You can’t opt out of paying your taxes and pension contributions on time, without incurring penalties. Why should your government and its large customers opt out of paying you on time? The National Audit Office’s recent report highlights some disturbing government behaviours and a distinct lack of policy delivery expertise. Whitehall needs to set a good example on prompt payments, delays damage small businesses, often irreparably. With the Small Business, Enterprise & Employment Bill currently progressing through Parliament, now is the time to seize the opportunity to legislate against those who take unfair advantage of SMEs and thereby damage the UK economy.

According to the NAO, the government believes a culture of late payment is preventing UK businesses, especially SMEs, from investing in growth and fully contributing to economic recovery. SMEs generate half of the annual turnover of UK businesses, but they often lack access to credit and may get into financial difficulties because of late payment by customers: a survey in 2014 suggested that late payment was a major factor in 1 in 5 UK corporate insolvencies and 4,000 small and medium-sized businesses that ceased trading in 2008 cited late payments as the cause. Giles Frampton of the Association of Business Recovery Professionals, R3 wrote in The Times recently that in 2013-14, almost half of the insolvency practitioners working on corporate insolvencies reported working on a case where late payment was a major factor.

Central government spends £40 billion a year on goods and services, of which about £4.5 billion is spent directly with SMEs. An additional £4 billion is spent with SMEs indirectly – where SMEs are subcontractors to government contracts.

The NAO reports that UK business welcomes the government’s commitment to pay 80% of undisputed invoices within 5 working days. However, there is little evidence that the commitment is having the intended effect of helping SMEs. There is a risk that the main effect is to boost the working capital of main contractors rather than benefiting other businesses in the rest of the supply chain.

The NAO finds that the centre of government has until recently shown little strategic leadership in relation to prompt payment in the public sector. Amongst the NAO’s recommendations are that the Cabinet office should:
o set out the principal objectives of the 5-day payment commitment and its benefits and costs.
o better promote the existing initiatives intended to ensure subcontractors are paid on time: the use of project bank accounts, the Prompt Payment Code and the Mystery Shopper Service.
o Ensure government departments comply fully with performance measurement and reporting requirements set by the centre of government.
o Ensure the date invoices are first received is accurately recorded.
o Monitor compliance by key contractors in paying subcontractors within 30 days

The report goes on to say that although almost all government departments have publicly reported good performance against the target, their reported performance is overstated. Very large numbers of electronic invoices from a few suppliers, and delays in ‘starting the clock’, mean these departments could meet the target even while most suppliers, including SMEs, are receiving a significantly lower standard of performance than is being reported.

Furthermore demonstrating their lack of commitment, Government officials were unable to locate the original papers setting out the policy objectives and estimated costs and benefits of the 5-day prompt payment commitment. The NAO went on to generate its own estimates, indicating that government suppliers could benefit from reduced interest costs of up to £88 million a year as a result of government paying invoices in 5 working days rather than 30 calendar days. Although the policy also increases government’s working capital requirement, the NAO estimates this generates a cost to the taxpayer of £55 million a year in increased interest costs on government debt, so an overall benefit to the economy.

The Head of the National Audit Office, Amyas Morse said: “UK businesses told us they welcome the Government’s commitment to pay invoices early; however, there has been a disappointing lack of effort by the Government to check whether the implementation of the policy is actually helping SMEs.”
“We are also seriously concerned about the prompt payment performance figures publicly reported by departments. These were overstated by the four departments we looked at. It remains to be seen whether the changes proposed in the Small Business, Enterprise and Employment Bill and secondary legislation will be enough to bring about improvements, not just in public sector payment practices but the private sector as well.”

Debt Guard Solicitors reporting in Real Business have indicated the situation is even worse. According to Debt Guard, “60 per cent of SMEs are experiencing late payments and the average owed per business is £38,186. One in four admits that if that figure grew to £50,000 it would be enough to send them into bankruptcy.”

The Small Business, Enterprise & Employment Bill, which includes clauses on tackling late payment, is currently on its passage through Parliament. However, a proposed amendment to introduce daily late payment interest at eight per cent above the base rate has been rejected by MPs. It seems clear that big companies will continue to ignore the calls for prompt payment unless tougher legislative and regulatory action is included in this Bill. Debt Guard have suggested that compulsory daily interest charges should be made law to punish businesses that pay late, unless they ‘opt-out’ and risk public criticism. The House of Lords should put forward an amendment in support of an ‘opt-out’ system on late payment daily interest charges for the House of Commons to consider and that those companies that do opt-out be publicly named to dissuade others from following suit.Cheriton Financials agrees and believes that this charge should be included in corporate tax returns and ring-fenced to be recycled back to SME funding.