In the autumn of 2024, the UK government announced a crackdown on late payment with the launch of the Fair Payment Code. It is the successor to the Prompt Payment Code, which has overpromised and underdelivered since its launch in 2008. Hailed as another new dawn by enthusiastic ministers but derided by critics as a recycled debt collection policy, we look at where the Fair Payment Code has come from and how it will help businesses.
RIP the Prompt Payment Code
The Prompt Payment Code survived 16 years. It set a maximum invoice-to-payment timescale and laid out standards on how creditors should communicate with debtors. Signatories had to make clear how disputes or billing queries would be resolved and avoid any practices which negatively impacted the supply chain. The code was designed to benefit all businesses, particularly SMEs. In 2021, the Prompt Payment Code was strengthened with more challenging targets, including:
1) A commitment to paying 95% of SME invoices within 30 days and paying 95% of invoices raised by large businesses within 60 days.
2) Signatories formally recognise the right of suppliers to recover statutory late payment charges if invoices are paid late.
3) Maintaining a dedicated point of contact for payment queries.
For the companies who signed up to it, the Prompt Payment Code was flaunted to suppliers and customers as a symbol of integrity.
Industry-led codes such as the CLC Construction Supply Chain Payment Charter embraced the Prompt Payment Code, building on it with recommendations on how sub-contractors and retentions get treated. The Reporting on Payment Practices and Performance Regulations 2017 mandated that all large UK companies submit data twice yearly to .gov.uk to show how well or poorly they managed supplier payments. For non-compliant companies, there is little evidence of enforcement action being taken against them. Put simply, the threats of fines and criminal proceedings against directors were not taken seriously.
Ultimately, the Prompt Payment Code was subject to underwhelming advertising campaigns that failed to get the mass sign-up initially envisioned. Watchlists published twice a year were helpful for those aware of the code. Over 5,200 private and public sector organisations became signatories to the Prompt Payment Code, which accounted for 0.09% of all UK businesses. It is difficult to call that a success, but it is quite the opposite.
Birth of the Fair Payment Code
Flanked by statistics such as late payment causing 50,000 insolvencies a year and costing SMEs 56 million lost hours of productivity, the Fair Payment Code (FPC) was launched jointly by the Department for Business & Trade (DBT) and the Small Business Commissioner. Because SMEs tend to be subcontractors or non-critical suppliers to bigger businesses, the FPC is taking a top-down approach. When a multi-million-pound company delays making payments to suppliers, those businesses cannot pay their own suppliers on time, so the impact of late payment sends shockwaves down the supply chain.
The issue of late payment strains supplier relationships, with too many SMEs suffering in silence to avoid upsetting the apple cart. We need to call it out!
Going for Gold with the Fair Payment Code
In place of a blanket accreditation for compliance, the FPC uses an Olympic-style gold, silver and bronze award system. Those seeking to earn a medal will find a robust application process and a two-year tenure on their award status. The FPC is aspirational, requiring significant thresholds to be met before reaching the top step of the podium:
1) Gold is awarded to companies paying 95% of suppliers within 30 days.
2) Silver is for companies paying 95% of SMEs within 30 days and all other suppliers within 60 days.
3) Bronze is the entry-level award for paying 95% of suppliers within 60 days.
The Fair Payment Code holds large firms to account, offering the carrot of accreditation to avoid the stick of reputational damage.
Unlocking Potential
As custodians of the FPC, the DBT and Small Business Commissioner are intent on making it the success the Prompt Payment Code should have been. Going beyond the medals, their modus operandi is to build on, support, and reinforce this new mandate to help SMEs.
Building on the .gov.uk payment reporting legislation of 2017, resources are being allocated to step up enforcement, making the threat of criminal proceedings a tangible reality for directors who are dodging their responsibilities.
Supporting the FPC will be new laws requiring all large businesses to state their payment performance in their annual accounts. Once published at Companies House, it becomes available for public scrutiny. With the media ready to name and shame, late payment takes a step closer to becoming commercially and socially unacceptable.
Reinforcing the FPC involves engaging stakeholders and consulting organisations such as the FSB and Enterprise Nation to shape a range of policies, laws, and regulations to address poor payment practices further.
Small Business Commissioner’s Steps
Not to be outdone by Downing Street, the Small Business Commissioner is encouraging SMEs to take steps to help them get paid on time. This includes:
1) Making use of accountancy software instead of being reliant on time-consuming (and error-prone) handwritten ledgers, spreadsheets and manual calculations. Accountancy software can also send out automatic overdue reminders to your customers and flag late payment.
2) Making sure you have a robust invoicing process to ensure billing is right first time instead of having to resubmit invoices and restart credit terms.
3) Be willing to push back against unclear contract terms or extended payment terms. Cashflow will be better doing the work for three customers on 30-day terms than one client on 120 days.
Advocates for the Fair Payment Code
There has never been a greater appetite in business and politics to tackle the scourge of late payment. For all its shortcomings the Prompt Payment Code did get businesses thinking, and started the conversation about SMEs facing cashflow insolvency because of late payment. Sequels are often disappointing, but the FPC is genuinely stronger and more engaging than its predecessor. The FPC takes the taboo out of late payment, making prompt payment a badge of honour. The FPC is another tool in the creditor’s kit bag. Let us not forget The Late Payment of Commercial Debts Regulations 2013 predates the FPC and is the very legislation Advocate Commercial Debt Recovery has been working under for over a decade. It could be argued the FPC is actually supporting our work!