Out-Law News | 02 Jun 2014 | 3:51 pm | 3 min. read
It also plans to “remove legal barriers” preventing small firms from accessing invoice finance, and to work with the Institute of Credit Management (ICM) to increase the accountability of signatories to the industry-led Prompt Payment Code, according to its response to last year's call for evidence on the impact of late payment on small suppliers. However, it does not intend to introduce some of the more radical options considered by the call for evidence, such as a statutory maximum payment period.
"For too long too many large companies have been getting away with not paying their suppliers on time to maximise their profits," said business secretary Vince Cable. "It is small business that is suffering as a result and it needs to stop."
"The government has taken action to create a responsible payment culture but we need to go further. We will now make it compulsory for large companies to publish information about their payment practices so that those who are not playing fair can be held to account," he said.
According to UK government figures, 85% of small businesses have experienced late payment in the last two years and are owed a combined £30 billion.
Amongst the 100 responses to last year’s call for evidence, there was “strong support” for increasing the transparency of companies' payment practices. In response, the government said that it would develop a “new, robust reporting framework that has useful content and is structured in a way that is genuinely helpful to suppliers and customers” in conjunction with businesses and their representative organisations. This reporting framework would be underpinned by legislation “when parliamentary time permits”, the government said.
The government said that there was “limited support” for the introduction of a statutory maximum payment period, particularly because accepted payment practice varied across the economy and across different industries. Instead, it said that it would work with industry bodies and businesses to promote “sector-based” advice and codes of best practice, building on the recent creation of a prompt payment charter for the construction industry.
Commercial law expert Ben Gardner of Pinsent Masons, the law firm behind Out-Law.com, said that the measures announced by the government could be a "welcome development" for small businesses. However, their effectiveness would likely depend on "the nature and the extent of the details 'large' companies are required to publish and whether such disclosures are made mandatory," he said.
"Large companies should be wary that, amongst other things, their payment terms could be subject to public scrutiny once these measures are introduced," he said. "It may be that the reputational implications for larger businesses will incentivise them to treat their supply chain more fairly and pay invoices in good time. The introduction of these measures could be particularly poignant 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."
"These reputational concerns could force larger businesses, particularly those that are household names, to rationalize their supply chains and align their payment terms more closely with the late payment regulations introduced by the government last year and the Prompt Payment Code. If these measures fail to improve payment times within the UK, it will be interesting to see if the government introduces more radical measures, such as non-negotiable maximum payment periods," he said.
According to the paper, those respondents that answered the government’s consultation questions on alternative finance methods were strongly supportive of it doing more to support small businesses use these methods to help their cash flow. In response, the government said that it would legislate to remove contractual barriers, such as bans on assignment, to small firms entering into invoice financing or factoring arrangements. The British Business Bank would also do more to provide small firms with the information that they needed to access alternative finance, it said.
Respondents also made “various proposals” to increase the accountability of signatories to the industry-led Prompt Payment Code, which the government said that it would “look at in more detail”, as well as considering what further action it could take to increase awareness of the Code and encourage more businesses to sign up. This was set up in 2008 by the ICM as a voluntary agreement promoting good payment practices. Code signatories, including a number of FTSE 100 businesses, commit to pay suppliers within an agreed time and to make sure that they have proper processes in place for any issues that may arise.
The government also intends to do more to make the public sector a “beacon of best practice on prompt payment”, according to its response. As well as introducing 30-day payment terms throughout the supply chain as previously announced, it will also legislate to require public authorities to accept e-invoices and run “timely and efficient” procurements. Both of these measures will be subject to further consultation on scope, according to the response.