Payment practices could be moving to the heart of corporate social responsibility following UK government action, says expert

Out-Law Analysis | 17 Apr 2015 | 9:49 am | 3 min. read

FOCUS: Large businesses that force their suppliers to accept lengthy payment terms or continually pay suppliers late could face serious reputational damage following the latest announcements by the UK government.

From April 2016, large businesses will be required to publish information about their payment practices twice a year. The announcement, made by business minister Matthew Hancock at the end of last month, is the latest in a number of initiatives taken by the last government to tackle unfair payment practices.

It is envisaged that requiring large businesses to publish this information in a central location will give suppliers more information about what to expect before entering into contracts – while making it easier for consumers to see which companies have the most "ethical" payment policies.

The reporting requirements are due to be created through new regulations which will be published early in the next parliament and it is expected that large businesses will be required to report on:-

  • their standard payment terms (including any changes that have been made to them since the last reporting period);
  • the average time taken to pay;
  • the proportion of invoices paid in 30 days or less, paid between 30 days and 60 days; and paid beyond 60 days;
  • the amount of late payment interest owed and paid;
  • any financial incentives required of suppliers before they can join or remain on supplier lists;
  • whether they are a member of any industry codes of practice relating to payment; and
  • dispute resolution processes, availability of e-invoicing and access to supply chain finance.

Large businesses have until April 2016 to ensure that they are comfortable with their payment policies and practices. Following this, the above information will need to be shared in the public domain. 

In the meantime, the government has committed to "lead by example" by paying 80% of central government invoices within five working days, with the remainder paid within the 30-day limit set by the EU's latest Public Procurement Directive.

It has long been accepted that small suppliers were not using their existing legal remedies, such as those available under the Late Payment Regulations, to enforce timely payments for fear of losing their biggest customers. The Prompt Payment Code, which was established in 2008, was the first attempt to adjust the balance in favour of suppliers - but its voluntary nature, and lack of any real sanctions for non-compliance, resulted in it not achieving what it set out to do.

That somewhat changed in March with the appointment of a new Code Compliance Board made up of business representatives, tasked with investigating challenges made against Code signatories and rigorously enforcing the removal of those found to have breached its standards. At the same time the Code was also strengthened to promote 30-day payment terms as standard with an absolute maximum term of 60 days being allowed for those wishing to sign up or remain a signatory to the Code.

Although it remains voluntary, it is hoped that signing up to a strengthened, more robust Code will give businesses a powerful tool with which to distinguish themselves from their competitors once the new reporting requirements come into force.

The government is also consulting on how to properly define what constitutes payment terms and practices that are "grossly unfair" under UK law, which should provide clarity for both customers and suppliers going forward.  This could make it easier for small businesses to challenge customers over their payment terms and to enlist the commercial knowledge of trade bodies to challenge such terms on their behalf.

Taken together, these measures and the reputational damage that they could potentially inflict could force household names in particular to address any historical imbalances in their payment terms and align them more closely with practices that are going to be considered as being fair in the eyes of the public (or that are at least as favourable as those of their competitors).

This supports the notion that, following the ineffectiveness of its previous initiatives, the Government appears to be looking to shift the issue of prompt and fair payment terms to the heart of corporate social responsibility.

Large businesses should therefore review their current payment policies and practices because, as the UK economy continues to go from strength to strength, long payment terms and the poor treatment of suppliers more generally is going to become increasingly unjustifiable.

Ben Gardner is a commercial law expert at Pinsent Masons, the law firm behind Out-Law.com.