Draft Reporting on Payment Practices and Performance Regulations 2017
Draft Limited Liability Partnerships (reporting on Payment Practices and Performance) Regulations 2017
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The Parliamentary Under-Secretary of State for Business, Energy and Industrial Strategy (Margot James)
I beg to move,
That the Committee has considered the draft Reporting on Payment Practices and Performance Regulations 2017.
The Chair
With this it will be convenient to consider the draft Limited Liability Partnerships (Reporting on Payment Practices and Performance) Regulations 2017.
Margot James
It is a pleasure to serve under your chairmanship, Mr Turner. Late payment is a significant issue for small businesses. It is estimated that small and medium-sized businesses are owed £26 billion in late payments. That can cause serious cash-flow issues for small businesses and, in the worst cases, cause them to go out of business. It can be difficult for small businesses to know who has a good reputation for payment and who has a poor reputation. They have no choice but to take it on faith that they will be paid in line with the agreed terms and conditions.
The Government are taking several steps to tackle the issue of late payments, one of which we are in Committee to discuss. Other measures include a Small Business Commissioner, whom we are recruiting at the moment, and the prompt payment code, which is an industry-led code of conduct setting out best practice. Today we are debating two statutory instruments that will introduce a requirement on large businesses to report on their payment practices and performance. The first instrument applies the requirement to large companies and the second to large limited liability partnerships. We are debating them together as the requirement is the same for companies and partnerships.
The reporting requirement will increase transparency, making it easier for suppliers to find information about large businesses’ payment practices and performance. The improved transparency should help suppliers to make better-informed business decisions based on reliable information. The public nature of the data will highlight large businesses that are leading by example and engaging in good payment practice, and will shine a light on poor practice that is potentially damaging to suppliers, in particular small businesses. Late payment will become a boardroom issue for many large companies.
Even a small reduction in overall late payment can benefit suppliers, smaller ones in particular. Last year I met suppliers who had been able to grow and innovate as a result of the reduction in late payment that we have already seen from the voluntary prompt payment code. Taken in the round, less late payment will boost our economy and help it to grow. We have already begun to see steps in the right direction, but there is much more to be done. The Government are committed to building on the prompt payment code by implementing the draft regulations.
The reporting requirement introduced by the draft regulations will mean that large companies must disclose information on a number of metrics about their payment practice and performance, including their standard payment terms, the average amount of days it took them to pay and the percentage of invoices that were not paid within the agreed terms. Businesses will need to report on those metrics, among others, for their first financial year starting once the regulations have come into force on 6 April 2017.
Each business in scope will be required to publish its individual and non-consolidated reports. That gives a greater level of transparency for suppliers looking to contract with reporting businesses. As part of the consultation process and in conversation with interested parties since, we have received a wide range of opinions about which metrics were most important. Throughout that process, we have sought to find a balance between the needs of small and large companies.
For example, the requirement is that businesses publish a report twice per financial year on the Government web service. We changed reporting from quarterly to twice a year in response to concerns that the reporting would be disproportionately burdensome on large companies. That maintains the balance between providing relevant information to suppliers with the need to minimise the burden on large business.
Smaller stakeholders have told us that up-to-date information is important. Stakeholders also told us it was important that information was easy to access. That is why information will be available on the Government web service as soon as a business publishes it, for suppliers to search and download. The web service is currently being developed with input from future users. That input has shaped the service, making it more user-friendly for both those who are required to report and those seeking the information. We will continue to seek input from users as we finalise the Government web service, which will be available from April this year.
In 2014, the Department for Business, Innovation and Skills published a consultation impact assessment that estimated the annual net cost to business of these regulations to be £3.2 million. Further research showed that the annual net cost to business is likely to be higher than that, estimated in our recently published impact assessment to be £17.7 million. However, that has to be considered against the savings to business that a reduction in late payments will bring. The impact assessment estimates that even a 0.25% reduction in the cost of chasing late payment could lead to a £22.9 million benefit for UK businesses.
The regulations have been welcomed by representative bodies, including the Federation of Small Businesses and the Chartered Institute of Credit Management, as a positive step towards a culture where businesses are paid on time for the goods and services they provide. Successful businesses create jobs and are essential to economic growth. To support small businesses and other suppliers, we need to take action to give them more information about the larger companies and limited liability partnerships they do business with and their records on payment. We need to tackle late payment, and the reporting requirement is an important part of the Government’s plan to do so.
