As the deadline of 16 March 2013 approaches for national implementation of Directive 2011/7/EU, the new directive on combatting late payment in commercial transactions, regulations have been laid before the UK and Scottish parliaments to effect the required changes.
The new Directive
Directive 2011/7/EU (the "new Directive") will be replacing the previous EU directive on late payments, and aims to strengthen the current legislative provisions put in place to tackle the culture of late payments in commercial transactions within the European Union. As with the previous directive, the new Directive is limited to payments made as remuneration for commercial transactions and covers commercial transactions between private and public undertakings or between undertakings and public authorities.
The most notable provisions of the new Directive include:
- Public authorities will have to pay for the goods and services they procure within 30 days or, in the case of contracts involving healthcare and in cases where a public authority carries out economic activities of an industrial or commercial nature, within 60 days.
- Enterprises are required to pay their invoices within 60 days, unless they expressly agree otherwise and the terms of payment agreed are not grossly unfair.
- Enterprises will automatically be entitled to claim interest for late payment and will also be entitled to obtain a fixed amount of €40 as a compensation for recovery costs. They are also entitled to claim compensation for all remaining reasonable recovery costs.
- The statutory interest rate for late payment will be increased to a minimum of 8% above the European Central Bank's reference.Member states can maintain or introduce laws more favourable to creditors that those set out in the new Directive.
The Department for Business Innovation & Skills ("BIS") undertook a joint consultation with the Scottish Government on how best to implement the new Directive. The consultation process was held from 20 September 2012 until 19 October 2012 and a response to the consultation was published in February 2013. In their response, the Government makes clear that they do not believe regulation is the remedy for late payment, stating that resorting to legal action is not a practical option except as a final alternative.
In response to the consultation, the UK and Scottish Governments have decided not to extend the payment period in public sector contracts involving healthcare or where the public authority carries out economic activities of an industrial or commercial nature to 60 days. Central Government is currently committed to paying its uncontested invoices within 5 days, while the Scottish Government aims for payment within 10 working days. Other public bodies also responded to the consultation by noting they did not require an extended time period as they had their own robust payment systems in place and had committed themselves to prompt payment practices by signing up to the Prompt Payment Code.
It has further been decided that the UK will retain the current three tier fixed charge rates of £40, £70 or £100, depending on the size of the debt, rather than adopting a minimum sum of €40 regardless of the size of debt. Creditors are also entitled to claim for additional reasonable costs in the recovery of late payments.
The English Position
For England, Wales and Northern Ireland, the Government will implement the new Directive by amending the Late Payment of Commercial Debts (Interest) Act 1998 by Statutory Instrument.The Late Payment of Commercial Debts Regulations 2013 (the "Regulations"), were laid before Parliament on 22 February 2013 and will come into force on 16 March 2013. The Regulations introduce:
- a maximum payment period of up to 30 days where the purchaser is a public authority, and in other cases a payment period of up to 60 days or longer as otherwise agreed, and if it is not grossly unfair to the supplier;
- a period of either up to 30 days, or longer if expressly agreed and if it is not grossly unfair to the supplier, for a purchaser to confirm that the goods or services they have received from the supplier conform with the contract before the payment period commences; and
- a right to compensation for the reasonable costs to the supplier of recovering a debt incurred if that amount exceeds the fixed charge sum.The above provisions will not apply to contracts made before the commencement date of 16 March 2013.
The Scottish Position
The Scottish Government will implement the same changes as contained in the Regulations through The Late Payment of Commercial Debts (Scotland) Regulations 2013 (the "Scottish Regulations"), which will come into force on 29 March 2013, almost two weeks later than deadline set by the new Directive. The Scottish Regulations will not apply to contracts made prior to the 29 March 2013.
The Scottish Government have further issued a consultation entitled "Better Regulation: Consultation on Proposals for a Better Regulation Bill" which has asked for views on whether a new national standard requiring all public sector bodies in Scotland to pay suppliers' invoices in less than 30 days should be introduced and what additional legislative or non-legislative steps might lead to a change in business culture towards prompt payment. The consultation paper discusses the merits of introducing the mandatory application of a late payment penalty, noting that this would create a powerful incentive for prompt business to business payment. This would go further than what is currently required under the new Directive, which states that a creditor should not be obliged to claim interest for late payment. It also appears to be at odds with the approach from the central coalition Government, whose policy is to adopt a straight "copy out" process in regard to implementing European regulation to avoid "gold-plating".
The coming into force of the Regulations and the Scottish Regulations this month will not significantly alter the current UK position on combatting late payment in commercial transactions. Most public authorities already aim to pay suppliers within 30 days or in some cases even quicker. Private businesses still have the option to contractually agree to longer periods of payments and they are not obliged to apply late payment penalties, although they may automatically do so.
The consultations in relation to the late payment directive have, however, highlighted a potential polarisation of opinion north and south of the border. Central Government are clear they do not wish to impose stricter measures than those featured in the new Directive, whereas the Scottish Government are keen to explore the option of introducing mandatory penalties for late payments in order to accelerate changes to the current culture of late payment. It will be interesting to read the response of the Scottish Government to the Better Regulation Bill consultation, which is due to be published early 2013, to see if they will be taking any of their proposals forward.