Big businesses that repeatedly pay their suppliers late need to be “named and shamed” by the UK government, the Federation of Small Businesses (FSB) told SCF Briefing this week.
The organisation also called for tougher penalties for companies with poor payment practices alongside other measures to ensure small UK suppliers are paid promptly and fairly, outlined in a three-point action plan released this week.
“The small business commissioner Paul Uppal has been given new powers last year to ‘name and shame’ businesses that have either poor payment practices in terms of payment terms or companies that have employed bullying tactics or those perennial late payers,” the FSB’s national chairman Mike Cherry said.
“So far we haven’t seen him exercise those powers and we would like him to come out and openly state which businesses have poor payment practices,” he added.
The launch of the FSB’s action plan comes just a year after the collapse of the UK construction firm Carillion which left many small suppliers stranded with thousands of pounds of delayed and unpaid invoices, leading some to enter bankruptcy themselves.
The problem extends beyond Carillion, with FSB research estimating that late payments lead to the closure of around 50,000 businesses a year alone in the UK.
Last July the FSB research found 17 per cent of smaller suppliers were paid more than 60 days after providing an invoice, while close to one in five smaller suppliers are paid late more than half the time by the public sector, the research found.
The FSB is pushing for the UK government to implement harsher penalties under the Prompt Payment Code which it originally set up in 2008. The code requires that large corporate signatories – which did include Carillion – pledge to improve payment practices and pay invoices within reasonable timeframes.
Cherry said the code lacks “teeth” to ensure signatories keep to their pledges and effectively penalise those that don’t.
“We would like to see a toughening up of the prompt payment code with penalties, which could be barring companies from contracts or could be organisations paying interest on late payments. The Carillion example showed – Carillion being a signatory to the code – that there weren’t enough teeth for the government to do anything to punish Carillion, and other organisations that signed up to this contract,” he said.
“Some suppliers reported that they were made to wait 120 days for payments from Carillion which is totally unacceptable particularly when you look at the outline of the code which required organisations to work towards payment terms of 30 days,” he continued.
FSB’s third action point called for mandatory use of ‘project bank accounts’ for certain government contracts which would ring-fence money due to contractors working on a public sector project. The accounts would ensure smaller sub-contractor businesses are paid on time and are protected from losses if the main contractor goes out of business.
This proposal was presented to British Members of Parliament (MPs) for the first time this week by Labour MP Debbie Abrahams in a 10-minute rule bill read on Tuesday. Abrahams said that late payments were as “unethical” and “unacceptable” as tax evasion.
Cherry told SCF Briefing that he wants the government to lead the way in establishing good payment practices.
“We argued for a long time for the greater use for project bank accounts. They are already used by Highways England in their construction projects and given the scale of late payment issue in the UK, we think that the government should set an example in their own supply chains and end those practices. One way to do this is to use project bank accounts,” Cherry said.
The UK has taken some concrete steps to hold companies to account, with ‘duty to report’ legislation introduced in April 2017. This requires certain companies to declare how long on average it takes them to pay invoices. This information is publicly available.
The UK government has previously spoken in favour of the use of commercially-funded supply chain finance programmes as a means of helping suppliers receive early payment on invoices.
While Carillion itself had set up an early payment programme for suppliers, it has since been criticised for bringing the scheme in at the same time as extending its typical payment terms.
Cherry told SCF Briefing that the FSB welcomes financial innovation, but warns that any type of financing scheme should not be used to avoid paying suppliers on time.
“In terms of the experiences our members report to us, small businesses value different forms of finance.
“What they don’t value is forms of finance that are there as an excuse not to pay suppliers within the terms of the contract as they see it. I think all innovations in this space work well, but the bottom line is we want small firms to be paid in a reasonable time for work they have done. We want payment to be prompt and fair and that is the bottom line,” he said.
Paul Uppal, the small business commissioner, responded to SCF Briefing’s request for comment with the following statement:
“As the small business commissioner, I am committed to ending the scourge of late payments and helping small businesses across the UK to thrive.
“I regularly engage with businesses of all sizes and work closely with the FSB and the Prompt Payment Code to improve the existing payment culture in the UK,” he said.
Poor payment practices are not confined to UK borders with small European suppliers also struggling with mounting unpaid invoices and extended payment terms.
The FSB is working with European counterparts to lobby the European Commission for improvements on the EU Late Payment Directive introduced in 2011.
It is urging the commission to recommend that all EU member states bring in ‘duty to report’ legislation on payment practices of large companies.