ICAEW has welcomed the government’s overriding ambition to tackle late payments, however it warns that new legislation forcing large companies to report on supplier payment performance in their annual reports is a flawed approach.

Effective cash flow management is a sign of good financial stewardship, however it should not be done at the cost of squeezing suppliers - often smaller companies that rely on being paid promptly – and risking their future survival.

However, ICAEW questions whether reporting is the most effective tool to tackle the scourge of late payments and believes that the requirement to include new disclosure requirements in the annual report is not the right place to start.

Although introducing secondary legislation to require these disclosures appears straightforward, it is fraught with practical challenges, risks reducing the usefulness of the annual report and, ultimately, is unlikely to contribute much to improving payment practices by large companies.

New disclosures

Business secretary Jonathan Reynolds said in a written statement that the new reporting requirement would help increase transparency around the payment practices of large businesses and bring them into focus for boards and investors. The government will lay secondary legislation in this parliamentary session, he said.

“We are determined to foster a strong payment culture in the UK by bringing the payment performance and behaviour of large companies more clearly into focus,” Reynolds said.

Sally Baker, ICAEW Head of Corporate Reporting Strategy, said: “We are deeply disappointed with the government’s announcement. The annual report is a prime channel of communication between directors and investors. It should not be the default location for all potential disclosures by companies.”

ICAEW questioned the appropriateness of the annual report as a vehicle for public policy objectives when other channels were already available and a proper strategic review of the purpose of the annual report was overdue.

Practical challenges

“Including this type of public policy information in the annual report is fraught with practical challenges and damages the coherence and usefulness of the report. We fully support efforts to tackle late payments. However, we remain unconvinced that this will improve payment practices by large companies.”

Baker said information on supplier payment practices is currently available on a web-based service and requiring disclosure in the annual report is therefore duplicative and does not align with other, well-advanced government plans to simplify the UK non-financial reporting legislative framework.

Solutions: Strengthen compliance enforcement

Instead, ICAEW believes that bolstering the director sign-off process for the web-based service and exploring ways to strengthen enforcement of compliance with the current regulations would be a more practical and more effective solution, while still being in line with the government’s objective. 

“As stated in our May 2023 response to the previous government’s consultation on the topic, we believe the objective for requiring certain information, and the intended users of that information, should determine the location and level of detail of any disclosure requirements for companies,” Baker said.

ICAEW says that greater promise to tackle the scourge of late payments lies in the wider package of measures announced by Reynolds, and it urges the government will move forward decisively in consultation with businesses and the public.

New Fair Payment Code

A new voluntary Fair Payment Code will replace the existing Prompt Payment Code with the aim of offering a clearer and more measurable set of ambitious commitments. Businesses will need to prove they have met good payment standards before being awarded official gold, silver or bronze status.

The Fair Payment Code will be a voluntary code of best practice for companies committed to fair and fast payments and will be overseen by the Small Business Commissioner. Reynolds said the new Code would serve as “a further lever to improve the UK’s business payment culture by shining a light on the best performers.”

ICAEW Policy Director John Boulton said: “It is positive that government is turning to this area early in the new parliament, putting substance behind the manifesto commitment to support SMEs.

“Small businesses are the lifeblood of the economy and we welcome that government is seeking action in this key area. We look forward to engaging with the consultation and contributing to the design of measures to encourage more timely payment.”

Consultation on additional late payment measures

The Department for Business and Trade will launch a public consultation “within months” on additional legislative measures to address late payments and long payment terms.

ICAEW will be consulting with members in the UK regions and business communities about these measures to understand how they will be affected and how they believe government can optimise the effectiveness of the new schemes.

Late payments and long payment terms continue to be a significant issue for small businesses and the self-employed across the UK. In 2022, small businesses were owed on average an estimated £22,000 in late payments from the businesses they supply.

As well as the direct costs to businesses through lost and late revenue, there are also indirect costs including a reduction in productivity through lost time chasing late payments and foregoing investment and growth opportunities.

Transparency around retention policies

Meanwhile, secondary legislation has been laid to require qualifying companies and LLPs to publish certain information on their practices, policies and performance with respect to retention clauses in any qualifying construction contracts with suppliers.

Amending the Reporting on Payment Practices and Performance Regulations 2017 and the Limited Liability Partnerships (Reporting on Payment Practices and Performance) Regulations 2017, this measure seeks to help increase transparency around retention policies and performance, and encourage improved payment practices.

Reynolds said the package of measures announced would meet the commitments laid out in the Labour party manifesto and Plan for Small Business. “These initiatives will ensure more businesses are paid on time – ultimately increasing productivity, improving cash flow and driving growth.”