Making Sense of the Late Payment Review

In an era dominated by pantomime politics, the climate emergency, and a cost-of-living crisis, you’d be forgiven for not knowing about the Late Payment Review and its relevance to current late payment tools. Such is the scent lock of our media; few found time to spare a few column inches.

Officially titled The Payment And Cashflow Review, the seventh late payment review in ten years was announced at the tail end of 2023 by Business Secretary Grant Shapps. The Department for Business, Energy and Industrial Strategy (BEIS) recognises SMEs as the backbone of our economy, playing a vital role in social and industrial innovation. Yet cash flow remains one of the top three reasons why they fail. The ‘big four’ are within the scope of the BEIS review, namely The Prompt Payment Code, the Reporting on Payment Practices Regulations, Commercial Debts Regulations, and the role of public procurement. Outside the big four, the review will also consider the role of accountancy software, bank and lender practices, sectors fairing worse than others, and the culture of late payment.

The Prompt Payment Code

At present, PPC signatories must meet a threshold for payments to be made on time and avoid practices negatively impacting their supply chain. The PPC’s value is in who decides to sign up voluntarily and the honesty of those self-certifying their compliance. Questions over credibility and validity remain clouds on the PPC’s horizon. The PPC is discussed in more detail on this website in the article titled Truth and Potential – The Prompt Payment Code.

SMEs matter. They make up 99% of all UK businesses, accounting for 61% of employment and 7% of turnover, according to 2022 statistics. The number of SMEs has fallen and is now 8% down compared to 2020.

What are the Reporting on Payment Practices and Performance Regulations 2017?

Any company meeting the qualifying threshold must submit information bi-annually on the average time to make payment, the percentage of invoices paid to terms, average payment terms, and PPC status. This information is available for public view at gov.uk. The regulations expire in 2024 and are likely to be extended. Brought in to unmask late payers and encourage the culture of paying on time, critics argue the regulations have overpromised and under-delivered. A recent poll suggested more than a quarter of firms legally obligated to submit payment data are failing to do so. The Good Business Pay Awards 2022 found only 5% of large companies pay invoices on time. This suggests a distinct lack of motivation.

The Late Payment of Commercial Debts Regulations 2013

Advocate is the UK’s leading debt collection agency founded on the aforementioned regulations, which make the debtor liable for debt recovery costs. We’ll be raising a glass to the Late Payment of Commercial Debts Regulations 2013 on its tenth birthday and to all the thousands of clients we have helped on the back of it. Prior to the regulations, the threat of recovering debt recovery costs in commercial contracts was less effective than a toothless hound. As intended, the primary benefactors of the regulations have been SMEs. The regulations have elevated the conversation, influencing the development of tools which predate it, such as the PPC, and shaping those which follow.

Public Procurement

Based on the notion of government leading by example, new public procurement legislation is being brought in. The Procurement Bill had its second reading in January 2023 and is expected to become law before the bells of 2024 chime us in. The 130-page document can be summed up in 84 words: removal of barriers to entry that SMEs often find insurmountable such as accreditations and financial indicators; strengthening of Modern Slavery checks and enhanced suitability checks to identify unscrupulous vendors; a switch to focusing on value for money, the public benefit and transparency; consolidation and simplification of over 350 procurement regulations into a single rule book; creation of a single central digital procurement platform; a new competitive tender process with room for bespoke processes; and 30-day payment terms in all public procurement supply chains.

The LGA has raised concerns such as limiting the use of shared service arrangements which enable several authorities to collaborate under a single contract and obtain a better price. The LGA also questions whether it goes far enough to encourage local councils to prioritise SMEs over larger businesses. Other critics say the Procurement Bill places charities at risk because the onus is tilted more towards price than quality which is dangerous in areas like social care, the NHS and defence. We would question how enforceable the ambition of 30-day payment terms in any government supply chain really is.

What Could the Late Payment Review mean?

With the caveat lector of not being sanity checked by elite economic scholars, here is a handful of ideas on what the review could mean: tax breaks for persistent early payers; fines for not meeting Creditor Payment targets; prosecution of directors instead of the company for not filing payment data; a cap on extended payment terms; low interest working capital loans; lenders mandated to ensure SMEs make up a minimum percentage of their portfolios; shortening of pre-action protocol and the court process when the claimant is an SME; let the Reporting on Payment Practices expire and include the same data within statutory accounts; make the PPC mandatory with two tiers of compliance and an accreditation similar to ISO.

Glossy reviews and parliamentary parchment paper play the long game, tomorrow’s manyana if you will. Laws can be years in the making. Recommendations from the Late Payment Review are unlikely to have any immediate benefit. Legislation can be fast-tracked, but it requires the stars to align and a level of choreography rarely seen outside the feral cat herding championships!

Sense and Sensibility

In Advocate’s world of debt recovery, SMEs are just as much in the crosshairs as multinationals. Yes, big businesses have a significant role to play in releasing money down the supply chain, but most SME-SME cases we see have nothing to do with waiting on funds from a large business. SMEs are more likely to delay action against fellow SMEs out of a sense of camaraderie or human connection. Clients typically instruct Advocate to recover payment from a large company much sooner than they would an SME, mainly because of the faceless logo of cash-rich construction firms, dot coms, and PLCs should know better.

When discussing the problem of late payment, there is always a danger of dumping big businesses, big tech, and big pharma on the naughty step. Plc bashing if you like? Make no mistake, they’re not all scapegoats, and many deserve the telling-off. By the same token, SMEs, decent or delinquent, are placed on the same rosewood pedestal by default. In short, it is the culture of late payment that needs to be vilified instead of the Plc or SME.

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