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:

1. 1. that the Prompt Payment Code be made compulsory for companies with more than 250 staff
   2. that payment terms should be halved from a maximum of 60 days to a maximum of 30 days
   3. 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

The voluntary nature of the Prompt Payment Code was always likely to render it ineffective. Late payments create serious problems for countless British small businesses, in some cases late payment is the final straw. Stricter penalties are needed for large companies that flout the rules. Liberal Democrats demand better. That’s why we support the AAT proposals to beef up the Code, by making it compulsory for the largest companies and putting penalties in place for those that fail to meet their obligations.

Baroness Burt added:

I have been urging the Government to take action on late payments for some time and so welcome the three clear recommendations put forward by AAT.

Political and business support is obviously welcome but what’s really needed is for the Government to stop the stream of failed initiatives, tweaks and voluntarism that have characterised their approach over the past eight years and instead legislate to solve the problem once and for all.

‘The Independent View‘ is a slot on Lib Dem Voice which allows those from beyond the party to contribute to debates we believe are of interest to LDV’s readers. Please email [email protected] if you are interested in contributing.

* Phil Hall is Head of Public Affairs and Policy at the AAT