What is the Prompt Payment Code, and is it worth the paper it’s printed on?

One of the biggest mysteries and frustrations of the UK’s ongoing battle with its ingrained late payment culture is successive governments’ enduring inability -- and perhaps unwillingness -- to take meaningful action to stamp it out, writes Adam Home, managing director of contractor debt recovery specialists Safe Collections.

The getting tough legislative trickle (seems never-ending)

Sure, there has been a steady trickle of legislation that poses as ‘getting tough’ on late Payments, and that’s tougher, arguably, than the Prompt Payment Code, which I will come to.

The latest toughening though (an amendment to the Reporting on Payment Practices and Performance Regulations passed in April), sums up the general Westminster take on what ‘tough’ means.

Essentially, it’s a glorified ‘name and shame’ scheme, requiring large businesses to submit details of their payment practices for publication on a publicly viewable website.

Do you know late payment helps send 50,000 small firms to the wall ever year?

This is despite official figures recently revealing that late payments and lengthy payment terms contribute to 50,000 small businesses going under every year. Poor payment practices by big companies contribute to suppliers’ cash flow becoming unsustainable. And the worst that happens? They get details posted online. It’s all a bit ‘meh.’

The incumbent government party has stubbornly stuck to its failing policy of gentle coercion over meaningful enforcement for well over a decade. In fact, one of the cornerstones of current late payment policy dates back to the last time there was a Labour government in power. It’s the PPC.

When was the Prompt Payment Code (PPC) introduced?

The Prompt Payment Code was introduced in 2008. Some 16 years on, it’s fair to say that it hasn’t had the intended impact of stamping out the UK’s pernicious late payment culture.

But what exactly is the PPC, who has signed up to it, and why has it failed?

These questions, which I’ll answer here, are timely because with a general election looming, the Liberal Democrats have pledged what would constitute a significant reform of the code. My take on that will follow the next few days on ContractorUK.

Voluntary compliance

The Prompt Payment Code is an entirely voluntary scheme. And that tells you a lot about its shortcomings. It only has something in the region of 5,000 signatories.

The code asks signatories to commit to three things:

1. Pay suppliers on time as per the terms agreed.
2. Be clear in their communication of terms with suppliers, as well as in notifying suppliers if a payment is likely to be late, and how disputes are resolved.
3. Promote the code across their supply chain.

Has the Prompt Payment Code been updated?

More specific requirements have been added to the Prompt Payment Code in the past few years, including:

● A commitment to pay 95% of invoices within 60 days.

● A commitment to pay 95% of invoices from SME suppliers within 30 days.

● Recognition of suppliers’ right to charge late payment interest and recovery costs if an invoice isn’t settled on time.

● A requirement for signatories to provide suppliers with a named contact for payment queries.

It’s strange that the latter two points should even make it onto the code.

The option for suppliers to charge interest and costs on overdue invoices is a legal right -- it doesn’t need a voluntary commitment from clients to pay it; it’s an obligation. And providing a named contact for payment queries is surely part and parcel of the good communication stipulation.

How is the PPC administered?

Again, there is an element of ‘name and shame’ to the way the code is administered these days.

With large businesses now required to submit details of payments on a six-monthly basis, any signatories to the code who don’t meet the 95% thresholds can be identified and removed. Mildly embarrassing, maybe.

But enough to stop large businesses from withholding payment beyond agreed terms? Not likely. And it only applies to those companies that bother to sign up to the code in the first place!

Finally, forget a voluntary code and instead parachute in penalties 

The simple truth is that not only has the voluntary approach to late payment reform failed, it was always doomed to do so. Payments should be capped at 60 days by law, and at 30 days for SME suppliers, with financial penalties for non-compliance. Only then will there be any hope of beating this major drag on the UK economy once and for all.