Late payment invoices to have a 60 day limit
Late payment invoices to have a 60 day limit
Late payment of invoices costs the UK economy approximately £11bn a year and shuts down businesses every day, putting enormous stress on small and medium sized businesses.
The government plans to effectively limit payment terms between UK businesses to 60 days by introducing legislation to amend the Late Payment of Commercial Debts (Interest) Act 1998, removing the exemption that allows businesses to agree to payment terms longer than 60 days if considered not ‘grossly unfair’.
Although this proposal is now in consultation, the government set out its longer-term plan to stamp out bad payment practice, saying that subject to further consultation it ‘may subsequently reduce this limit from 60 days to 45 days in the next five years’.
‘The intention is to address a current negotiating imbalance between small and large businesses, whereby small businesses frequently feel compelled to agree very long payment terms in order to agree a contract,’ a government spokesperson said.
The proposals are predominantly designed to stop large businesses from extending their standard payment terms to avoid paying interest on overdue invoices.
Late payment is a massive problem for SMEs with figures showing that 40% of invoices involving trade credit were paid late and outside of agreed terms in 2020; and in 2022, small and micro businesses were owed on average £22,000 in late payments. In addition, 12% of large businesses take more than 60 days to pay invoices to SME suppliers.
Currently late payment is only controlled in a voluntary way through the Fair Payment Code, which sets a recommended 30-day payment period for SME invoices owed by large businesses.
The new laws are set to give stronger powers to the Small Business Commissioner (SBC) to issue fines against large businesses, which persistently pay suppliers late, with penalties based on businesses’ unpaid statutory interest liability.
The SBC will also carry out spot checks on businesses and enforce a 30-day invoice verification period to speed up resolutions to disputes.
As part of the proposals, audit committees will have to monitor payment performance at big business, meaning that audit committees will be legally required to scrutinise payment practices at board level, placing greater pressure on large businesses to demonstrate they are treating small suppliers fairly, if the proposals are passed.
The scourge of non-payment was described as ‘unacceptable’ by small business minister who said: ‘Too many small firms go under each year because they aren’t paid on time – that is completely unacceptable.’
But it is thought that changes to the current payment regime will not be straightforward and there is likely to be strong pushback from affected businesses during the three-month consultation on the issue.