Government boosts small suppliers by strengthening Prompt Payment Code

Late payments are a huge problem for small businesses, whose often thin margins mean that any delay has a huge knock on impact.

Recognising this, and the effect that COVID-19 has had on many SMEs, the government has announced that it will strengthen the Prompt Payment Code.

This article will discuss:

What are the proposed changes to the Prompt Payment Code?

According to the gov.uk press release, there are three main changes that will be made to the Prompt Payment Code (PPC):

1. Any company signing up to the Code must pay 95% of invoices to small businesses (those with fewer than 50 employees) within 30 days, as opposed to the current 60 days (this will take effect from 1 July 2021, and the requirement will stay at 60 days for larger businesses)
2. Any company signing up to the Code must have their CEO, Finance Director or business owner (if they’re a small business) personally sign the Code to ensure that responsibility is taken at the highest level
3. Confirmation that suppliers can charge interest on late payments from companies signed up to the Code

Other changes include the introduction of a new logo that signed up companies can use in external communications, and Code administrators being granted the power to investigate breaches based on third-party information.

What is the Prompt Payment Code?

At this point you might be wondering what the Prompt Payment Code is, and why you’ve never heard of it before.

The Code was introduced in 2008 and is voluntary, so this won’t help all small businesses struggling with late payments.

However, there are now almost 3,000 companies signed up and, to stay on the register of approved companies, they must pay suppliers promptly and abide by the other rules of the code.

And breaches are taken seriously, with Sky News noting that both Shell and BAE Systems were suspended from the Code last year for not following the rules.

More positively, there are indications that big companies are starting to take prompt payment seriously, with Tesco announcing in July 2020 that it would pay small suppliers immediately until February 2022 to help them cope with the impact of the pandemic.

What has the reaction to this been?

Gary Turner, the Managing Director of Xero UK (whose online accounting software is used by thousands of small businesses) welcomed the changes, but noted that much more radical action was required:

“In an age where we can use our thumbprint or a selfie to pay instantly, how is it still acceptable that large businesses pay suppliers months later?

“We support the measures the government is taking to enhance the prompt payment code, but this should be the first step in a longer cultural shift. 

“If we’re going to rebuild the economy, small businesses must be able to have and use money that’s already theirs. We’ve been calling on the government for a ‘fair buyers bill’ to stop corporates increasing payment terms. 30 days should be the maximum standard for payment terms. Yet in the last year, 59% of small business owners said that corporate customers increased the length of their payment terms. 

“This is the next ethical issue corporates need to address. Poor cash flow is the number one reason that businesses fail, and this is often tied up in late payments.

“After a devastating year any moves to treat small firms more fairly should be welcomed.”

In the gov.uk press release, Federation of Small Businesses (FSB) Chairman Mike Cherry hailed the move, but also stressed the need for “swift delivery” and said that “ending our pernicious poor payment culture for good over the coming months will be fundamental to turning our hopes of economic recovery into reality.”

Can we expect any more changes?

A consultation on increasing the scope and powers of the Small Business Commissioner closed on 24 December 2020, and included proposals to legally enforce late payment issues.

Of course, this doesn’t guarantee anything will change but, at the very least, the government is seriously recognising this issue and the impact it could have on the UK’s economic recovery.

We’ll keep you updated when the outcome of the consultation is published.