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Print articleGovernment to Tackle Late Payments to SMEs with Tougher Remedies – the Whole Solution?
November, 2013 - Iain Drummond, Kate GIllies
Background
Following a recent YouGov survey's finding that 85 per cent of SMEs in the UK have been affected by late payments over the past two years, Prime Minister David Cameron has announced that the UK government is to launch a consultation this year to examine ways of reducing this problem, and find solutions to ensure payments are made more timeously to SMEs by larger companies.
In recent weeks the media has reported that one of the government's proposals is that the Prompt Payment Code should be amended to include tougher remedies for late payment – is this the correct approach? Will this alone address the situation?
Late Payment Provisions
The remedies that currently exist for businesses suffering late payments are:
- The Late Payment of Commercial Debts (Interest) Act 1998 ("the Act")
Interest
The Act implies a term into business-to-business contracts, giving at least 8% per year interest on the price of goods or services (8% above base rate). This is a statutory right for any SME, and one which can only be contracted out of if the contract otherwise provides a substantial remedy under section 9 of the Act.
Compensation payment
Under section 5A(2) of the Act once interest begins to run the SME is entitled to a fixed sum in addition to any interest claimed for. The amount is fixed according to the size of the overdue debt: £40 if the debt below £1000, £70 if the debt below £10,000 and £100 if the debt is more than £10,000.
- The Late Payment of Commercial Debts Regulations 2013 ("The Regulations")
The Regulations amended the Act with effect from 16 March 2013 in order to implement the EU Late Payment Directive 2011. The Regulations provided additional remedies:
Recovery for reasonable costs
As well as the fixed charge that a supplier may claim under the Act as compensation, the Regulations entitle the supplier to claim any other reasonable costs incurred in recovering the debt. Any attempt to exclude or limit this right is made subject to the Unfair Contract Terms Act reasonableness test (regardless of whether the contract concerned is on written standard terms or is an individually negotiated agreement - regulation 3).
60 days/30 days
Although not a remedy as such, the Regulations also require that business-to-business payments be made within 60 days and public sector bills should be paid within 30 days.
- Prompt Payment Code
The Prompt Payment Code is a voluntary initiative that was set up by the UK government some four years ago or so, to encourage and promote best practice between organisations and their suppliers in relation to payment. If a firm signs up to this voluntary code then they must adhere to its rules. Larger firms are being encouraged to sign up as the government's message is that this will provide certainty to their suppliers. Certainty on payment inspires confidence across the supply chain and this confidence stimulates investment and growth. The message is therefore that this is good for both suppliers and customers.
However, because the code is voluntary it has been criticised as being ineffective, and as there is no obligation to sign up to it many SMEs are still affected by late payments.
Government Consultation
There has been speculation as to what will be addressed in the forthcoming government consultation, including but not limited to:
whether a means of enforcing the legislation could be by strengthening the Prompt Payment Code discussed above, including the possibly of imposing fines on companies that do not pay suppliers on time or other sanctions;
whether more can be done to enforce the legislation which already exists;
whether there is a need for further legislation and/or penalties;
whether the government can do more to help SMEs, including through new technologies and services such as electronic invoicing and mobile payments; and
the reluctance of SMEs to enforce their statutory right to interest and compensation on late payments, and exploring ways to encourage these SMEs to start enforcing these rights.
SME attitudes
At the recent Scottish Construction Convention held at Eurocentral on 8 October 2013, one of our construction disputes specialists, partner and solicitor advocate Iain Drummond, hosted a learning zone, leading a discussion on a number of issues, including payment. A common feature of the discussions was the reluctance shown by SME representatives in the audience to charge interest on late payments, or to impose the other sanctions available to them under the late payment legislation. The reason given by most was the fear of causing long-term damage to their relationship with their customer, whether a main contractor or client. Some admitted to using the provisions as a threat, but without actually following through on them.
Therefore, there is a clear reluctance amongst SMEs to use the remedies provided to them for late payment. The government's consultation will therefore need to focus on this aspect as well as on the practices and attitudes of late payers.
Conclusions
According to data from electronic transfer firm BACS, late payments to SMEs are reported to be a huge problem presently within the UK, with SMEs collectively being owed late payments of some £30.2bn.
There are several statutory measures available to SMEs for late payment but these are not being used primarily due to the fear of causing relationship damage.
The forthcoming government consultation seeks to address the issue of late payments to SMEs, in particular by imposing possible further sanctions on those who do not pay on time. However, experience tells us that in order for these remedies to be effective, there needs to be a wider change in culture and attitudes to payment amongst payees as well as payers.
