Almost a quarter of insolvencies (23%) are caused by late payment issues. That’s a staggering figure that equates to tens of thousands of businesses collapsing every year.
Many other small companies just about manage to absorb late payment, but the loss of income can stop them from investing and growing, it can also damage productivity and generally has a very negative impact. This negative impact isn’t just on the small business, its owners and employees but obviously has a knock-on effect on the wider economy too.
In response to this growing problem, the well intentioned and entirely voluntary Prompt Payment Code was introduced in 2012.
The Code simply requires large companies to pay their suppliers within a maximum of 60 days. Only 2,000 companies have signed it and some of these still pay people beyond 60 days because they know there is very little enforcement and no financial penalty for breaches.
As Liberal Democrat Baroness Burt recently said,
Late payment is a huge threat to British businesses and bitter experience has shown it’s not going to be eradicated by a voluntary Prompt Payment Code especially without any possibility of fines for persistent non-compliance.
The Department for Business, Energy & Industrial Strategy is currently holding a call for evidence on the subject. Association of Accounting Technicians (AAT), which has 140,000 members including thousands of licensed accountants who provide tax and accountancy services to over 400,000 British businesses, has responded by making three key recommendations for change:
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- that the Prompt Payment Code be made compulsory for companies with more than 250 staff
- that payment terms should be halved from a maximum of 60 days to a maximum of 30 days
- that a clear, simple financial penalty regime for persistent late payment should be introduced and enforced by the Small Business Commissioner
These recommendations have gained widespread backing from small businesses, business groups and politicians including several senior Liberal Democrats. Lord Fox, the Liberal Democrat Business spokesperson, said