Small Business, Enterprise and Employment Bill

Lord Mendelsohn Excerpts

Wednesday 7th January 2015 Grand Committee

Moved by

[Lord Mendelsohn]

3: Clause 3, page 3, line 40, leave out “may” and insert “shall”

[Lord Mendelsohn (Lab)]

My Lords, I shall speak also to Amendments 4, 6, 7, 10 and 11.

We are concerned with the effective operation of the policy in this legislative framework. We have deep concerns that the legislation as drafted will have unintended consequences that will put small businesses in a weaker rather than a stronger position. The Government’s approach addresses only the information asymmetry and addresses insufficiently the market power asymmetry. This means that the Government’s current proposals are likely to benefit larger entities and to provide little for SMEs other than better knowledge of how weak their position really is.

The huge advantage of our proposals is that they use transparency to change culture by enshrining good practice, reinforcing duties and making enforcement attractive to large companies. This will not just address the growing problem and impact of late payments but promote a more competitive and effective market where the velocity of the circulation of cash will have a positive impact on growth productivity and business activity. We have been struck by some of the grumblings around the business discussion paper, Building a Responsible Payment Culture, and the feeling that somehow too much weight was given to the concerns and interests of those with the most interest to protect. Our proposals meet more clearly the overall policy objectives of the Government and are consistent with the central concerns of SMEs.

In considering our proposals and given the range of evidence and data the Government have, in the possible event that they remain unpersuaded by the overwhelming logic and attractiveness of our amendment, could BIS make available the evidence demonstrating that our suggestions would be less effective in achieving the outcomes we share? I think that any independent economic model would strongly endorse the positive benefits of our approach.

I would be grateful, too, if the Government’s current consultation for the Bill, when published, were to detail more clearly where the responses were from—the particular areas and sectors, and whose interests they reflect. I also request that the Minister gives some consideration to making our suggestions available to some key stakeholders to integrate as a small addendum to the consultation.

The model we propose is compelling. Has the Minister any current modelling that should dissuade the Government from accepting our amendments? What assurances can she give that the £40 billion—or £45 billion, or £50 billion—in late payments currently outstanding can come down over time with anything like the scale needed to show that these proposals from the Government will succeed? What is the anticipated decline? How strongly can this be addressed? I would be happy for her to test the efficiency of our model against that of the Government. I am very conscious of the exhortation of the noble Baroness, Lady Wheatcroft, that we need action. Certainly, we need to ensure that any measures that benefit small businesses do so as swiftly as possible.

Our amendments work as a package, reflecting the fact that, as all research and experience shows, late payment might be the most egregious practice but it is not the only one. In may be the easiest to identify and quantify, and it may even have the largest economic impact, but it may not be the worst or most shocking payment practice. Late payment is one element of the payment story. There are problems with withholding payments or fines, and with retrospective charges and retrospective payments.

I thank the small businesses, and their advisers and representatives, who provided us with a great deal of background information. The detailed and voluminous stories we have heard and keep hearing—yet which people do not want to go on the record over—provide some evidence of the weakness of approaching this solely by way of transparency, information and exhortation. I will outline in more detail some of the problems in this area when talking about Amendment 10.

Our amendments on this try to provide a more practical framework to meet the objectives of the Bill. Clause 3 provides that:

“The Secretary of State may by regulations impose a requirement, on such descriptions of companies as may be prescribed, to publish … prescribed information about the company’s payment practices and policies relating to relevant contracts of a prescribed description”.

Amendment 3 changes this “may” to “shall” to make it a firm requirement. By the Government’s own standard, changing culture would require a common series of obligations and practices. Has the Minister any data or economic models that would demonstrate that there is a more effective way of making these changes other than by means of a universal provision?

Amendment 4 is a practical way to make culture change. We propose that rather than the Bill being a way to make it acceptable to complain about late payment, we encourage a business operating culture of paying on time and sticking to contracts. By making this a more clear obligation on the part of the companies that are required to pay, we also meet the problems of dealing with the consequences of poisoning commercial relationships and for the exercise of market power concentration and intimidation to allow poor practices to continue. The amendment requires companies to produce quarterly statements that list all payments to suppliers that have been paid more than 30 days after the suppliers agreed payment terms, without a formal query having to be made. We are aware that concerns have been raised with BIS that unless time limits are properly identified there would be an ever-increasing pressure on small businesses to accede to extended timescales for the settlement of payments. I would be grateful if the Minister would outline how the Government feel this would operate in practice, and how small businesses will be able to resist such pressures.