Throughout the consultation process and the development of the policy, we have sought to strike a balance between the need for suppliers to have useful information and the need to minimise the burden on large companies. That has informed the development of the web service and the guidance that was recently published. We will continue to develop the web service in line with feedback from potential users. I commend the regulations to the Committee.
Margot James
I thank hon. Members for their pertinent comments, questions and observations—I have learned quite a bit in the process. I shall deal first with the shadow Minister’s speech and questions. He referenced the prompt payment code and some of the efforts that have been made to date to improve what I think we all agree is a serious problem facing small businesses. He said that not many companies abide by the prompt payment code or have signed up to it—it has limitations—and he gave some numbers. Almost 2,000 big companies have signed up to the code and, anecdotally, it is having an effect.
The good news is that we accept that the prompt payment code does not go far enough. That is why we are setting in stone the regulations under discussion today. As my right hon. Friend the Member for Wantage pointed out, approximately 15,000 of the large companies are likely to come within the scope of the regulations. That puts its likely impact on a much more secure footing.
The hon. Member for Sefton Central rightly pointed out that the measure is not a silver bullet and that it has to be seen as part of a package of measures, not the least of which is the appointment of the Small Business Commissioner. He asked when that measure was likely to be implemented. We anticipate having the Small Business Commissioner in post, with the resources needed to undertake inquiries and deal with complaints, by October this year.
The hon. Gentleman said that companies sometimes use late payment almost as a systematic policy, and I could not agree more. There is no doubt that some companies use small enterprises almost like a bank, which is immoral and unacceptable. The measures are of course designed to tighten the net, so that it will not be possible for the larger companies that fall within the regulations’ scope to continue with that approach.
The hon. Gentleman talked about the Late Payment of Commercial Debts (Interest) Act 1998, implemented by the Labour Government to make it a legal requirement for companies to abide by better payment terms. I agree that those were laudable aims. He implied that Conservative Governments are a bit too cautious, noting that we rely on culture change and shy away from statutory intervention. I agree about that, but we follow those instincts for a good reason: we want to arrive at a workable solution to the problem of late payment.
Unfortunately, the 1998 Act is not at all widely used, for the very reason the hon. Gentleman set out in his speech: smaller companies do not want to press home the situation they are in with their bigger customers because they fear losing the contract or the opportunity to bid for further work. That is the problem with using the 1998 Act, and it would be the problem with any overly legislative and punitive approach. Ultimately it would rely on small companies coming out into the open and challenging their big customers, which is very difficult.
The consultation phase on the corporate governance Green Paper is finished, and I agree with what the hon. Gentleman said about it being one way to get the suppliers’ voice heard more loudly in the boardroom. That is what we anticipate and I am glad he supports that element of the regulations.
The hon. Gentleman also mentioned companies going in and out of scope, as it were. In theory that could be an issue, but we have set three criteria, at least two of which should be met by companies if they are to be considered in scope. It is not just a question of the 250 employees; it is also a question of whether they have a turnover of £36 million or more, and whether the net asset value on their balance sheet is in excess of £18 million. Companies need to satisfy two of the three criteria to be in scope, to guard against the concern he raised.
I heartily agree that some companies tend to try to game the system—I hasten to add that most do not, but a good number do. That will be at the top of my mind when, in consultation with the Secretary of State, I appoint the Small Business Commissioner. He or she will need eyes in the back of their head to apprehend and anticipate the sorts of ruses that some large companies might get up to in trying to get around the reporting system.
That brings me neatly to the policing of the reporting, which the hon. Gentleman raised as a concern. Within five years there will have to be a formal review of the effectiveness of the regulations. I hope that answers to an extent the concerns raised by my right hon. Friend the Member for Wantage. In the meantime, the large companies that are in scope will have a legal obligation to report in the way I outlined. If they fail to report twice a year, or if they misreport on any occasion, they will have committed a criminal offence and, in the worst cases, my Department will resort to prosecution.
The hon. Gentleman asked about the web-based reporting system. We anticipate that it will be in place on the gov.uk site from April. We will keep that under constant review and consult stakeholders, particularly small businesses and their representative bodies, to ensure that the format is user-friendly and that they see value in having a simple way of identifying large companies’ payment practices. Come October, that will be backed up by the Small Business Commissioner himself or herself.
