Large corporations consistently failing to remit payments to their suppliers in a timely manner could face financial penalties under new government proposals designed to support smaller enterprises.
The draft proposals, unveiled Thursday, also seek to limit invoice payment terms to a maximum of two months, with a further reduction to 45 days slated within five years.
Business Secretary Jonathan Reynolds introduced the plans alongside research attributing the failure of thousands of businesses annually to the issue of late payments.
While opposition parties have voiced support for the initiative, they have also asserted that businesses are currently facing hardship under the Labour government due to recent National Insurance increases outlined in the Budget.
The government asserts that the proposed changes would represent the most significant overhaul of payment regulations since firms were granted the authority to charge interest on overdue invoices in the 1990s.
Government research indicates that approximately 1.5 million businesses have been affected by late payments, with an estimated £26 billion owed at any given time.
This issue poses a particular challenge for small firms, which typically possess smaller cash reserves and are disproportionately affected by the time and resources spent pursuing late payments.
In unveiling the plans, Secretary Reynolds stated that late payments were the “number one issue” cited by small business owners.
Under the proposed regulations, which will undergo a 12-week consultation period, the Small Business Commissioner—a role established under the previous Conservative administration in 2017—would be empowered to levy fines on companies that engage in late payment practices.
These new powers would apply to companies with over 250 employees, which are already mandated to report their average payment times biannually.
According to a government policy paper, companies could be subject to fines if they fail to pay a quarter of their invoices on time within the stipulated six-month reporting period.
The fines would be equivalent to double the amount companies owe their suppliers in late-payment interest, which is currently set at 8% above the Bank of England base rate.
The government has not yet established a timeline for the legislation required to implement these changes, stating that it will be introduced as parliamentary time allows.
Furthermore, the government has outlined plans to reduce the maximum payment period that businesses have to pay their suppliers.
Currently, commercial invoices are generally expected to be paid within 60 days, although longer settlement periods can be agreed upon if the supplier consents and the arrangement is not deemed “grossly unfair.”
The business department has indicated that this exemption has allowed some larger firms to effectively impose extended payment terms on smaller suppliers, who often feel compelled to accept them in order to secure contracts.
It added that eliminating the option to agree to payment terms exceeding 60 days would address the “negotiating imbalance between small and large businesses.”
This universal 60-day limit could potentially be reduced to 45 days within five years, with the aim of “further improving business cashflow.”
Conservative shadow business secretary Andrew Griffith welcomed the crackdown on late payments but argued that businesses are suffering from a “full-on strangulation of employment red tape” under the Labour government.
He also criticized the decision in the Budget to raise employers’ National Insurance (NI), a payroll tax, describing it as a “£25bn jobs tax.”
The Liberal Democrats echoed these criticisms of the NI rise, adding that smaller firms had been “badly hit” by the increase.
Business spokesperson Sarah Olney also stated that the government needed to deliver a “proper plan” for companies, including “fixing business rates and cutting sky-high energy bills.”
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