Amendment 6 asks for assurances from the relevant auditor that the company is maintaining accurate and honest financial records and statements. What is therefore expected of auditors is exactly the same as now. We would require them to exercise broader and clearer judgment in these matters. Confirming that the accounts represent a true picture of the economic position of the company and that it is a going concern should be qualified if the only way it can meet its cash flow or profit targets is by late or poor payment practices.

Amendment 7 would establish that the financial reporting officer shall be liable for false reporting. If there were false reporting, the business would be liable for a fine equivalent to no more that the amount it owed—the overall value of the invoice—and up to a maximum of £10,000 for false reporting. This therefore provides for not just clearer information but also for obligations to pay to be an audit requirement, and for enforcement to be undertaken through existing government agencies. It also makes shareholders and company boards protecting their and the company’s long-term interests hold their executives properly to account on these matters.

Amendment 9 makes it an offence for companies not to fulfil compensation payment plans which have been made by more than 30 days. It has the effect of empowering small businesses, putting the onus on big businesses to report themselves. Failure to complete a quarterly return would be subject to a fine upon conviction.

--- Later in debate ---

[Lord Mendelsohn]

My Lords, I am encouraged that these amendments have triggered a long and very useful debate on late payment issues. I was struck by my noble friend Lord O’Neill, who spoke so persuasively about the central principle behind our amendments, which is to ensure that measures designed to help small businesses really and truly do so. It is in that context that the objections raised by the noble Lord, Lord Stoneham, around over-regulation have to be seen. There is no point in legislating if the legislation does not achieve its aims. When we look at the size and scale of late payments, the extension of how long it takes for payments to be made and the drift over a number of years, unless we have measures that really will change this situation, we will fail to achieve those aims. It is important that what we do is effective and I do not think that an objection to making something effective is simply to say that it constitutes over-regulation.

Important points have been raised about some companies where there are consequences and cashflow difficulties, but the comments made by my noble friend Lord Mitchell are important. The price is the price and the time you should pay is the time you should pay. If there are problems, there should be an opportunity for companies to talk together and address them, but it should not be a case of taking unilateral measures or that these issues can be dealt with only through lawyers and the courts. We suggest that there should be effective discussions between the parties and that power relations which affect that sort of discussion should not be exercised unilaterally.

The noble Lord, Lord Cope, raised a number of points which address some of the issues, but they did not fundamentally address the problems that we are trying to deal with—namely, the asymmetry of power. In relation to the issue of the burdens, much of what the Government are proposing and we are proposing could actually be achieved through software packages that are already available. I think that the preparation of these reports would be a lot more pleasurable than VAT returns on a quarterly basis.

I want to say in relation to Amendment 5 that I was impressed with the Grant Thornton document. It certainly identified the costs which it suggested could be taken out. I actually thought that it would be the largest beneficiary of those costs, and it is impressive to see an accountancy firm not supporting the position of its own fees. I thought that the document was a very useful introduction to the debate. However, the costs are still significantly lower than the benefits identified by the Government, so I would say even within that context that I cannot see the strength of the case. We therefore are strongly of the opinion that this needs one definition.

I am grateful to the Minister for what she has said. We are encouraged by some things and discouraged by others. We are certainly encouraged that as regards Amendment 3, there is an assurance that “may” will become “shall”, and that it will perhaps morph into “shall” in the drafting. We are also grateful for her reassurances on some particular measures, and in relation to the overall aims that we are both trying to achieve. In relation to the consultation, which we look forward to reading, we would request, however, that we are not looking at an edited summary but more extensive reporting of the fuller sense of the discussions.

I have to say that some of the other measures still do not address fundamental problems. It is not the case that these charges are frequently imposed by consent, as was mentioned in relation to Amendment 10; they are dealt with unilaterally. That has been under-emphasised. On Amendment 9, the responses indicate that penalties would not be of benefit. That is understood within the context where the companies would have to be the ones that tried to achieve those penalties, which would not be of benefit—there is no doubt about that. We are trying to make sure that the obligations are changed so that companies see that it is of benefit to make the payments. In that way, we are addressing the issue of culture change. Transparency and information are a necessary but insufficient condition to make that change, and given the position of small businesses and the amount of money outstanding, we have to be conscious that these measures would succeed significantly in providing economic change.

However, we still have some matters to consider, some responses to receive and some greater opportunity for the Government to look at this matter. Although I am sorry that the Minister cannot accept our proposals, I hope that she can do so in due course. The message that goes out from here should not be that this side is the only one that really believes in getting things done and is on the side of small businesses. I beg leave to withdraw the amendment.

Amendment 3 withdrawn.