The UK’s ongoing commitment to prompt invoice payments

One of the biggest issues which small to medium sized enterprises (“SMEs”) face is the late payment of invoices. Research carried out by the Federation of Small Businesses (“FSB”) suggests that it leads to the closure of nearly 50,000 businesses each year, while Intuit Quickbooks asserts that it costs SMEs £22,000 a year and 56m hours of lost productivity across the economy.

The new government has made clear that it intends to support SMEs and the self-employed in reducing the impact that late payment of invoices can have by implementing new protective measures. This approach will help the government encourage economic growth.

The current position

The current legislative framework requires companies to report their payment practices on an annual basis and holds directors at non-compliant companies liable with fines and criminal records.

Businesses are able to charge interest and recovery costs if invoices are not paid 60 days following their due date and public authorities are able to charge the same if invoices are not paid 30 days following their due date. A longer period for this can be agreed between the parties, but the period agreed must be fair to both parties involved. However, the impact that late payments has on SMEs is still significant; FSB research indicates that over 2.8 m SMEs deal with this issue.

Proposed changes

The government have put forward a package of measures to assist businesses in counteracting the harmful effects of late payments. This includes the New Fair Payment Code which will require businesses to meet certain standards to be awarded official code status – there will be gold, silver or bronze in a tiered system:

• Gold award – businesses will be awarded this status if they are paying at least 95% of all invoices within 30 days
• Silver award – businesses will be awarded this status if they are paying at least 95% of all invoices within 60 days, with at least 95% of invoices to small businesses within 30 days
• Bronze award – businesses will be awarded this status if they are paying at least 95% of all invoices within 60 days.

There is also a focus through the principles within the new code for businesses to be clear, fair and collaborative.

The government are also proposing an increase in reporting obligations, including payment reporting twice per year. They also intend to step up enforcement of existing reporting obligations to encourage a cultural shift in this area.

The consideration of the new government proposals including the New Fair Payment Code will be crucial for businesses as it promotes transparency and timely payments. The aim of this is to assist in improving cash flow and relationships with suppliers, and enhance the financial stability of both larger and smaller businesses.