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Liz Barclay assesses late payment issues ahead of rule change

Author: ICAEW Insights

Published: 18 Mar 2022

In anticipation of next month’s new rules requiring businesses to pay 90% of invoices within 60 days or risk being excluded from public contracts, the Small Business Commissioner reports on attempts to tackle late payments in the UK.

How bad is the problem of late payments now?

Overdue invoices isn’t the biggest payment problem. Firms accepting long payment terms is, because they feel they have to in order to get the work, leading to payments in 60/90/120 and even 150 days. Those extended payments terms leave smaller firms unable to manage their cashflow. Poor payers need to stop imposing long payments terms and smaller suppliers need to have the resolve to refuse to work for customers offering those terms – which is easier said than done when you need the work. 

The good news is that the data shows that the situation improved slightly during the pandemic. EY’s analysis of payment data shows that the average days to pay fell to 36.3 days from 37.5 days. About 13% of invoices are paid in longer than 60 days and 26.2% of invoices are not paid within agreed terms. Both of those figures have improved since before the pandemic and improved significantly since both peaked in June 2020. It seems that many firms have realised that they need to pay faster to make sure that they get the supplies they need for their customers. 

Who are the biggest perpetrators? 

There are huge differences between sectors. There is a perception that the construction sector is where the worst payers can be found, but in the past two years it’s the sector that has improved the most. It was able to keep operating through the pandemic while other firms struggled with employees moving to remote and home working and payments slipped through the gaps, or firms had to wait for other firms to pay them before they could pay their own bills. 

The payments data shows that in other sectors such as household products and pharma, the situation is getting worse. However, patience with excuses for late payments and poor payment practices is waning with the impact of COVID-19. It’s time all firms looked at their payment practices and thought about how to treat their vital suppliers better. It benefits everyone if payments are quicker.

How effective has the UK’s prompt payment code been in tackling late payments in the UK?

Data shows that signatories to the Prompt Payment Code (PPC) do pay faster and the gap between them and the rest is widening. The Code has been effective because it makes firms examine their payment practices and look at how to improve processes to reach the Code criteria. Those signing up to the Code want to do the right thing and they don’t want the reputational damage that comes with being suspended or removed from the Code. However, we want to see many more firms signing up, with the intention of paying 95% of all invoices within 60 days and 95% of invoices from small firms within 30 days.

Why have current sanctions failed to have the impact that was hoped for?

All change takes time and many firms find that their processes are so cumbersome that they can’t meet the payment targets of the Code. Changes to payment processes can also be very expensive so some argue that if you don’t have to make changes, why spend the money doing so. Changing culture can take even longer. We’ve seen great examples of new CEOs coming into firms and being appalled at the way smaller suppliers are treated and simply driving change from the top. That really makes the difference. 

What more needs to happen?

We have to convince firms of the benefits to them of improving payment practices and make sure they get the message out to the firms they work with all the way along the chain. We have to get CEOs and boards to drive change from the top. We have to make smaller suppliers confident enough to push back against poor payment practices, such as refusing to work for firms that won’t pay in less than 60/90/120 days. 

We need advisers to firms, such as accountants, to spell out to their clients the benefits of paying more quickly if they want to make sure the suppliers they rely on are resilient and sustainable. It’s very expensive to lose a good supplier and while you’re finding a new one you can lose valuable customers to your competition. Firms need to realise that investors want to work with ethical companies, talented people want to work for ethical companies, and paying fast and fair is a good indicator of an ethical company. 

Do SMEs understand the rules and the sanctions available to them?

Small firms may occasionally contact us to tell us about their experiences, but they rarely make official complaints that we can act on about bigger firms that pay them late or offer them outrageously long payment terms. They are worried about damaging the working relationship and not being given the next piece of work. There is an underlying belief that bigger firms will eventually pay up. 

Firms can invoice for interest on late payments and for compensation and we hear anecdotally that when they tell their customers that they’ve checked with the Office of the Small Business Commissioner (OSBC), they do get paid. However, there are still many, many smaller suppliers that don’t know the rules and even more that wouldn’t apply them even if they did know because of that fear of losing future work. 

How should SMEs approach payment by suppliers? 

Think about payment terms before you agree to do any piece of work. Ask when and how you will get paid, what detail has to go on the invoice, when you can submit an invoice, who your point of contact is for payments and whether you need a purchase order number. 

If you’re told you will be paid in 60/90/120 days or even longer, ask for payment in 30 days and negotiate better payment terms. Often bigger firms tell us no one has ever asked for payment terms that are shorter than their standard. You can set your own payment terms when you are bidding for a contract and if the customer refuses, you can decide whether or not to accept the contract or to negotiate. That’s part of doing business. 

Make sure everything is put in writing; most disputes are difficult to resolve because nothing has been agreed in writing. When you know payments are due, send a reminder of the date you expect to receive the money. If payments are late, send a letter saying you will contact the OSBC if you aren’t paid by a certain date. If all that fails, then come to us. We will do all we can to make sure you get paid and to preserve your working relationship with your customer. 

From 1 April 2022, suppliers bidding for central government contracts worth more than £5m per annum, will need to demonstrate that they pay at least 90% of their invoices to suppliers within 60 days or risk being excluded from the procurement. For more guidance on tackling late payment, visit ICAEW’s Small and Micro Business Community.

Small Business Community

Whether you work with small businesses or run your own, find practical resources to help at every stage of the business journey. ICAEW's Small and Micro Business community is open to all.

Marta Pacheco

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