Commercial Update 93 – Late Payment Terms, Can They Really Help You Get Paid?

The UK Government’s planned Payment and Cash Flow Review (Heads of Terms published in later 2022) has promised to ‘scrutinise existing practices and measures, and the progress in combatting late payment, to ensure that the UK has the right arrangements in place to best support small businesses.’

It may be worth having a quick look at some of  the main areas that currently exist to deal with later payers. These are:

  1. Reporting: larger businesses are required to report on their payment practices and performance, including average payment times.  This enhanced level of transparency is intended to create an “embarrassment factor” and give suppliers more information on the payment practices of potential customers. 
  2. Statutory remedy for late payment: the law (The Late Payment of Commercial Debts (Interest) Act 1998 ) gives all businesses a reasonably generous statutory remedy for late payment of debts. This covers:
    1. interest of 8% above the Bank of England base rate on overdue payments from the customer; and
    1. debt recovery costs of a ‘fixed sum’ (either £40, £70 or £100 depending on the size of the overdue debt). Where these fixed sums do not cover the reasonable costs of recovering the debt, additional amounts may also be claimed.

Bear in mind though, that it is possible to exclude this statutory remedy (including a right to claim interest on late payments of Bank of England base rate plus 8%). In the even that  the statutory interest-rate remedy has been excluded, the parties can agree payment terms longer than 30 days but if the specified credit period is found to be “grossly unfair”, then a court will substitute a default period of 60 days.  

  • Small Business Commissioner: small businesses which have not been paid on time can complain to the Small Business Commissioner (SBC), providing general advice and administers the Prompt Payment Code, a voluntary scheme under which signatories agree to meet targets such as paying 95% of all invoices within 60 days and paying 95% of small business invoices within 30 days.  The SBC currently has limited powers above and beyond slapping wrists/naming shaming. 

This area is a key one, the Government estimates that UK businesses are owed over £23 billion based on outstanding invoices. The plan seems to be to look at:

  • Whether the SBC will be given more power (to include more investigatory powers and fines) – at the same time, a Statutory Review of the SBC is taking place, which is also expected to feed into the Review;
  • Whether the reporting process set out above should carry on as is, be strengthened or scrapped;
  • Whether the statutory remedy could be improved; and
  • What ways businesses could be supported to help manage their cashflow, using technology, finance and improving awareness.

Its conclusions are expected to be published in 2023 (probably towards the end of the year).

The key thing will be implementation – one survey from 2015 suggested that about half of all businesses do not exercise their rights to claim late payment interest on overdue invoices for fear of losing future business – the more usual problem is that the express contractual provisions are less generous than the statutory remedy.. ..

For suppliers, it may be worth checking your terms in the meantime and thinking about:

  • If you have an interest rate on late payments of 1-2% interest above a base rate, is this really enough and can/should it be substituted for a higher rate?
  • Is a 90 day payment term really justifiable?
  • Is any late payment remedy out of all proportion to the likely loss? If so, then it may be regarded as an unenforceable penalty.

As always though, these conversations will depend in practice upon the relative bargaining power.

Regards to all