Small Businesses: Late Payments

Debate between Lord Sharma and Ian Paisley

Wednesday 27th January 2016 Westminster Hall

[Alok Sharma]

The adage that cash is king matters most to the smallest businesses, so my hon. Friend is right that cash flow is vital for a small business, as it is for larger businesses. The sum total of all this is that the very real risk of insolvency sometimes results from late payments. A poll of 1,000 business owners carried out in August 2015 by the electronic invoicing network Tungsten showed that more than 20% of businesses faced with unpaid invoices were having a brush with insolvency, and some of them, sadly, were having more than a brush.

The complaints that have come in to me from the Thames valley area as a result of my work with the FSB are wide-ranging and come from a range of industry sectors. I hear that large companies apply pressure in all sorts of different ways. Pressure is being applied to accept 90 to 180-day payment plans, fees are being charged to remain an approved supplier, and all sorts of complicated processes for submitting invoices have to be followed. Sometimes, payment is simply delayed with no reasonable excuse whatsoever.

[Ian Paisley (North Antrim) (DUP)]

I congratulate the hon. Gentleman on securing this debate. Many SMEs in my constituency have expressed exactly the same concerns and fears. Does he agree that SMEs are effectively at the mercy of larger companies and that their survival depends on these cash payments being paid, and being paid quickly?

[Alok Sharma]

The hon. Gentleman makes a valid point, and I will address the culture of late payments within big businesses, which is sadly prevalent in the UK but is perhaps not always the case in other jurisdictions.

I will quote some of the businesses with which I have been in contact. A machined plastic parts supplier that has been doing business for 50 years without any problems suddenly found that a large company it had been dealing with demanded payment of a non-negotiable fee to a third party to remain on an approved supplier list. The supplier said that it had reported the situation to the large company’s

“own ethics team who seem to think it is normal business practice and I have had it confirmed that we will be de-listed if we do not pay.”

An SME with 10 people and a turnover of less than £2 million that supplies goods and services to large telecommunications companies in the UK and Ireland contacted me:

“I could write a book on the various hoops we have to jump through”.

The examples provided by the SME include self-imposed cash arrangements by large companies and pressure to accept long payment terms.

A direct supplier to a local authority contacted me. It has had that contract for a long time, but it was suddenly told that it had to procure work through a particular procurement portal. The supplier told me:

“It was free to register (ignoring the not-insignificant effort in doing so), but the portal company then informed us that ‘a 5% fee...will be deducted from your agreed rate for each work opportunity you secure via the portal’”.

That is a 5% mandatory fee being put on a small business, which is completely unacceptable. The owner of the business went on to tell me in conversation:

“In our opinion as a small business unable to fight the process, this amounts to supplier bullying.”

I have had businesses in the construction sector contact me. One said:

“Our industry (construction) is full of poor payment practices despite the Construction Act.”

Finally, a service provider that supports pharma and medical device companies across Europe wrote:

“We have experienced very late payments with UK based companies only, either by paying after 90 days…or after starting legal proceedings. In contrast working for a German based company we do get our invoices settled usually within 2 weeks.”

The hon. Member for North Antrim (Ian Paisley) made a point about corporate culture. As we have heard, these problems are cross-sector and do not relate to just one part of British industry. Having run a business in Germany myself, I can tell the House from personal experience that German corporates are generally pretty good at paying on time. In Britain, some large businesses have developed a culture of late payment over the years. Squeezing small suppliers has been considered normal business practice, and hang the negative consequences for the supplier. The risk of late payment in Britain is considered to be higher than in many other European nations, according to the latest European payment index, and it is clearly not an acceptable way of carrying on.

In the past few days, colleagues will have seen the outcome of the Tesco discussions. To be fair, Tesco contacted me before this debate and told me:

“Smaller suppliers with spend from us under £100,000 a year, will move to 14 day payment terms.”

That is a win for the adjudicator, for small businesses and, ultimately, for Tesco and British business in addressing the culture of large companies in doing business with small suppliers.

What are the Government doing? I am sure the Minister will talk about the measures to address late payments that have been implemented, or are planned to be implemented, but I will highlight a few areas on which I would be interested in getting feedback either now or in writing, if the answers are not readily available.

The first is the strengthening of the prompt payment code, which clearly has happened because of Government encouragement. It is a real success and a badge of honour for businesses. Also, thanks to the input from the Government, not only has the number of companies signing up to the code increased but the code has been strengthened so that 30-day payment terms are now considered standard and 60-day payment terms a maximum.

One of the suggestions made to me by the FSB is that the Government should commit to making sure that any supplier that supplies to Government should sign up to the code; being a signatory should be an absolute requirement before a company starts to supply any Government body or agency. I would be very interested in hearing the Minister’s views on that suggestion.

The second point is with regard to the EU directive relating to late payments. Of course, that directive was originally based on pre-existing UK law and it requires that businesses pay their suppliers within 60 days or face interest payments on money owed. However, the UK implementation of the directive allows businesses to agree longer terms

“provided it is not unfair to the creditor.”

For a small business, even 90 days is a very long time to wait to get paid. Given that the prompt payment code suggests that 60 days be considered a maximum period for payment, will the Minister consider amending the legislation to ensure that 60 days is considered the mandatory maximum period for paying suppliers?

Thirdly, I welcome the requirement from April this year for large and listed companies to publish their payment practices twice a year. Can the Minister confirm whether this piece of secondary legislation is on track and what the definition of a “large company” is? Is it one that has more than 250 employees? That is certainly the European definition of a large company.

My fourth and final point relates to the Government’s plans to establish a small business commissioner, who will help to solve complaints from small businesses about late payments. I hope that the Minister will agree that the commissioner needs to be an individual who commands respect across the business community. Perhaps it could be a former chief executive officer of a large business. I would not go so far as to say that we should get a poacher turned into a gamekeeper, but I think she will know what I mean. I know that we will have the Second Reading debate of the Enterprise Bill in the coming days, but hopefully she can provide a bit of commentary on the role of the commissioner. I welcome the creation of the commissioner; they will help SMEs, but only if they are seen to have some real teeth. If they come to be seen simply as a postbox for complaints, I am afraid they will lose the confidence of SMEs and will not command the respect of large businesses.

The FSB wants the scope and remit of the commissioner to be broadened to consider complaints about poor payment practices in the public sector as well, which I understand is not currently the role that has been prescribed for it. The FSB is also rather keen that the commissioner should have the power to make referrals to the Competition and Markets Authority. Both these suggestions are worthy of serious consideration. I would be interested to know the Minister and the Government’s view of them, if not today then perhaps in the Second Reading debate.

As I have said, there are more than 5 million small businesses in the UK. I do not think anyone expects that the commissioner will set up a huge administrative bureaucracy, mechanically processing complaints, so there needs to be a holistic approach for dealing with complaints. What I would like to see is the commissioner establishing a public register or website, loosely based on those that review holiday destinations, on which SMEs could enter verified complaints about late payments or poor supplier policies practiced by their customers.

Once SMEs start coming forward with issues, many of which will be recurring in terms of their scope and the identity of offending large companies, that will enable the commissioner to spot patterns of poor behaviour within different sectors. The commissioner should certainly have the power to bring CEOs from big companies around a table to ensure that they act collectively to end poor practices. I think we would find that if we were able to tackle 20% of the problems that are identified, that would solve 80% of the problems related to late payments.

Eradicating late payments will provide a boost to jobs, growth and productivity, and I am absolutely convinced that greater transparency will help to eliminate what I regard as a corporate disease.