The Prompt Payment Code is currently branded as "driving a change in payment culture". Perhaps the government's forthcoming consultation will bring this closer to becoming a reality.
Following a recent YouGov survey's finding that 85 per cent of SMEs in the UK have been affected by late payments over the past two years, Prime Minister David Cameron has announced that the UK government is to launch a consultation this year to examine ways of reducing this problem, and find solutions to ensure payments are made more timeously to SMEs by larger companies.
In recent weeks the media has reported that one of the government's proposals is that the Prompt Payment Code should be amended to include tougher remedies for late payment – is this the correct approach? Will this alone address the situation?
Late Payment Provisions
The remedies that currently exist for businesses suffering late payments are:
- The Late Payment of Commercial Debts (Interest) Act 1998 ("the Act")
Interest
The Act implies a term into business-to-business contracts, giving at least 8% per year interest on the price of goods or services (8% above base rate). This is a statutory right for any SME, and one which can only be contracted out of if the contract otherwise provides a substantial remedy under section 9 of the Act.
Compensation payment
Under section 5A(2) of the Act once interest begins to run the SME is entitled to a fixed sum in addition to any interest claimed for. The amount is fixed according to the size of the overdue debt: £40 if the debt below £1000, £70 if the debt below £10,000 and £100 if the debt is more than £10,000.
- The Late Payment of Commercial Debts Regulations 2013 ("The Regulations")
The Regulations amended the Act with effect from 16 March 2013 in order to implement the EU Late Payment Directive 2011. The Regulations provided additional remedies:
Recovery for reasonable costs
As well as the fixed charge that a supplier may claim under the Act as compensation, the Regulations entitle the supplier to claim any other reasonable costs incurred in recovering the debt. Any attempt to exclude or limit this right is made subject to the Unfair Contract Terms Act reasonableness test (regardless of whether the contract concerned is on written standard terms or is an individually negotiated agreement - regulation 3).
60 days/30 days
Although not a remedy as such, the Regulations also require that business-to-business payments be made within 60 days and public sector bills should be paid within 30 days.
- Prompt Payment Code
The Prompt Payment Code is a voluntary initiative that was set up by the UK government some four years ago or so, to encourage and promote best practice between organisations and their suppliers in relation to payment. If a firm signs up to this voluntary code then they must adhere to its rules. Larger firms are being encouraged to sign up as the government's message is that this will provide certainty to their suppliers. Certainty on payment inspires confidence across the supply chain and this confidence stimulates investment and growth. The message is therefore that this is good for both suppliers and customers.
However, because the code is voluntary it has been criticised as being ineffective, and as there is no obligation to sign up to it many SMEs are still affected by late payments.
Government Consultation
There has been speculation as to what will be addressed in the forthcoming government consultation, including but not limited to:
whether a means of enforcing the legislation could be by strengthening the Prompt Payment Code discussed above, including the possibly of imposing fines on companies that do not pay suppliers on time or other sanctions;
whether more can be done to enforce the legislation which already exists;
whether there is a need for further legislation and/or penalties;
whether the government can do more to help SMEs, including through new technologies and services such as electronic invoicing and mobile payments; and
the reluctance of SMEs to enforce their statutory right to interest and compensation on late payments, and exploring ways to encourage these SMEs to start enforcing these rights.
SME attitudes
At the recent Scottish Construction Convention held at Eurocentral on 8 October 2013, one of our construction disputes specialists, partner and solicitor advocate Iain Drummond, hosted a learning zone, leading a discussion on a number of issues, including payment. A common feature of the discussions was the reluctance shown by SME representatives in the audience to charge interest on late payments, or to impose the other sanctions available to them under the late payment legislation. The reason given by most was the fear of causing long-term damage to their relationship with their customer, whether a main contractor or client. Some admitted to using the provisions as a threat, but without actually following through on them.
Therefore, there is a clear reluctance amongst SMEs to use the remedies provided to them for late payment. The government's consultation will therefore need to focus on this aspect as well as on the practices and attitudes of late payers.
Conclusions
According to data from electronic transfer firm BACS, late payments to SMEs are reported to be a huge problem presently within the UK, with SMEs collectively being owed late payments of some £30.2bn.
There are several statutory measures available to SMEs for late payment but these are not being used primarily due to the fear of causing relationship damage.
The forthcoming government consultation seeks to address the issue of late payments to SMEs, in particular by imposing possible further sanctions on those who do not pay on time. However, experience tells us that in order for these remedies to be effective, there needs to be a wider change in culture and attitudes to payment amongst payees as well as payers.
The Prompt Payment Code is currently branded as "driving a change in payment culture". Perhaps the government's forthcoming consultation will bring this closer to becoming a reality.
