Government announces new plans to tackle late payments
There was a time some years ago when a major selling point of disclosed invoice finance was the perceived ability of established Invoice Financiers practised in the art of collecting debts when compared to the frequent troubles of small businesses in persuading their customers to pay on time.
Over the years a number of measures have been introduced by the Government to deal with the culture of late payment, particularly as practised by large organisations when dealing with small suppliers, and perhaps predictably the most recent proposed developments have exposed a much less radical approach by the UK Government than that which will apply in the EU.
The European Commission announced on 12 September 2023 a new regulation to combat late payments in commercial transactions. The proposed regulation would replace the Late Payment Directive from 2011. Its proposals include:
- a maximum payment term of 30 days for commercial transactions, which cannot be derogated from, and
- automatic rights to late payment interest and compensation fees which cannot be waived.
Under the new regulation, member states would be required to set up enforcement authorities to monitor compliance, initiate investigations and issue sanctions against late payers.
The regulation needs to be adopted by the European Parliament and the Council and will, if implemented in its current form, apply one year after becoming law. It represents a significant departure from the current directive and will impact UK businesses contracting with EU entities.
Shortly after the EU published it proposals, on 2 October 2023 the Department for Business and Trade (DBT) announced its plans to reduce the late payment of business invoices, particularly for smaller businesses. The Government says that it sees late payment of invoices and long payment terms as significant barriers to business growth, especially for smaller businesses.
The new measures include:
- Extending the Reporting on Payment Practices and Performance Regulations 2017. These regulations require in-scope businesses to publish information about their payment practices. The aim is to eradicate bad practices through increased transparency. The regulations are currently due to expire on 6 April 2024. As well as extending the regulations, the Government intends to include new requirements to report on the value of invoices paid late, disputed invoices and retention payments for businesses in the construction sector.
- Broadening the powers of the Small Business Commissioner. The Government intends to introduce primary legislation to enable the Commissioner to undertake investigations and publish reports where necessary on the basis of anonymous information and intelligence.
- Strengthening the Prompt Payment Code so that businesses must reaffirm their commitment every two years to stay on it. This voluntary code gives companies and public bodies the opportunity to commit to paying their suppliers on time and fairly.
- Providing greater advice to small businesses on negotiating payment terms and using digital payment technology to manage cash flow.
The Government hopes these measures will foster a stronger culture of paying on time, providing businesses with more predictable and reliable cash flow. More detail on the new measures will be included in an upcoming review of prompt payment and cash flow issues.
However, the contrast between these measures and those likely to be adopted throughout the EU is quite striking and it is hard to imagine that the UK proposals will have anything like the same practical effect as those from the EU.
Contact our Invoice Finance team.