Government needs to toughen SME late payments regime

The government is failing to tackle larger companies who treat small businesses ‘disgracefully’, and needs to toughen up its regime to counter long payment terms and late payments, according to a report from the business, energy and industrial strategy (BEIS) committee

The report found that bad payment practices have led to the failure of many SMEs and prevented others from growing and improving their productivity. Initiatives to address poor payment practices, including the government’s prompt payment code, have been ineffective, MPs said.

The committee found evidence that payment terms are getting longer and that several high street stores, such as WH Smiths, Holland and Barrett, and Boots UK, have long payment terms. Several companies looked at by the committee took on average more than 60 days to pay an invoice.

MPs identified the construction industry as a sector where poor payment practices are rife, as highlighted in the treatment of suppliers by failed outsourcer Carillion. 

The report pointed out SMEs also face other unfavourable terms - described as ‘supply chain bullying’ by the Federation of Small Businesses (FSB) - such as being required to give discounts for prompt payment or being charged fees to remain on a suppliers list.

The committee recommends the government introduce a statutory requirement for companies to pay within 30 days, move as soon as possible to require all medium and large companies with more than 250 employees to sign the prompt payment code, and equip the small business commissioner with powers to fine those companies who pay late, as well as extending the commissioner’s remit to cover the construction industry.

The report also recommends other changes to tackle the abuse of retention payments within the construction industry, proposing that independently managed project accounts are introduced, and money withheld only when there is a good reason to do so.

In addition, the committee warned the government is on course to miss its target of awarding 33% of all central government contracts to SMEs by 2022. It recommended that companies and their supply chains that bid for public sector contracts should pay within 30 days or be prevented from bidding.

The committee said poor payment practices are indicative of a flawed corporate culture and should be questioned by auditors and shareholders as part of their role in ensuring that boards behave responsibly and in the interest of all their stakeholders.

It also wants the government to give ‘serious and urgent’ consideration as to whether mandatory interest on late payments would offer a greater incentive to pay on time in a way that does not expose individual SMEs to supply chain vulnerability.

Rachel Reeves, BEIS committee chair, said: ‘Many SMEs are placed in a stranglehold by larger companies deliberately paying late and ruthlessly taking advantage of their suppliers, causing these firms financial instability. Unless the government levels the playing field and acts to bring in a tougher regime for poor payment practices then we choke-off the opportunity for SMEs to invest and grow in the future.’

Phil Hall, Association of Accounting Technicians head of public affairs and public policy, said: ‘The fact the BEIS select committee has finally made the same recommendations to government that AAT has been campaigning for over the last 12 months is testament to the recommendations likely effectiveness as well as the strength of the AAT campaign.

‘The support from the BEIS select committee builds on that previously secured from the SNP, Green and Liberal Democrat parties and various big hitters from the Conservative and Labour parties who have already publicly backed our campaign. The pressure is now on government to deliver these changes and eradicate the scourge of late payments.’

As well as late payment concerns, the report examined the ‘long tail’ of unproductive small businesses, looking at a variety of issues relating to SMEs including support and advice, leadership, management and digital skills, and scale-ups.

It noted that there are a ‘myriad of policies and initiatives’ aimed at helping SMEs innovate, export and address productivity issues, some of which rely on EU funding. SMEs can find this difficult to navigate and fear that that money will dry up when the UK leaves the EU. The committee is calling on the government to improve online support for SMEs and urgently explain how it will match EU funding.

BEIS report Small businesses and productivity is here

Report by Pat Sweet

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