Could new late payment laws help the U.K.’s small businesses?

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Amid the fallout from the catastrophic collapse of Carillion last year, the U.K. government has been getting tough on late payments.

In the coming months, new legislation is expected to strengthen the powers of Small Business Commissioner Paul Uppal. Proposed changes are expected to make it possible for financial penalties to be imposed on large companies who fail to pay on time, as well as close existing loopholes that allow these businesses to avoid officially reporting their payment practices twice a year.

According to Ian Cass, managing director of the Forum of Private Business, implementing these changes could have a major impact on the problem.

“There was always a question in our minds about how effective the Small Business Commissioner would be without the ability to research and investigate independently, and without the power to impose some kind of penalty or fine on consistent late payers,” said Cass. “Without these two it was always going to be a struggle to change the culture of late payment, which is what is required.”

A report released this month by Hitachi Capital finds that late payments have cost the U.K.’s 5.6 million SMEs at least £51.5 billion over the last 12 months. Because of this, serious steps are already being taken.

This year, the Chartered Institute of Credit Management, which runs the industry-led Prompt Payment Code for the government, has begun a "naming and shaming" approach, removing or suspending businesses found to have been breaching its terms. The most recent cull, in July, saw 18 companies including BT, Prudential and BAE Systems named and suspended.

“The ability to suspend companies from the code is key, as in the past, companies have used it as a badge of honor to gain government contracts while sometimes having no intention of meeting its requirements,” said Cass. “That will now change. The Holland and Barrett case earlier this year was a great example of this, where the exposure and suspension led to the CEO flying over from America, sitting down with Paul, and committing to making some real changes. That’s where the real power lies, in the action taken following the exposure; and if small businesses see positive outcomes they will report culprits more often.”

However, while small businesses are welcoming the action so far and the proposed new legislation, many feel that even more radical steps need to be taken to initiate a widespread cultural change.

Greg Carter, founder and CEO of business finance company Growth Street — which recently conducted a survey of 500 U.K. SMEs in partnership with the Small Business Commissioner, finding that 82% had experienced either late payments or no payment at all — says that the Small Business Commissioner needs to be awarded similar powers to the Information Commissioner’s Office (ICO). The ICO can impose penalties of up to £500,000 and even prosecute companies found to be breaching its rules regarding the collection and use of personal data.

“I think this would be the natural next step,” said Carter. “In addition, the U.K.’s Days Beyond Terms (DBT) is around 16 days, whereas in Germany this stands at around seven days. Much of the blame for this rests on the large PLCs who take advantage of their scale to squeeze small businesses, often with the intention of retaining cash on the balance books to report better margins.”

While the government is hoping that increasing the powers of the Small Business Commissioner will encourage more smaller companies to stand up to large corporates over payment practices, Growth Street’s latest survey found that 75% still feel they would fear taking action against a late payment, fearing harming their client relationships. However, in coming years, Carter predicts, technology will help with this by leveraging the increasing amount of payment data being collected.

“As SMEs move their accounting to cloud accounting, they will have greater access to invoice payments terms and DBT data,” he said. “This means an API could be developed to feed the Small Business Commissioner with real time and anonymous group DBT data, so they are able to see when and which large business is paying late. This would mean the likes of the Small Business Commissioner could take action without the SME risking damaging their relationships.”

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