Prompt Payment Code Beginning to Bite?

Late payment by large corporations is still very much rife as the balance of power remains tipped very much in the favour of the goliath.

Chris Tate, Business Advisory Director at Moore says “It’s a selfish motivation because if everybody was doing it and it became widespread, and I would say in certain industries it is an endemic problem that causes structural problems throughout the sector where you can end up with situations where otherwise healthy businesses that are good businesses keel over, because they are starved of cash”.

Chris goes on to say “Many small businesses can quickly find themselves struggling to keep their head above water because late payment is the underpinning of that adage ‘cash is king’ and most insolvency events in the UK are caused by lack of cash not by lack of profit.”

“Because late payment is in the hands of the late payer, that money is free money. They don’t have to borrow it from a bank with a rate of interest on it and they don’t have to have it supplied by shareholders with an equity return on it. It’s working capital funding free of charge to grow their business. Which is quite a powerful motivation for any single business to wish to pay late,” Chris explained.

Signs of improvement but not soon enough

The government is planning to overhaul the small payment regime by moving responsibility for the voluntary Prompt Payment Code from the Department for Business, Energy and Industrial Strategy (BEIS) to the Small Business Commissioner’s Office, headed by Paul Uppall, which will be given new powers to tackle late payments by issuing fines and binding payment plans when big business fails to pay bills on time.

Chris points out that government initiatives like the Prompt Payment Code, in which businesses commit to paying within 60 days with the aim of halving that to 30 days, are voluntary. “At the moment the sanctions don’t fit the extent of the problem however there are signs its moving in the right direction.” He says.

“Recently the Small Business Commissioner’s named and shamed some companies it had investigated, and the Prompt Payment Code expelled 18 contractors from its books. 17 of those 18 have submitted action plans to achieve future compliance, however time will tell whether these action plans are a work of fact or fiction”
From 1st September 2019, any supplier who bids for a government contract above £5m per annum will be expected to answer questions about their payment practices and performance. If they are unable to demonstrate that they are paying 95% of invoices within 60 days, they are likely to be excluded from the process.
 
“Whilst the Prompt Payment Code remains voluntary there is a prospect, albeit currently considered remote, it may become mandatory in the future for large businesses, which would drastically improve the payment practices of larger organisations, in general, and help ease the cash flow squeeze on smaller businesses who suffer from slow payment.”