Fair Payment Code: The answer to late payment woes?

23/09/2024

The recent announcement from the UK government regarding new measures to tackle late payments appears to be a significant development for small and medium-sized enterprises (SMEs). 

An endemic issue, late payments cost businesses an average of £22,000 annually and contribute to around 50,000 closures each year.

The introduction of a new Fair Payment Code, mandatory payment reporting for large companies, and tougher enforcement measures is a welcome step. However, will these initiatives be enough to create significant change in the payment culture that has long plagued UK SMEs?

A step in the right direction

The government’s commitment to holding larger firms accountable through mandatory reporting is commendable. By requiring large businesses to disclose their payment practices in annual reports, there is potential for increased transparency that could pressure them into prioritising more timely payments.

The Fair Payment Code aims to incentivise good payment practices by rewarding companies that adhere to fair payment standards with gold, silver or bronze status. This overt initiative could foster a more responsible approach to supplier relationships amongst bigger companies.

The Fair Payment Code replaces the previous Prompt Payment Code (PPC), which was first established in 2008. While the PPC aimed to encourage best practices, the Fair Payment Code introduces several key changes:

Personal Responsibility

Under the Fair Payment Code, business owners, Finance Directors or CEOs must personally sign the code, acknowledging their responsibility for payment practices. This change aims to ensure accountability at the highest levels of a company.

Faster Payments

The Fair Payment Code requires signatories to pay 95% of invoices from small businesses (those with less than 50 employees) within 30 days, half the time outlined in the current PPC. The target for larger businesses remains 95% of invoices within 60 days.

Tiered Status

As mentioned above, a key difference is that businesses that meet good payment standards will be awarded official code status, with gold, silver or bronze categories based on their performance. This tiered system is designed to incentivise faster payments and recognise responsible businesses.

Enforcement

The government will step up enforcement of existing regulations that require large companies to report their payment performance twice yearly on GOV.UK. Non-compliant companies could face criminal prosecutions, including unlimited fines and criminal records for responsible directors.

Consultation on further measures

A consultation will be launched to explore additional policies that can address poor payment practices and support SMEs further.

Will the Fair Payment Code go far enough to alleviate late payment?

Despite these positive developments, scepticism remains about whether these measures will lead to substantial changes. The reality is that many SMEs have been waiting years for effective action against late payments. Whilst the new code and reporting requirements are steps in the right direction, will they be sufficient on their own to change entrenched behaviours among larger companies?

The success of these initiatives will largely depend on enforcement and compliance. If penalties for non-compliance are not stringent enough or if monitoring is lax, larger firms may continue their late payment practices with little consequence. Additionally, while the government’s efforts are commendable, they should be complemented by broader reforms in business practices and technology adoption – such as e-invoicing – which have been shown to reduce late payments significantly.

How Debt Collection Agencies can support businesses

Commercial debt collection agencies continue to play a crucial role in supporting UK SMEs in navigating the challenges posed by late payments.

Access to a knowledgeable team with expertise in recovering overdue payments efficiently and professionally can be invaluable in getting paid what is owed without damaging customer relationships.

Working up front with an agency to implement robust credit control measures, including monitoring customers’ creditworthiness, can assist in preventing late payments before they occur.

One of the benefits of outsourcing the collection of overdue debts is that, often, the weight of the involvement of a debt recovery agency results in your payment being prioritised by the debtor.

The government’s latest measures represent an important step towards addressing the persistent issue of late payments affecting SMEs across the UK. However, whether these initiatives will lead to lasting change remains uncertain. As businesses navigate this evolving landscape, partnering with a commercial debt collection agency can provide essential support in managing credit control and recovering debts effectively.

If your business is struggling with late payments, please get in touch to discuss your options with our experienced team. Call 0800 9774848 or email collections@hiltonbaird.co.uk. Alternatively, get a no win, no fee debt recovery quote.