The UK government introduced the Small Business, Enterprise and Employment Act in March 2015. It is a wide-reaching piece of legislation with the aim “to make the UK the best place in the world to start and grow a business”. The legislation covers everything from tied pub tenants to zero hour contracts, but one of the most significant components of the act is the Prompt Payment Code.
The Prompt Payment Code, which came into effect in April this year, is the government’s attempt to combat the problem of late payments from buyers to suppliers, a problem which forces 50,000 UK businesses a year to close, according to the Federation of Small Business. The act aims to increase transparency and focus on payment practices through a tough new reporting requirement on large British companies.
Large companies and large limited liability partnerships (LLPs) will be required to publish information about their payment practices and performance on a government approved web service twice per financial year. The first round of reporting is due at the end of this month (September, 2017) for those companies with a financial year end in March.
Those companies with poor payment practices will be exposed, making payment behavior a boardroom reputational issue and forcing them to improve. Equally, small businesses will be empowered to use the data to negotiate fairer terms, challenge late payments and make informed decisions about who to trade with.
What does the code mean in practice?
The act will apply to any business which is deemed as “large” by the 2006 Companies Act. That means that any company which meets and two of the following three criteria will be included: annual turnover above £36m, total balance sheet of more that £18 million or more than 250 employees.
If your company meets these criteria, then it falls under the requirements of the Prompt Payment Code. This means reporting detailed statistics around the time it takes the business to pay invoices, within the six month reporting period, as well as the proportion of invoices which were paid late and the average time to pay any given invoice. In addition, the business must describe its payment terms, dispute mechanism and any supporting services it offers, such as e-invoicing or supply chain finance.
It is important to note that not reporting or reporting falsely is a criminal offense, with the company and directors liable to a fine on summary conviction. All directors will be liable.
The government is hopeful that public pressure through the open nature of the report and pressure from companies, suppliers and other third parties comparing reports will push companies to reform their payment practices and reduce the number of invoices paid late.
There is some evidence this is the case. According to one YouGov poll of consumers who said they have boycotted a brand, 36% said mistreating people in the supply chain was a reason they would boycott a company. Once the data is public, companies which are shown to be poor payers risk quite a significant public and media backlash. In addition, suppliers will surely take this data into account when it comes to deciding which companies to work for and negotiating when contracts.
Strategically minded finance directors, treasurers and procurement managers should be asking themselves: “what can I do to improve payment for my suppliers?” Technology is spreading the reach of solutions like supply chain finance, allowing businesses to employ them to help more of their smaller suppliers earlier in the process. The challenge will be implementing change in your organisations in a low-cost and low-friction way, however.