT’s concerns about the inadequate nature of these payment reporting obligations.

So, AAT has again strongly recommended that the Government legislate for all companies to pay 95% of their suppliers within 30 days.

This would remove bureaucratic reporting requirements, such as those imposed by the 2017 regulations, or the need for disclosures on payment practices being made within company annual reports, and all the other burdensome tweaks made over the past decade that have failed to make any real difference to the problem.

There is widespread support for such a move from the business community and even from policymakers – a YouGov poll commissioned by AAT showed that 73% of MPs back the idea of a 30-day maximum payment term.

French disconnection

Civil servants frequently use the example of France as an argument against legislating for maximum payment terms. This is a red herring. The main weakness here is not the existence of a maximum payment term but the fact payment terms are too long and too complex – a maximum of 45 days for periodic invoices, 60 days for construction industry invoices, 90 days for those exporting outside the EU (and other variations).

A single maximum is required to avoid confusion and unnecessary complexity and one that is not too long is essential to guarantee success.

30 days would meet this criterion and 30 days is what AAT will continue to campaign for.

Phil Hall is AAT's Head of Public Affairs and Public Policy.

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