In the latest attempt to stem the flow of late payments being made by large companies, the Small Business Commissioner, Paul Uppal, is recommending the introduction of a traffic light warning system, thereby allowing suppliers to avoid repeat offenders if they choose to do so.
Since 2017, large companies have been required to report their payment practices on a twice-yearly basis. This data will feed into the proposed traffic light system, with habitual late payers (and those that have failed to comply with their reporting requirements) being given a ‘red light’.
This will be welcome news to SMEs, given that the Federation of Small Businesses estimates that large companies not settling their bills on time causes around 50,000 businesses to fail every year. However, it is clear that this scheme alone is unlikely to result in a meaningful change to the current late-payment culture.
Recent research suggests that 65% of large firms still take more than 30 days to settle invoices and 21% more than 50 days; this despite the Prompt Payment Code being introduced more than a decade ago which committed signatories to pay invoices within 60 days.
The Prompt Payment Code has often been criticised for its ‘lack of teeth’. This was further highlighted by the collapse of Carillion - itself a signatory to the Prompt Payment Code) in 2018.
A joint inquiry by two parliamentary select committees identified Carillion as a “notoriously late payer” which often waited 120 days before paying its small suppliers. At the time of its collapse, Carillion owed some £2bn to suppliers, sub-contractors and other short-term creditors. The fall-out has been significant; a survey by the Building Engineering Services Association and Electrical Contractors Association showed that, on average, small building, electrical and engineering firms were owed £141,000 by Carillion (and this does not, of course, take into account lost future business). Furthermore, Carillion’s collapse triggered a 20% spike in the number of UK building firms becoming insolvent during the first quarter of 2018.
Last month the joint inquiry recommended reducing the Prompt Payment Code to 30 days, from the current 60. However, as Carillion shows, the Code is too often ignored, to the detriment of small businesses.
It seems, therefore, that until the office of the Small Business Commissioner is given the power to impose meaningful sanctions on persistent offenders, the late-payment culture is unlikely to change.