Why penalties aren't the answer for late payments to contractors

The government has given its first indication that it is willing to consider fines as an option to tackle late payments, writes Adam Home, managing director of Safe Collections. But is it an indication that is long overdue, or an indication that is due for a long think over?

Writing in the government’s document responding to the largest ever feedback it had on the age-old issue of not getting paid on time, former small business owner and now small business minister Kelly Tolhurst MP said the proposed reform – with penalties as its showpiece – will ‘end the “unacceptable culture” of suppliers being left out-of-pocket.  

About time too, many people and contractors will say. The government has consistently been accused of dragging its feet on this issue which has become a major drag on the UK economy. And the minister’s other comments in the consultation response are right – it’s an issue that disproportionately affects small businesses and sole-person companies.

Another way

But let’s look at it another way. Despite the fact that UK SMEs are estimated to be owed a disturbing £15billion in unpaid invoices (according to the FSB), the government has consistently resisted calls to introduce meaningful sanctions to tackle the problem.

Following the introduction of a voluntary Prompt Payment Code, the office of Small Business Commissioner was created to protect the interests of SMEs on this and other issues. Yet the SBC was only given the power to issue non-binding pay recommendations in cases where it found payments had been withheld.

Now, having listened to the views of more than 300 SMEs, microbusinesses, contractors and freelancers, the government has apparently accepted that its efforts to date – including the SBC - can be construed as “weak”. Under mounting pressure to act, it will now consult on introducing tougher penalties through the commissioner, up to and including fines. The reasons it didn’t do all this before have, conveniently, been left behind.

Not just big business

There remains a more fundamental problem. In the government’s latest announcement, it talks very plainly about the need to “hold to account the minority of larger businesses who fail to make payments on time.” And yes, the culture of large companies who take a dismissive view of the cashflow needs of small suppliers (and seem to think they are entitled to pay them as and when they please), is indeed an issue that needs addressing.

But it isn’t the only issue. There are more than 5.6million small businesses employing fewer than 50 people in the UK, of which 5.4m are rated as ‘microbusinesses’ employing less than 10. In contrast, there are only 8,000 companies categorised as “large”, meaning they employ more than 250 people.

Clearly, 5.4 million microbusinesses, sole traders, freelancers and contractors can not all have supply deals with those 8,000 large companies! In fact, the number that do are in a significant minority. And yet the size of the late payment deficit - £15 billion – indicates that this is an issue affecting a significant proportion of small businesses, if not the majority.

The fact is that a great many contractors and freelancers experience payment problems not from big businesses, but from other small companies. In fact, it is the norm for many freelancers and contractors to only ever work for other small-ish businesses -- and yet most will go through problems getting paid for goods delivered or services rendered at some point.

So to us, and not for the first time unfortunately, talk of issuing fines to big businesses who don’t pay on time sounds like the government is more interested in tough-talking soundbites, than getting to the core of the issue. Our fear is that penalties as they are proposed (not as widely as some who endorse a penalty-issuing SBC might imagine) will barely scratch the surface. And even if a big company is fined for paying late, how does that benefit the still unpaid supplier?

Upgrade ‘Reasonable’ to ‘Full’

From what we see from our hard work day in, day out as specialists in this area, what contractors really need is the government to look again at the Late Payment of Commercial Debt Act 2013, which introduced the right for creditors to claim back “reasonable costs” incurred in recovering debts, to be paid by the debtor. The problem with this is that “reasonable costs” has always been poorly defined. It certainly falls short of recovering full costs.

Whoever the debtor is, big company or small, late payments result in considerable disruption and hassle for the tiniest of businesses like contractors. Not only are they left waiting for money they are entitled to and might need, either to cover business costs or to pay themselves and any staff they might have, they often have to suffer the double-penalty of having to pay simply to chase the money. Once it becomes clear that a debtor is not going to pay unless forced to, debt recovery takes time, effort and money -- time taken out of running your business, money spent on a debt collection agent or on legal fees.

Our message to the SBC

So to commissioner Paul Uppal and to those who sit beside him at the policy-making table in this area, we say it is thoroughly wrong that small businesses should be penalised for recovering money they are owed, when payments become late by having to pay for it. The 2013 Act means contractors can now recover some of the costs involved, but it is frequently far from all - certainly not when you add lost time into the equation. So Mr Uppal and his colleagues, rather than threatening to fine just the big boys, please simply take a firm line that makes it clear that anyone who pays late (whether small, mid-sized or massive) will have to pay the full costs of recovery which the unpaid suffered. This would make for a much, much stronger deterrent, and one that is much more useful to the small businesses that our economy depends on but which are going unpaid, and will continue to go unpaid, if you think penalties are a panacea.