A recent YouGov poll commissioned by Crossflow Payments has highlighted poor payment practices and their detrimental effects on SMEs and the wider economy. In particular, it has been reported that:

  • 15.4% of the annual turnover of construction SMEs was subject to late payment in 2016 – this is equivalent to an estimated £22.6 billion for the sector as a whole;
  • 25% of companies advised that they regularly receive payments late and nearly half have reported that they frequently receive payments late by more than 10 days;
  • 21% of companies said that timely payment would result in increased marketing and sales budgets and the hiring of more staff; and
  • for 18% of companies, timely payments would allow them to increase the wages of existing staff.

Late payment can therefore cause serious issues for small businesses. It causes cash flow problems which, in turn, affects profits, hinders investment and, at the extreme end of the spectrum, causes businesses to fail. The Federation of Small Businesses (which represents the interests of UK SMEs) noted in its report Time to Act: The economic impact of poor payment practice that 50,000 businesses could have been saved in 2014 if payments had been made on time – this would have added £2.5 billion to the UK economy.

In light of these issues, what efforts are being made to tackle late payment? We recently blogged (see http://www.brodies.com/blog/payment-practices-duty-to-report/) about proposed new regulations which would require large businesses to publish information about their payment practices, policies and performance on a central government website. This duty came into force on 6 April 2017.

In summary:

  • qualifying businesses will now have to report on their payment practices twice a year;
  • this duty will apply to a company or LLP that has met two or more of the following conditions on both of its last two balance sheet dates:
    • Over £36 million turnover;
    • Over £18 million balance sheet total;
    • Over 250 employees;
  • this duty applies to business-to-business contracts;
  • failure to report or the publication of false or misleading information could result in criminal sanctions being imposed on both the directors and the company.

Overall, the introduction of this duty to report signals a firm effort to disrupt the status quo in payment practices by naming and shaming businesses that take a long time to pay. It is hoped that the duty to report and the risk of criminal proceedings and fines will encourage an improvement in businesses’ payment practices. This should, in turn, have a positive impact on suppliers down the contract chain. Additionally, it is anticipated that an increase in payment transparency will give suppliers more information, thereby allowing them to make informed decisions about their trading partners going forwards. All that said however, it remains to be seen if these measures will have the desired effect, particularly since these regulations have only recently been brought into force.

For further details of these new measures please see http://www.brodies.com/blog/payment-practices-duty-to-report/.

Source: The Reporting on Payment Practices and Performance Regulations 2017 (http://www.legislation.gov.uk/ukdsi/2017/9780111153598/contents) and The Limited Liability Partnerships (Reporting on Payment Practices and Performance Regulations 2017) (http://www.legislation.gov.uk/uksi/2017/425/contents/made).