‘Crackdown’ on late payments to small businesses announced

The government has announced its “toughest crackdown on late payments in over 25 years” aimed at protecting small businesses.

The measures strengthen legislation first laid out in the 1998 Late Payment of Commercial Debt Act and the government says they will give the UK the toughest laws on late payments in the G7.

The new measures include:

• new powers for the Small Business Commissioner to investigate poor payment practices, adjudicate in payment disputes and issue multi-million-pound fines to persistent late payers for breaking the new laws
• a 60-day cap on payment terms on all large firms when paying smaller suppliers 
• mandatory interest on late payments set at 8% above the Bank of England base rate

The government has said compensation would also be available for late payments. In its example: “If a small business is owed £10,000 by one of its customers and is paid 60 days later than the agreed payment date, under the new rules they will be owed £10,293.15 including mandatory interest (£10,000 plus £193.15 interest plus £100 compensation).”

The boards or audit committees of large companies that persistently pay late will also be required to publish explanations for poor payment performance and detail the actions they are taking to address it. 

Announcing the new measures, Minister for Small Business and Economic Transformation Blair McDougall said: “These are genuinely game-changing measures that will ensure no business, no employer, no family has to endure the immense strain of being left strapped for cash they have already earned.”

According to the government, late payment problems cost the UK economy £11 billion every year and cause 38 businesses to close every day. In FreeAgent’s most recent Small Business Monitor survey 71% of business owners said they’ve waited more than a month to get paid, with 40% waiting more than three months.

Consultation on banning withholding retention payments

The government has also announced a ban on the withholding of retention payments under the terms of construction contracts and will hold a consultation on how this will be implemented. 

Some construction contracts allow the contractor to retain a portion of the contract price for a period after the work has been completed so that if deficiencies in the work done become apparent, the final payment can be withheld until the subcontractor has made good the faults - these are known as retention payments.

Business Secretary Peter Kyle said the new rules will prevent small firms losing retention payments because their contractor becomes insolvent or simply does not pay them. 

“Far too many businesses are forced to shut down because they have not been paid – that is simply unacceptable. We are unveiling the strongest, most robust changes to payment laws in over a generation – laws that will transform the fortunes of small businesses for years to come and make their day to day lives much easier,” he said.

FSB welcomes progress after ‘years of dithering’

The Federation of Small Businesses (FSB) worked with the government on developing the plans. FSB Policy Chair Tina McKenzie said: “For the first time, audit committees and boards will question and challenge poor payment performance, publish it in annual reports for all to see, and put it right. Paying in 60 days is not prompt - but strengthening that as the absolute maximum cap after years of dithering is a good step towards encouraging payments in 30 days across all supply chains.

“We’ll keep working with the Government to make sure new laws are brought in as soon as possible.”

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