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Protecting Small Businesses: UK Government to Tackle Late Payments

In February 2023, the UK Government announced that they were reviewing the current payment practice regime as it is due to expire next April. The review, titled the ‘Prompt Payment and Cashflow Review’, includes focus on how successfully the current regulation was performing in relation to late payment and to determine whether it required extending or amending. The Government has now announced that their findings will be published shortly and provided a glimpse of how it will support businesses and boost economic growth.

It was found that the late payment of invoices and long payment terms remain key issues that prevent the growth of businesses, in particular, Small and Medium-sized Enterprises (SMEs). In 2022, SMEs were owed on average an estimated £22,000 in late payments. Consequently, owners and managers of SMEs spend an unreasonable amount of time chasing late payments in an effort to prevent cash flow issues or spending avoidable costs on debt collectors.

An initiative to tackle the culture of late payments that UK businesses face would provide support to small businesses who struggle to have the resources to accommodate late payments in their businesses. Moreover, research has suggested that an improvement in late payments could boost the UK economy by £2.5 billion annually.

An indication of the new measures which will support SMEs following the ‘Prompt Payment and Cashflow Review’ include:

  • Extending the Reporting on Payment Practices and Performance Regulations 2017. Following the consultation, the Government will take forward legislation to extend payment performance reporting obligations. The reporting will include new metrics, including a value metric so businesses and commentators can see the value of invoices, including those paid late, and a disputed invoices metric;
  • The Government will provide greater advice to SMEs on negotiating payment terms that better suit them, how going digital can support getting paid quicker and managing cashflow;
  • Broadening the powers of the Small Business Commissioner: Introducing broader responsibilities, enabling the Commissioner to undertake investigations and publish reports where necessary on the basis of anonymous information and intelligence;
  • Encouraging prompt payment as part of a business’ ESG commitments;
  • The Prompt Payment Code will continue and require affirmation every 2 years by businesses who are signatories.

These measures are an attempt by the UK government to not only improve the current payment culture, but also provide businesses with predictable and reliable cash flow, allowing them to spend with greater certainty. Moreover, reducing the time spent chasing payments will free up time for businesses to spend on other important areas. In turn, the Government hope this will result in an increase in investment and productivity across the economy.

Although we are hopeful that the review will be successful in achieving the above results, ensuring that your commercial contracts, include tailored, expertly drafted payment terms, can also assist in preventing late payments and stabilising cashflow.

Not only do clear payment terms in a contract give parties visibility into when money is expected to come into your business, they also form part of the contractual obligations between the parties. Failing to specify contract payment terms can result in disputes between parties and ambiguity, so it’s important that they are outlined clearly. Payment terms in a commercial contract can also provide remedies where the counterparty fail to comply. For example, remedies can include a suspension of services or interest on the amount payable.

The Commercial & IP Team at Berry Smith can provide specialist advice on drafting and amending payment terms in your commercial contracts, as well as general commercial and business advice.

The Commercial & IP Team at Berry Smith can provide specialist advice on commercial contracts, as well as general commercial and business advice.

Please contact us if you would like more information about the issue raised in this article or any other aspect of Commercial law at 029 2034 5511 or commercial@berrysmith.com