Late payment interest: what does the ‘Prompt Payment & Cashflow Review’ mean for late payments?

On 03 December 2022, the Government announced a review of the current practices and measures in place concerning late payment issues for businesses.

The current legal framework

There are currently a number of statutory, regulatory and procedural mechanisms in place to promote prompt invoice payments, namely:

• Late Payment of Commercial Debts (Interest) Act 1998 (the 1998 Act): In England and Wales, the statutory remedy for late payment is governed by the 1998 Act, which sets interest at a rate of 8% of the Bank of England’s base rate. In addition, a fixed sum of between £40 and £100 can be recovered to cover the costs of chasing the debts, dependent on the amount of money owed.

• The Prompt Payment Code (the PPC): The PPC is a voluntary scheme whereby businesses commit to paying suppliers in a timely fashion, which can enhance a buyer’s reputation and make it more attractive to suppliers. The PPC has, however, been met with criticism due it its lack of effectiveness, therefore recent developments have led to stricter requirements under the PPC, for example by requiring signatories to pay 95% of invoices from small businesses within 30 days (down from 60 days), and imposing fines for non-compliance.
• The Small Business Commissioner (the SBC): The SBC acts as an ombudsman for small businesses by assisting in disputes as well as providing general advice, direction and guidance.
• Payment Practices & Performance Regulations 2017 (PPPRs): The PPPRs require large companies (i.e., companies with a turnover of more than £36m, a balance sheet total of more than £18m, and more than 250 employees) to report on their payment practices twice a year, covering areas such as standard payment terms, payment resolution mechanisms and average payment times. Non-compliance can carry criminal penalties, although such penalties have yet to be imposed since the introduction of the PPPRs, despite threats of enforcement.

A need for reform

Despite the legal framework mentioned above, businesses are still encountering significant issues in receiving prompt payment as highlighted by the following:

• 62% of small businesses report being affected by the issue of late payment at least once, with 50,000 small businesses closing each year as a result.
• Despite the statutory interest entitlement, 80% of small businesses do not charge interest on late payments. This is likely attributable to a lack of awareness and/or a fear of damaging contractual relationships.
• UK businesses are owed over £23b based on outstanding invoices.

The above therefore clearly represents a major issue in businesses receiving payments promptly and has resulted in a government-led review focussing on the following areas:

• Transparency & advocacy: The review will recommend how to hold businesses accountable for payment practices and improve transparency using published data.
• The progress made within different business sectors: The Government will look at the progress made by different business sectors, investigating reasons behind differing performance and exploring barriers and solutions.
• Late payment cultures: The review will investigate business behaviours related to late payments and their impact on sustainability and growth, including emotional and psychological effects on small business owners and staff. It will explore contracting practices, liquidity, and cash-flow pressures in both small and large businesses, as well as the impact of business characteristics on cash-flow considerations. Additionally, the review will recommend ways for the Government and others to promote a culture of responsibility among large businesses toward their smaller suppliers’ sustainability.
• The existing legal framework: The existing legal framework will be examined, and recommendations made as to how it can be improved to promote prompt payment.
• The role of banks, technology & awareness: The review will investigate ways to support small businesses in managing cash flow, including exploring financing solutions and increasing awareness of appropriate products. It will also examine how technology, such as accounting platforms, can aid small businesses and assess the variation in usage across sectors. Additionally, the review will recommend ways to improve awareness and uptake of available support and tools, tailored to different stages of business.

What could reform mean to you?

• The 1998 Act: As a buyer, you are currently restricted under the 1998 Act as to the length of the credit period you can impose. Under the current regime, if you impose a credit period that is ‘grossly unfair’, a default period of 60 days will be applied. Reform could see a less stringent test be applied, preventing buyers from imposing lengthy credit periods.
• The SBC: If you are a small business, you can make a complaint to the SBC if you have not been paid by your customers on time. However, the SBC’s current powers are limited as it cannot take effective enforcement action. Reform will likely see the SBC granted increased powers, providing a mechanism for small businesses to recover late payments.
• The PPPRs: The effectiveness of the PPPRs in assisting businesses in identifying the payment practices of customers, seeking additional measures to ensure payment for those reported as frequently making late payments, and ‘naming and shaming’ late payers is questionable, as improvements have only been seen for around 4% of invoices to which the PPPRs are subject. Reform is therefore likely to address this, looking at the data provided by the PPPRs as well as increasing evidence requirements relating to payment practices.

Key takeaways

The findings of the Government’s report are likely to be published towards the end of 2023 and could result in increased regulation and protection around the payment practices of businesses, all of which will need to be considered when drafting commercial contracts.

Please note that this information is for general guidance only and should not substitute professional legal advice. If you have specific concerns, we recommend consulting one of our legal experts.