The UK government is set to introduce stricter regulations to address the widespread issue of late payments, a challenge that has long plagued small businesses.
According to the Department for Business and Trade (DBT), late payments cost small and medium-sized enterprises (SMEs) an average of £22,000 annually, contributing to the collapse of approximately 50,000 businesses a year.
In addition to financial losses, delayed payments result in the loss of an estimated 56 million working hours, equivalent to 2.3 million working days, significantly impacting productivity and stifling business growth.
The upcoming legislation will require large companies to report their payment practices in their annual reports, bringing greater transparency to their dealings with smaller suppliers. This requirement will put the onus on large corporations to disclose how quickly or slowly they are paying their invoices. To ensure compliance, enforcement will be stepped up, with companies needing to report their payment performance biannually. Directors of businesses that consistently fail to meet their payment obligations could face severe penalties, including prosecution and unlimited fines.
Construction industry one of the hardest hit
The government’s move to tighten regulations follows long-standing calls from small business organisations, particularly given that 52% of small businesses report experiencing late payments each quarter. This equates to approximately 2.6 million businesses regularly being impacted by delayed payments.
The construction sector is one of the hardest-hit industries, with insolvencies frequently caused by delayed payments. This highlights the urgency of addressing the problem across different sectors.
Central to these reforms is the introduction of a new Fair Payment Code, replacing the Prompt Payment Code. This new framework aims to incentivise prompt payments through a tiered ranking system. Under this system, businesses can achieve Gold, Silver, or Bronze status based on their payment performance, with the Gold Award being given to those who settle invoices within 30 days. The government hopes this will encourage larger firms to adopt best practices, which will have a trickle-down effect across supply chains.
Prime Minister Keir Starmer emphasised the importance of these reforms, stating, “We’re determined to back small businesses by unlocking their barriers to growth, and stamping out late payments is at the heart of this.” Starmer acknowledged that delayed payments create cash flow crises for businesses, ultimately leading to insolvency in some cases. The Labour government has committed to addressing these long-standing issues that have been exacerbated by the economic pressures small businesses face.
The government is currently consulting on additional measures to improve payment practices further. One of the proposals includes expanding the powers of the Small Business Commissioner (SBC). This would allow the SBC to investigate and report on poor payment practices and bring greater scrutiny to the relationships between large and small businesses. These additional powers are hoped to increase accountability and give small businesses a stronger voice when dealing with larger firms.
Uncertainty surrounds proposed payment regulations
However, questions remain about whether the current Labour government will implement all the previously proposed measures. The Conservative government had been preparing to introduce mandatory payment reporting requirements for large businesses and limited liability partnerships (LLPs), with new reporting obligations set to take effect in January 2025 under the Reporting on Payment Practices and Performance (Amendment) Regulations 2024. These regulations would have applied to all financial years beginning after 01 January 2025, but it is unclear whether the Labour government intends to pass this legislation.
Research from the DBT revealed that some large companies intentionally delay payments to free up working capital, effectively using smaller businesses as a source of interest-free financing. This practice has had a devastating impact on the financial stability of smaller firms, which often lack the resources to absorb such delays.
Introducing the Fair Payment Code and the stepped-up enforcement of payment reporting requirements are crucial steps towards changing this payment culture. While these measures alone may not fully resolve the late payment crisis, they mark significant progress in addressing one of the most pressing issues SMEs face.
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