This debate raises far-reaching questions about embedded commercial culture in the UK and questions of fairness and of freedom of contract. 

A consultation has recently closed on a central plank of the government’s plan for SMEs. Within it, the eclectic bundle of proposals intended to tackle ‘the scourge of late payments’ may not have received quite the attention it warrants, considering the potentially far-reaching consequences.

60 days later

The most eye-catching measure in this well-intentioned package is the effective introduction of sixty days maximum payment terms for UK businesses, or at least those subject to English and Welsh law. 

This will be done by removing the much-used ‘not grossly unfair’ exemption built into current UK legislation (2013 Regulations and 1998 Act) which practically enables 60+ days.  Further, the consultation murmurs about potentially bringing this down to 45 days in future.

The UK proposals come as the European Commission’s proposals for even tighter limits – originally 30 days, subsequently watered down to 60 - remain in limbo between a zealous Commission and member states concerned about competitiveness. 

In this context the UK’s seeming intention to light a path whilst many of its most significant economic partners (and competitors) continue to ponder is notable. 

Heat versus light

This is an area of policy that has long been characterised by strong feelings and appalling examples of poor treatment on the one-hand, and unclear terminology and imperfect data on the other. 

The predominant descriptor for the agenda, ‘late payment’, is part of the problem, often obscuring a proper assessment of the ill to be remedied.  After all, a supplier paid on 90 days against 90 days terms is not necessarily in a better position than a supplier who benefits from 60 days terms but is paid ‘late’ on Day 61. 

‘Poor payment practice’ is a more useful term that recognises that commercial power can be articulated in many different ways, many of which are more subtle and impactful than simply paying outside terms.  And which can be challenging to address with legislative tools.

Whack-a-mole

The consultation from DBT goes some way to recognising this complicated reality.  It complements the headline grabbing measures around 60 days and the automatic levying of statutory interest, with other more pragmatic proposals.  These include limiting the time period in which invoices can be disputed to 30 days and it also brings forward interesting proposals to restrict the use of retentions in the construction sector.  There are also welcome new powers for the Small Business Commissioner to provide greater scrutiny of the practices of larger businesses.

But the uncomfortable reality is that where a purchasing business can and wants to protect its own balance-sheet at the expense of its suppliers by paying late, long or poorly, then it is probably going to do so. 

Well-intended but broad measures like 60 days may simply displace poor behaviour and encourage other aggressive procurement, contracting and payment practices.  Some of these are already obvious, others will surely be developed.  They may leave the economic position of suppliers relative to purchasers the same or even worse.  And that is before one considers the powerful deterrents that will remain against a brave supplier seeking to use bold new powers.

One size doesn’t fit all

Sectors are diverse and the commercial relationships within them more so.  It is important to enable detrimental practices to be challenged, even where detriment has been normalised as ‘standard business practice’.  Equally, however, if longer payment terms are freely offered and are part of well-functioning commercial arrangements, then there should be a high evidential bar to restrict the current flexibility.

Moreover, English law is often used where only one or neither party has a direct economic presence in the UK.  The incalculable benefits of English law as a jurisdiction of choice for international transactions will need to be protected.

Marginal gains

None of this should be seen as defeatist, however, and this is the most ambitious contribution to this debate for years; UK Finance and its members certainly look forward to continuing the conversation. 

Poor payment undoubtedly has a negative impact on tens of thousands of UK businesses, particularly smaller ones.  And there is much that can be done to improve things.  An empowered – and crucially resourced - Small Business Commissioner able to investigate and call out poor practice where it is demonstrated would be a big step forward.  As would be a signal that tightly targeted actions to address poor practices that hit suppliers’ working capital and access to external finance – additional to retentions would be pay-when-paid clauses – are options in future.

And it might be that the prospect of some of the more far-reaching ‘big stick’ measures help us get to a better place.