New government crackdown on late payments

The government has unveiled new measures to support small businesses and the self-employed tackling late payments.

The Department for Business and Trade has announced a new package of measures targeting late payments, including a new Fair Payment Code, fresh rules on company reporting and major consultation. 

According to DBT, late payments cost SMEs £22,000 a year on average and lead to 50,000 business closures a year.

Every quarter, 52 per cent of small firms in the UK suffer from late payments, with roughly 2.6 million small firms facing this issue.

Construction remains one of the worst hit sectors for late payments.

In 2023, a third (34 per cent) of construction sector workers downed tools and refused to resume work until an outstanding invoice was paid, and 28 per cent threatened legal action in order to get a customer to settle up, according to research from Lopay. 

In the 12 months to April 2024, Insolvency Service data showed that construction accounted for 18 per cent of insolvency cases, with 4,401, the worst-hit industry in England and Wales.

Following the recent ONS figures Saible CEO, Jarvey Moss, lamented the problems faced in the sector.

Moss said: “All insolvencies result from problems with cash flow. 

“Of course not all cash flow problems in construction result from poor payment culture, but a great many do. 

“We can change this for the better.”

The new crackdown will see the government consult on new laws which will hold larger firms to account and get cash flowing back into businesses, in an effort to deliver on their pledge to grow the economy.

According to DBT, cracking down on late payments will unlock growth for 5.5 million small firms by enabling them to invest their time hiring more employees, boosting wages, and exporting around the world.

Furthermore, new legislation will be brought in the coming weeks to force large businesses to include payment reporting in their annual accounts.

The aim is to put the onus on them to provide clarity in their annual reports about how they treat small firms, meaning company boards and international investors will be able to see how firms are operating.

Enforcement will also be stepped up on the existing late payment performance reporting regulations which require large companies to report their payment performance twice yearly.

Under current laws, responsible directors at non-compliant companies who don’t report their payment practices could face criminal prosecutions including potentially unlimited fines and criminal records.  

Last October, the Conservative government introduced new measures to make businesses report on retention payments as part of a crackdown on late payers in the industry.  

Under the legislation, fresh payment performance reporting obligations include a value metric, so businesses and commentators can see the value of invoices, invoices paid late, and disputed invoices. 

Prime minister Keir Starmer said: “We’re determined to back small businesses by unlocking their barriers to growth, and stamping out late payments is at the heart of this.

“We know how important it is for business owners to have the peace of mind and certainty around their cashflow to keep their businesses alive. 

“After years of delay, we’re bringing forward measures that small businesses have long been calling for to tackle late payments once and for all.”

Business secretary Jonathan Reynolds said:  “Late payments are simply unacceptable and this government is determined to level the playing field for small business. 

“When the cashflow runs dry, small firms go under, which is why we need to hold larger business to account with their payment practices and foster an environment that supports growth and jobs. 

“We know there’s a lot more to be done, but today we are calling time on late payers once and for all.”

A new Fair Payment Code has also been announced to replace the old Prompt Payment Code,  designed to push businesses to pay faster more often, to be awarded either gold, silver or bronze status. 

Businesses will need to prove they have met good payment standards before being awarded official code status.

Small business minister Gareth Thomas said: “Small businesses deserve to be paid on time, it’s as simple as that. 

“I’m optimistic that today’s first big step will help pave the way for real change that supports SMEs to thrive and help to grow our economy.”

New research published by the Department for Business and Trade has found payment problems multiply the further down the supply chain you go, with delays to payments increasing with each business along a supply chain.

The research also found that there was a clear imbalance between big and small firms, and that administrative errors are a major factor in creating slow payments with 24 per cent of firms saying that invoices being incorrectly handled added to delays.

Tina McKenzie, policy chair at the Federation of Small Businesses (FSB), said: “This is what real change looks like, the Business Secretary has clearly recognised the importance of eradicating bad payment culture, which so devastates the UK supplier base and holds back growth. 

“This series of actions today – including the crucial steps being taken to deliver on Jonathan Reynolds’ commitment on audit committees – shows the Government is rightly focused on delivery and working in partnership with the business community.

“There will be so many decisions the Government needs to get right, early – an actively pro-small business budget, a good industrial strategy and tackling late payment. 

“Announcing this programme of work today is a huge confidence boost for the small business community and a clear signal the new Government intends to stand up for small firms.”

Was this interesting? Why payments are nearly always late in construction

If you have a tip or story idea that fits with our publication, please contact the news reporter miles@wavenews.co.uk