Businesses who suffer from late payments from the customers, or who are in the habit of making late payments to their suppliers, need to be aware of big changes the government intends to make to the law.
The government estimates that late payments cost the UK economy £11 billion a year and result in the closing of 38 businesses every day.
Following consultation, it intends to make sweeping changes to the law to address the issue.
Businesses will need to be paid within a maximum period of 60 days. There will be limited exceptions to this rule where both parties are large companies, the purchaser is the smaller business, or where goods are being imported or exported. It is proposed that the 60 days could be reduced to 45 days after 5 years. To allow some transition period, the 60 days limit will not come into effect before 2027. For many small businesses who pay their staff and other expenses on a monthly cycle, a 30 days limit might be preferred and there is a risk, which the government acknowledges, that 60 days could become the default with some businesses actually extending their payment terms to reduce the risk of paying late.
There will be a statutory time limit of a suggested 30 days for disputing invoices. Businesses that dispute invoices after the time limit has expired will need to pay compensation to the supplier. Again, many businesses may believe that the 30 days period is too long.
There will be a minimum rate of interest payable on late payments fixed at 8% above Bank of England base rate. Agreeing to vary the minimum rate will no longer be allowed.
The Small Business Commissioner (SBC) will be given powers to investigate businesses suspected of breaking the rules, to adjudicate disputes outside of the court process and to issue fines. The power to adjudicate disputes between small and large businesses is intended to limit any impact on the court system and is “subject to the existing exemptions”. Presumably, these will include a right of appeal through the court system.
Larger businesses will be required to report on their payment of statutory interest. The aim is to expose bad practice and to assist the SBC in imposing penalties as a deterrent for persistent offenders.
The government states that it intends to take forward the proposed legislation “as soon as Parliamentary time allows”.
The proposed changes will be welcomed by small businesses and, if the government’s estimates on the consequences of late payments are correct, may give much needed assistance to the UK economy generally. The actual effects of the implementation of the proposed measures remain to be seen.
In the meantime, businesses should consider the effect of the proposed changes and be prepared to make any necessary changes to their business practices or trading terms.
How we can help
Our expert team of experienced corporate solicitors are well-equipped to be able to assist you with updating your business practices or trading terms. For more information, please contact Julian Milan on 0121 2367388 or email julian.milan@mfgsolicitors.com.