Business Transactions: Cash Retentions

Baroness Ritchie of Downpatrick Excerpts

Wednesday 27th January 2016 Westminster Hall

[David Simpson]

Again, I agree with the hon. Member. I could do exactly the same thing in my constituency and I am sure that other Members could do the same in their constituencies. This situation is unacceptable and we will address it as we go through the debate.

[Ms Margaret Ritchie (South Down) (SDLP)]

rose—

[David Simpson]

I will give way to the hon. Lady; I will never be forgiven if I do not.

[Ms Ritchie]

I thank the hon. Gentleman for giving way and I congratulate him on securing this debate. Does he agree that although the Government are now undertaking a cost-benefit analysis of the retention system with the express aim of eliminating these retentions by 2025, there is a need for a statutory retention deposit scheme, which could be brought in through the Enterprise Bill and which would be similar to the tenancy deposit scheme as a means of protection?

[David Simpson]

I think the hon. Lady has seen my speech.

--- Later in debate ---

[David Simpson]

That is right, and that is exactly the problem. The issue needs to be addressed. Speaking from Northern Ireland’s point of view, it has been a major obstacle to small and medium-sized companies moving forward. To add to that, those SMEs have no protection against cash retentions. Banks do not consider unprotected retentions as sufficient security for lending purposes, and that is a major problem for SMEs. Even though that money is on the books, the banks will not let them use it as security for overdraft facilities. In addition, and perhaps most alarming of all, public bodies and large companies are using millions of pounds of small firms’ retentions to boost working capital. That is happening with a lot of the major supermarket chains. They are using the money that they hold back to move their companies forward, to buy premises and to buy land. That has been the story for some considerable time. That is not just speculation; it is happening in today’s society while the Government are reviewing the matter but have not yet agreed to legislate, and we need to see that legislation.

My next comment is on a somewhat disappointing matter. In 2015, the Under-Secretary of State for Business, Innovation and Skills, Baroness Neville-Rolfe, acknowledged the problem and said:

“issues with retentions go to the heart of the industry’s business models…low levels of capitalisation mean that the industry is heavily reliant on cash flow.”—[Official Report, House of Lords, 3 March 2015; Vol. 760, c. 127-28.]

In addition, she said that the Government had no plans to legislate to tackle the issue. That point was raised earlier, and I again emphasise that the Government need to look at that.

While the sector is delighted that the Government recognise that there is a problem—they are to be supported in their efforts to eliminate cash retentions by 2025—and I very much welcome their long overdue review of the retentions system, we need to see some action.

[Ms Ritchie]

I thank the hon. Gentleman for giving way again. He is making a compelling case for the elimination of cash retentions. Would he agree with me that the situation, particularly in Northern Ireland, for those involved in the construction industry was compounded when the aggregates levy credit scheme was withdrawn? That was remedied in the European Commission and the European Court of Justice some months ago, but the British Aggregates Association is now taking a further case against the Commission ruling. That could plunge our industry into further peril and financial difficulties.

[David Simpson]

That is an excellent point, and we have been lobbied on that over the past days and weeks. That case could have a devastating impact on the construction industry in Northern Ireland, so it will be fought tooth and nail. We hope that the Government will support people in that.

It is not enough for the Government to talk about removing retentions by 2025; we need to see some form of legislation to stop retentions. We cannot sit back and ignore a potential loss of £360 million over the next nine years, as calculated by the loss of £40 million in 2015, while the Government work towards elimination but have no plans to legislate. That is grossly unfair and frankly hugely debilitating to the construction sector and the UK economy.

There has been huge interest in the debate. I am sure that many Members, like me, have been briefed by the Specialist Engineering Contractors Group, which has been the voice for SMEs on this poor payment practice. Like many here today, I recognise that cash retentions work in theory. They were originally established as a protection against any defects that might have been left when a job was finished or left unfinished. These days, since all contractors have to go through a lengthy pre-qualification process to be able to take on any job, there should no longer be any need for retentions to be withheld. However—this is quite embarrassing for the UK—we still have not legislated to have retention moneys placed in safe keeping. France, Germany, America and Australia are already leading the way and have put in place effective processes to secure the money, should the larger contractors go into insolvency or adopt poor payment practices when releasing the finance to their subcontractors.