THE DEPARTMENT of Business, Innovation and Skills (BIS) and the Scottish government are consulting on changes to legislation regarding late payments to SMEs to comply with an EU directive, to be implemented by March 2013.
The UK was one of the first countries to introduce late payment legislation, but it is thought that implementing the EU directive will create a level playing field for UK businesses trading with other businesses and public authorities in all member states.
Research from BACS in July this year suggested that more than one million SMEs are facing late payments, with the average SME owed £36,000. It also claimed late payments were, on average, 43.4 days overdue. More than a third (37%) of the 478 SMEs surveyed for the report named large businesses as the worst culprits, though 25% said fellow SMEs were most guilty.
Perhaps most importantly, SME finance functions spend an average of 2.1 hours a week chasing late payments.
There is already legislation to combat this – the Late Payment of Commercial Debts (Interest) Act 1998. Under the legislation, a three-tiered late payment charge of between £40 and £100 can be levied on late payments and late payment interest can be added at 8% above the Bank of England base rate.
Law firm Graham Quar & Co says that courts will add late payment charges and interest when they order recalcitrant debtors to pay, but this is rarely added voluntarily by the debtor companies.
The EU directive attempts to challenge this. Under the directive, public authorities will be required to pay suppliers within 30 calendar days of receipt of an undisputed invoice. For business-to-business payments, the contractual payment period is limited to 60 days, unless otherwise expressly agreed and provided such terms are not “grossly unfair”, and the default payment period will be 30 days – the same as it currently is.
The main change is that the directive provides for a minimum compensation of €40 (£31) to replace the three-tier payment structure. The directive could be seen as a watering down of UK law, where even the minimum levy – for payments less than £1,000 – is £40.
However, the directive does include a further deterrent – creditors will also be able to claim reasonable recovery costs incurred, including the costs of a collection agency or a lawyer, for example.
The BIS consultation emphasises that the legislation will be the last resort and the directive is intended to create an environment where prompt payment is the norm. This, as the BACS survey also suggests, is not the case currently.
Importantly, it will also positively affect SMEs doing business in EU member states. The impact assessment produced by BIS suggests “businesses perceive selling abroad as entailing a higher risk of late payment” and the revised directive will reduce the disincentives for cross-border trade.
“This will give a real boost to UK business by providing them with the confidence and certainty they need to work with overseas suppliers,” said business and enterprise minister Michael Fallon.
FDs of suppliers will have a better case when chasing up late payments. The main point of the EU directive may be that it prevents big business from dictating terms that go beyond the 60-day period, hence the provision that terms cannot be grossly unfair even if agreed.
However, “grossly unfair” is not defined. Philip King, chief executive of the Institute of Credit Management, says creditors will be loath to accuse a customer of imposing “grossly unfair” terms. But the strength of the directive, he adds, is that there is a clause that a business representative body can bring a case claiming terms are grossly unfair.
“If a particular organisation imposed what could be thought of as ‘grossly unfair’ terms on all their suppliers, a body such as the Forum of Private Business could bring about an action saying they are grossly unfair. This would benefit suppliers without them taking individual action and jeopardising their position,” King adds.
This will be no “silver bullet”, warns King. But suppliers will have an extra weapon in their arsenal to chase payments. ?