How is the duty to report on payment practices legislation helping start-ups?

The legislation requires any business over a certain threshold to report on their payment record and will make sure small suppliers get paid on time

Late payment is a growing problem for UK small businesses.

According to a survey of 80,000 invoices by MarketInvoice, 62% of the UK’s small businesses were paid late in 2017 – an increase of 60% on 2016. On average, these companies have to wait 18 days to be paid with a massive £21.1 billion in late payments outstanding every year.

In an effort to combat this, the government has introduced ‘duty to report on payment practices and performance’ legislation. This requires any businesses over a certain threshold for metrics such as turnover or number of employees to report on their payment record.

The legislation acts as an extension of the Prompt Payment Code, which was started in 2008 to set standards for best payment practice and encourages the payment of suppliers within 30 days.

This follows the appointment of small businesses commissioner Paul Uppal, who has been tasked with driving a culture change in late payments.

Is the duty to report legislation having any impact?

Discussing duty to report, Oliver Kidd, senior associate at law firm Stevens & Bolton, explains: “Whilst the regulations came into force in April last year, the reporting obligation is linked to each company’s financial year, so not every company within scope was required to take action immediately. It’s also not entirely clear that every company with a duty to report is fully aware of that fact, as I wouldn’t say the regulations have been particularly widely publicised.”

The collapse of construction giant Carillion – which was rumoured to make some of its small suppliers wait 120 days for payment – provides a recent example of a tardy corporate that puts the financial health and future of UK small businesses in jeopardy.

According to official court documents, creditors of Carillion could end up receiving just a penny in the pound.

Mike Cherry, Federation of Small Businesses (FSB) national chairman, says: “Sadly, these kind of poor payment practices are all too common among some big corporates. Perhaps if they weren’t it would be easier to spot the warning signs of a huge company in financial trouble.”

What does the data so far tell us about duty to report?

As stated above, not every business that falls under the legislation has published their first report. Depending on when their financial year started, the reporting date of some companies will not be until later in the year.

That said, a decent sample size of 350 have published their data on a centralised portal, though some entries are incomplete or feature inconsistencies.

Kidd comments: “What isn’t clear is whether there is any procedure in place for the data to be reviewed centrally before it is published. There are currently some 30 plus companies on the list appearing to have reported only their company details and nothing at all about payment performance.

“There are also three companies with stated payment terms of 1,000 days, so we shouldn’t be surprised to see that they have been able to report that they pay 100% of their suppliers within agreed terms. This, of course, isn’t in the spirit of the legislation and we wonder whether it has raised any eyebrows with the regulators.”

What does the data tell us about the UK’s late payment culture?

With the information presented under 24 different headings, there is a plethora of metrics to draw from. Taking into account standard payment terms, most companies fall within a range of 30 to 60 days – though – as we’ve seen above – some have standard terms of 120 days or even longer…

Additionally, the percentage of invoices not paid within agreed terms currently ranges between 0% up to 97%.

Kidd continues: “One would hope that those with the lengthier payment terms would perform better at paying suppliers within agreed terms, however that is not necessarily the case with several entries we reviewed.

“Suppliers will no doubt be hoping that reporting companies are not prepared to simply report poor payment performance, rather than actually change their approach. Another recent development in this area has seen the small business commissioner establish an impartial, independent and free-to-use service aimed at helping small businesses resolve payment disputes with larger organisations. This development should also be welcomed by smaller suppliers.”

Duty to report: time will tell

Most small businesses simply aren’t in a strong enough position to dictate payment terms or can’t afford to be selective about which large organisations they work with.

Even though many recognise the need to include robust payment terms in contracts, small businesses that do try and enforce payment terms on their more powerful clients risk losing out on custom. It’s often not worth the hassle.

Unfortunately, the regulators did not include prescriptions for maximum payment terms or even penalise those who persistently pay late with fines or other sanctions. However, it is hoped the duty to report will introduce transparency to the supply chain and promote a culture of better payment practices.

Mark Greatholder, senior associate at Foot Anstey, commented: “To date the feedback that I have been receiving from SMEs is that the new legislation is welcome and shows that there is an attempt to understand the challenges faced by SMEs and find solutions,”

“However, only time will tell whether the new legislation has a meaningful impact on SMEs. To some extent it will depend on whether the large organisations who are subject to the legislation see enough benefit to their businesses (or enough adverse impact to their businesses resulting from their duty to report) to invest the time and effort it takes to improve their payment practices.”

Kidd commented: “It seems this softer approach is likely to require more time and buy-in from the business community before we begin to see a significant shift in behaviour. The regulations have at least put the issue of late payment on the agenda at boardroom level. Failing to report when required or reporting misleading information attracts criminal liability and potentially hefty fines, so the regulations should not be ignored,” he concludes.

GoCardless gives start-ups and small businesses access to online direct debit. It’s free to set up and you pay just 1% per transaction with a cap of £2 (and no hidden charges). Find out more.