The UK government has announced that it will tackle late payments with what it says will be the most significant legislative reforms in 25 years. According to government figures, late payments cost the UK economy £11 billion a year and lead to 38 businesses closing every day. Small and medium-sized firms employ 60% of the country's workforce and generate £2.8 trillion in turnover, so it's a big problem if they become insolvent.
At the moment, the Late Payment of Commercial Debts (Interest) Act 1998 provides for interest to be charged on late payments and the UK also transposed EU legislation on the subject, but the laws have had limited effect in improving the speed of payments.
Against this background, the government wants to deal with late payments, long payment terms, disputed payments, and in the construction industry, unfair practice around retention payments.
What is the government planning?
Maximum payment terms - the government plans to amend the Late Payment of Commercial Debts (Interest) Act 1998 to effectively limit payment terms between UK businesses to 60 days. Subject to further consultation, this may be reduced to 45 days after five years.
A deadline for disputing invoices: the government will introduce a 30-day invoice verification period. Businesses who wish to raise a dispute will need to do so within 30 days of receiving an invoice, otherwise they will be liable to pay the invoice in full within the agreed payment terms, alongside any statutory interest or debt recovery costs if the invoice is paid late.
Statutory interest rate: the statutory interest rate payable on late payments will be mandatory. This will remove the ability to negotiate compensation rates lower than the statutory rate. This aims to increase financial incentives to pay invoices on time.
Additional reporting on statutory interest: there will be additional reporting requirements around statutory interest liabilities.
Financial penalties for persistent late payers: new legislation will give the Small Business Commissioner powers to issue financial penalties to businesses who persistently pay their suppliers late. This will use payment behaviour data submitted by businesses under the Reporting on Payment Practices and Performance Regulations 2017 to identify and issue financial penalties to persistently late-paying businesses, with penalties based on businesses' unpaid statutory interest liability.
Additional powers for the Small Business Commissioner (SBC): this aims to improve the SBC's ability to conduct investigations (beyond its current complaints scheme), allow it to provide legally binding arbitration in disputes, and impose financial penalties or make arbitration awards after an investigation or arbitration process. This also aims to enable the SBC to investigate the accuracy of the payment reporting data that large businesses provide under the Reporting on Payment Practices and Performance Regulations 2017.
The government also wants to encourage audit committees and board-level scrutiny of large company payment practices as well as to reform the use of retention clauses in construction contracts.
The consultation ends on 23 October. Following the consultation, the government will aim to publish its next steps within twelve weeks.
As well as these proposals, the government has launched a new Fair Payment Code, and is legislating to require large companies (for example, those that come within the Reporting on Payment Practices and Performance Regulations 2017) to include their payment performance within their annual reports. This aims to increase transparency and provide greater oversight of payment performance reporting at board level.
What is the impact of this?
Companies may wish to respond to the consultation, but in any event should be considering their payment practices and ensuring that they have processes in place to deal with disputed invoices promptly, and otherwise make payment within a reasonable period. As well as looking at internal processes, you'll also need to review payment terms in contracts.
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