The hon. Gentleman asked about the effect of the regulations on early payment discounts. I will investigate that in the Department and get back to him if there is anything to say. He is right that companies sometimes offer that or suppliers negotiate it. It is another area that I am not yet sure will be covered by the regulations, but I will look into it and let him know.
There was some debate about interest charges. The hon. Gentleman answered his own question by reading the Government’s consultation response—I have read it and think it is correct. Our focus is on getting earlier payment. We are using transparency and the weight of the law to require that reporting in order to achieve prompter, earlier payments. Interest charges are not widely used, for the reasons he set out. We will keep it under review, but I think it is too dependent on SMEs coming out into the open and charging interest on their customers, which few are prepared to do. We want to change the balance of power in the relationship through the means proposed in the regulations. For the time being, we will look to enforce the regulations before looking at further regulations for imposing interest rate charges.
The hon. Member for Kilmarnock and Loudoun asked whether transparency will be enough. It is a good question, and one to which clearly I do not yet have an answer. We will probably only know once the regulations have been in place for two years. In answer to the question from my right hon. Friend the Member for Wantage, we believe that transparency will have the desired effect of ensuring that payment is made earlier and more promptly in the majority of cases.
However, will transparency alone be enough? I am also responsible for the national minimum wage, and I see that transparency there, through the naming and shaming of companies that do not comply, is starting to have an effect. I think the regulations will have an effect as well. They will not have that effect on large companies that go through quite serious trouble and have to take measures that even the best-governed companies would prefer not to take, so I can see that there will be examples when transparency alone will not be enough. However, I hope and believe that those will be a minority of cases, and that the vast majority will register a considerable improvement.
The hon. Member for Kilmarnock and Loudoun also mentioned cash retention in the construction industry. I am very concerned by that issue and am working on it at the moment with officials. We have commissioned independent research to better understand the costs and benefits of retentions and the alternatives. It has taken longer than we hoped, because this is a real issue that has been going on for far too long and needs to be tackled vigorously. We will look at ways of perhaps applying the regulations to that, but if it needs more than that, I hope that we will be able to deliver an effective means of preventing what is an unscrupulous exploitation of legitimate circumstances in which construction works have not gone right and it is the customer’s entitlement to hold some money back. I appreciate that it is too widely abused at the moment.
I thank my right hon. Friend the Member for Wantage for his kind remarks about my role in business. I agree with him that we are reluctant to regulate. We are trying to strike a balance between the legislative approach favoured by the previous Labour Government in 1997, which did not really work, and relying on just a nudge and setting an example. I think the regulations strike that balance. I think they will have an effect without having the unintended consequences that a more heavy-handed, legislative approach would have.
My right hon. Friend questioned the impact assessment. The cost currently stands at £15 million for large companies. There were further re-workings of the figures and further evidence supported an increase from the original estimate, which was an underestimate. He pointed out that that is not much per company. We cannot really look at it on a per company basis, because some companies are already behaving well and are already paying within a reasonable timeframe, so it will not cost them anything more.
Regrettably, a large number of companies do not pay on time, so I will not call them outliers. I do not think the actual cost of paying people on time is necessarily administratively a great deal more than the cost of keeping people waiting. That is why the cost per company in the impact assessment is quite small. My right hon. Friend asked whether I feel that is an underestimate. In fact, I feel the opposite: I think the impact assessment does not take any account of the savings that the myriad small companies will enjoy as a result of being paid on time. Those savings are real, as I outlined in my opening remarks. A small employer told me that they were able to divert a whole person from their accounts department to make more productive use of their time, which should assist our industrial strategy of making companies in this country more competitive and productive. The regulations will go some way towards achieving that happy state.
Finally, the vast majority of the Government’s strategic suppliers are now adhering to the prompt payment code, although there is another issue further down the supply chain. The prompt payment code deals only with tier 1 suppliers. I hope the regulations will improve what happens further down the supply chain. In conclusion, I am in favour of the regulations. I think they are important. I hope the Committee agrees.
Question put and agreed to.
Resolved,
That the Committee has considered the draft Reporting on Payment Practices and Performance Regulations 2017.
DRAFT LIMITED LIABILITY PARTNERSHIPS (REPORTING ON PAYMENT PRACTICES AND PERFORMANCE) REGULATIONS 2017
Resolved,
That the Committee has considered the draft Limited Liability Partnerships (Reporting on Payment Practices and Performance) Regulations 2017.—(Margot James.)