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Late payments: a problem that’s not going away

The issue of late debt payments to businesses, especially those at the bottom of the food chain, is one that, like the possibility of another Donald Trump presidency, just refuses to go away.

Accounting software provider Xero detailed in an early March set of quarterly data that at the end of 2023 small firms were now holding unpaid debt to the tune of £1.6bn. The firm’s analysis is based on the accounts of numerous small businesses that use its software.

Among the other findings was the worrying fact that small firms were experiencing delays that averaged 6.1 days beyond agreed payment terms in the last three months of 2023.

Xero isn’t alone in its findings. For years, the Federation of Small Businesses has been trying to address the problem, noting that in 2022, “52% of small businesses experienced late payments.”

52% of small businesses experienced late payments

Various governments have tried to fix this perennial problem. There was the Late Payment of Commercial Debts (Interest) Act 1998 which provided businesses with the statutory right to charge interest and a fixed administration fee on overdue invoices. In April 2020 the law was amended to state that no payment term longer than 60 days may be agreed if the creditor is an SME and the debtor is not. Overall, the law gave businesses a legal footing to recover what they were owed. However, the problem was – and still is – that firms are reluctant to use it for fear of alienating customers.

Then, in 2017, came the Small Business Commissioner (SBC), an independent public body set up by the government under the Enterprise Act 2016 to tackle late payment and unfavourable payment practices in the private sector. The body seeks to provide general advice and information, handle complaints about payment issues and direct small businesses to existing dispute resolution services where appropriate. Its website claims that over £8m in unpaid invoices have been recovered under its watch.

But the SBC is toothless; as the government’s website says, it can make “non-binding recommendations on how the parties should resolve their disputes.” Indeed, the AAT, an accounting body, has since 2016 been calling for the SBC “to be given the power to impose financial penalties to those who persistently fail to pay 95% of invoices within 30 days. This would give it much greater influence when investigating complaints.”

Back in March last year, law firm Travers Smith, wrote about the government’s December 2022 announcement of a Payment and Cash Flow Review. The review sought to examine the success of the law, the SBC, and a disclosure regime which requires large firms to report their payment practices.

As to the outcome – if there is one – the SBC could be granted stronger powers, the disclosure regime could be strengthened, and the law could be improved. The consultation document predicted a response by the end of 2023. It’s now spring 2024.

One move the government did make was announced at Autumn Statement 2022; it related to public sector payments so that from April 2024 companies seeking government contracts exceeding £5m must demonstrate prompt invoice payment within an average of 55 days.

Looking to the future, Alex von Schirmeister, Xero UK’s managing director, reckons that there’s an urgent need to address the matter as late payment is an “unapproved debt” that significantly affects the operations of small firms. He thinks that firms should be made accountable to ensure faster payments.

But beyond this the government seems not to be in any hurry to change the situation. This leaves firms having to be careful who they supply to and on what terms while trying to build a cash buffer to allow for late payments.

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