Government breathes new life into prompt payment strategy
- 07 Dec 2022
- Fred Hicks
Last weekend, on Small Business Saturday, government announced the launch of a major review of mechanisms designed to help tackle late payments to small businesses, including the right of suppliers to charge interest, the remit of the Small Business Commissioner, and requirements for larger companies to report their payment practices.
All of this is hugely welcome, and IPSE will fully engage with the review to ensure the specific challenges facing freelancers are taken into account. But we had hoped government would set a clear intention for the UK’s standard commercial payment term to be lowered to 30 days from the date of invoice, which would match IPSE’s call for a fair payment term for the UK’s self-employed.
Late payment during a cost-of-living crisis
Missed payment deadlines are by no means a new problem, and it’s one IPSE has campaigned against for years.
But the issue is much broader than clients marginally missing a reasonable deadline – it’s also the expectation that freelancers should accept unreasonably long payment terms; whether it’s a 90-day period or a ’60 days End of Month’ term lodged on the first day of a month, the effect is the same. And outright non-payment of invoices is awfully common - 31 per cent of freelancers we surveyed this year have experienced non-payment, and of these, 52 per cent had experienced it in the preceding 12 months.
Freelancers can develop their offer, market themselves effectively, win contracts and deliver outstanding results for clients – but ultimately, all of this can be undermined by a simple failure to pay on time.
Even in good times, freelancers have a limited financial buffer to cope with this kind of income shock (we estimate freelancers are owed more than £5,000 on average). But during a cost-of-living crisis, a missed payment which would previously have put a freelancer temporarily (but nonetheless undesirably) into debt, might today put them out of business altogether.
Where could the cashflow review help?
There are a range of carrots and sticks in place to encourage clients to pay smaller suppliers on time, all of which have the potential to go further.
Since 2017, medium and large-sized companies have been required to publish their payment practices online. These rules are now up for review and could possibly be scrapped; but it would be a mistake to do this without having first put this data to good use. Government publishes the data online for suppliers to review; perhaps more could be done to promote and encourage the use of this data by suppliers, as well as to name and shame serial late payers. IPSE recently used the data to create a Payment Practices Index, which you can use to check and compare the payment timeliness of a prospective client.
There’s also the Prompt Payment Code, membership of which requires companies to commit to good payment practices, including paying 95% of small business invoices within 30 days and providing suppliers with a point of contact for payment queries. However, participation is voluntary and companies that fall off the standard are publicly named; but companies who have never even attempted to meet the code don’t run the risk of being suspended from it. Perhaps making the code mandatory for some businesses would ease this difficulty.
It's positive to see that the review will explore the role that technology could play. Improved technology can of course speed up payments, but it could also speed up disputes too; IPSE has called for more work to build on government-backed trials of online dispute resolution platforms. These could be a ‘one-stop-shop’ for the self-employed and small businesses to negotiate, mediate and settle disputes with binding outcomes whilst also reducing the judicial caseload for payment disputes.
Creating a prompt payment culture will require bold reform
But it is ultimately legislation that has the greatest potential to move the dial on late payment. The UK’s main commercial payment legislation grants suppliers a statutory right to charge interest on late payments, as well as a ‘maximum’ payment term of 60 days (or a 30-day statutory term for debts without a contract). Parties can agree to longer so long as it is ‘fair’ – but it’s difficult to say how fair a longer term than 60 days can be on the average one-person business.
A recently passed reform in Belgium means that a payment term of longer than 60 days will, in the eyes of the law, become ‘unwritten’ – meaning it defaults to the statutory unwritten payment term of 30 days. There’s no doubt this is a bold step – but it will nonetheless help to protect the smallest businesses from 90 day, 120 day, or even longer payment terms.
Earlier this year, IPSE called for the UK’s standard commercial payment term to be brought down to 30 days. Whether this could be achieved through changes to legislation, or a suite of other measures and incentives, a 30-day term would go a considerable distance to making self-employment incomes less volatile.
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Senior Policy and Communications Adviser
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