Member Article

Late payments: Broaden ‘Duty to Report’ legislation to truly support SMEs

Late payments have plagued SMEs across the UK for decades. Although many have tried to put a stop to the issue, research by BACs shows small businesses are facing a bill of £6.7bn just to collect money they’re already owed.

The figure itself is startling, but even more so when the direction of travel is considered – in 2017 the figure was £2.6bn. In April of 2017 the government introduced new ‘Duty to Report’ legislation with the explicit aim to tackle late payments. Clearly, it’s not working. So, what is the regulation and what does it aim to do?

Increased transparency

The ‘Duty to Report’ legislation was introduced to boost transparency of payment practices by making it mandatory for large businesses to publish details on the time taken to pay their suppliers. The idea was that forcing companies to do so would cause them to be more punctual when paying suppliers, to avoid being repeatedly named and shamed.

The government focus on tackling late payments was welcomed by business and trade organisations, as a vital move to boost the health of the 5.5 million SMEs in the UK and the wider economy. The question is, why isn’t the legislation working?

Late payment loophole

Government recently admitted that there is a loophole in the ‘Duty to Report’ legislation allowing large businesses to ignore the regulation without being penalised. Failing to comply is a criminal offence for any business that meets two of the following criteria:

• Annual turnover equal to or in excess of £36 million

• A Balance sheet equal to or in excess of £18 million

• A minimum of 250 staff

However, any services that are contracted and paid-for by group subsidiaries outside of the threshold currently don’t have to comply. This has rightly caused uproar amongst MPs and small business representatives alike, with Rachel Reeves MP, Chair of the Commons Business, Energy and Industrial Strategy Committee stating that the loophole “undermines efforts to tackle late payments and protect small businesses.”

Similarly, Small Business Commissioner Paul Uppal admitted that it’s “disappointing” the legislation hasn’t been as effective as many anticipated.

The right support

It’s promising to see politicians recognising this loophole exists but what action is taken to address it will be the real test. In fact, it’s recently been announced the Small Business Commissioner could soon have the power to fine large enterprises that repeatedly flaunt payment agreements, news that will no doubt please SMEs across the country. However, the success of such measures will depend on the level of fines – if it equates to a financial slap on the wrist for the biggest businesses, will it change anything? Then there’s the question of whether these ‘potential’ fines are converted into action. If not, SMEs may be left without the support network they so badly need.

If the government is truly committed to removing the administrative burden of late payments that puts so many SMEs out of business, it needs to broaden the ‘Duty to Report’ legislation to remove the loophole and force large businesses and their subsidiaries to report their payment habits. Only then will an environment of complete transparency be created, which in turn may finally make a serious dent into the ever-present burden of late payments.

Until this happens there are ways for SMEs to fight back against the negative impact of late payments, from having frank discussion with partners that continuously fail to adhere to agreed payment, to imposing sanctions on those partners, or seeking out invoice finance facilities to bridge the gap.

SMEs are the growth engine for the UK economy, yet they currently aren’t receiving the support they need to thrive. It’s galling to see big business being able to hold SMEs to ransom in this way – whether accidental or otherwise – without understanding of the scale of the impact. It’s one thing for Government to recognise the issue, it’s another to close the loophole and show their true commitment to business owners across the country.

This was posted in Bdaily's Members' News section by Steve Noble, COO at Ultimate Finance .