Small Business Commissioner

Lord Mendelsohn Excerpts

Monday 22nd January 2018 Lords Chamber

Asked by

[Lord Mendelsohn]

To ask Her Majesty’s Government what progress they have made in establishing the role of the Small Business Commissioner; and what further action they are taking to support small and medium-sized enterprises, including tackling the issue of late payments.

[Lord Mendelsohn (Lab)]

My Lords, I thank everyone who is going to participate in this debate, and thank everyone for their endurance. It is nice finally to be at the moment when we start. I thank the House of Lords Library, too, for an excellent briefing that I hope has been of help to noble Lords. From these Benches I thank the Institute of Directors, which has kept us constantly informed with a lot of very useful detail and data.

I hope that we will have a very constructive debate, and I hope to make some general observations for the Minister to consider. I hope that he will not feel that we are criticising, hectoring or boring him, and I hope that he understands that I am trying to make the point that late payments, and support for small businesses, matter, and that across this House we should be united in making an effort to try to achieve some progress.

I make two basic assumptions. The first is that the Government are to be credited not just for the small business Bill, and not just for establishing the requirement for notification of payments, but for the establishment of the Small Business Commissioner. These things are important steps, and important strategic anchors for what can be achieved in the long term.

I also say that the Government have made an excellent choice in the Small Business Commissioner, Mr Paul Uppal. He is a 20-year veteran owner of small businesses, including in the property sector, and a former Conservative MP for Wolverhampton South West who is now based in Birmingham. He is absolutely first class and an excellent appointment, and I wish him and his colleagues great success. We on these Benches have been invited to visit the Small Business Commissioner and we look forward to doing that. In him we have someone who will try to do his very best.

However, he faces a real challenge to make a difference. A survey in a trade magazine asked what faith companies had in the Small Business Commissioner to improve payments. Only 3% had “a decent amount”, 21% had “a little” and 76% had “none at all”. This reflects a much broader concern about some of the issues we have around late payment. The first is that there is not enough weight—and there are not enough levers—behind the Small Business Commissioner to make a real difference on late payments. I also think, in the context of the role of the Small Business Commissioner, that it is a huge opportunity, particularly if we learn some of the lessons and apply some of the models that others have, to achieve a huge amount for small businesses.

The purpose of this debate is to ask the Government to do three things. The first is to remain committed and to look for ways to continue to add pressure through the system to encourage a resolution of late payments. The second is for the Government to be open to review early and to consider additional actions and resources in the interim, while these institutions are gaining their feet. The third is for the Government to be sympathetic to the opportunities that the Small Business Commissioner may present as he starts going about his work, learning lessons and receiving a great deal of experience.

The problem of late payments is still quite large. Most surveys put it somewhere between £40 billion to £50 billion; a few have it as larger and only one as smaller. There are various breakdowns between small and large but, in general, taking the figure of £45 billion, we know that the extent is significant. Interestingly, a number of surveys put a bit more flesh on the bones of some of the problems and challenges we are facing. The Dun & Bradstreet survey has found that this is putting the future at risk for 58% of SMEs. Cash flow, profitability and future trading capacity are all being hit. This research revealed an average late payment amount of £63,881 for each SME, with 11% owed between £100,000 and £250,000. This withholding of payments brings about cash-flow difficulties for 35% and delayed payments for 29%. Some 51% say late payments are more of a problem than they were three years ago, and 51% of SME owners are using personal savings to cover the shortfall from late payments. Manufacturing was the sector most affected, closely followed by retail. Robert Blackburn, from Kingston University’s Small Business Research Centre, has also stressed that these late payments seem,

“to worsen during difficult economic times”,

and the uncertainties of the moment may well be adding to that.

The Sage survey released in December 2017 made the stark point that the UK’s late-payment culture is the worst in the world. Alan Laing, the managing director of Sage, made a number of strong points. In particular, UK businesses spend an average of 15 working days chasing late payments. That is a higher level of wasted time than in any other country in the world. The survey went further in naming the UK as the world capital of late payment, finding that 18% of all invoices paid to SMEs in the UK were late, a total matched only by Singapore, and that almost 10% of invoices become bad debts. This is extremely difficult. This was a significant survey of 3,000 businesses around the world.

There is another damaging trend which I cannot account for. I would be grateful for the Minister’s view—I am not blaming him for it. Research by MarketInvoice, in which 80,000 invoices were studied, found a very peculiar situation. Almost three-quarters of invoices sent by UK businesses to EU firms were paid late in 2017. This figure represents a huge increase from the 40.4% of invoices that were paid late the year before. This significant increase is not just with EU firms. United States firms have also extended their payment dates and have a higher proportion of late payments. I do not know, and cannot account for, the reason, but that is a significant shift. Overdue invoices from the US have also risen from 40.4% to 71%. This is of great concern.

Last year, the insolvency body R3 said that more than 20% of business failures had been caused by late payment or the domino effect of other business failures. With the recent collapse of Carillion we saw that it had extended payments to 120 days, even though the Government said they tried to compel it to pay on time. There is, of course, no mechanism to highlight to anybody that the period has been extended to this point. Indeed, the whole public sector—late-paying councils, trusts and government departments—are outside the scope of the Small Business Commissioner. The public sector pays small businesses late over 62% of the time, and that is a huge concern.

There are things in place to try to encourage payment, some of them long standing, such as the Late Payment of Commercial Debts (Interest) Act 1998, amended and supplemented by the Late Payment of Commercial Debts Regulations 2002. These allow one to claim interest and debt recovery costs if another business is late in paying for goods and services, if a time is not agreed and it becomes due after 30 days. The percentage is the base rate plus 8%, so the interest due on a £10,000 debt over 90 days is £205. This is, and has been, insufficient to make any material change. I would be interested to know whether the Government have ever had any data on how many late payments have been made. For example, they should know how many interest payments have been made to small suppliers in the public sector. I would also be interested in that figure. However, that in itself was insufficient to make a huge change in this area so the Government introduced the Prompt Payment Code, which has approximately 2,087 members. It is an attempt to encourage suppliers to pay promptly. Like Ronseal, the code does what it says on the tin. Unfortunately, it does not.

I would be grateful for the Minister’s observations on companies’ duty to report under the Prompt Payment Code. It appears that they are probably not paying on the due date. The Sage survey makes the most important point—namely, that the Prompt Payment Code addresses the wrong thing. This is not about people paying; it is about making sure that they are chased for the money they owe. We have a cultural problem in that in the UK it has become unacceptable to chase people for money. We have to change that culture so that it is reasonable to expect late payments to be chased.

I am getting into the swing of this. In Australia, where the concept of the small business commissioner was first invented, the purpose was to change the small business environment for the better. It was not about late payment. In fact, Australia’s experience is that soft measures are not sufficient. People in Australia are campaigning for legislation to allow electronic payments to be tracked and all the other significant measures that we have discussed. I hope the Minister considers that in the future we should be alive to the opportunities that others are creating and the initiatives that others are introducing to ensure not just that we tackle late payments more effectively but that the role of the Small Business Commissioner is to improve the business environment and the capacity of small businesses to access justice as regards information and trading. Those are the proper tasks for the commissioner. I hope that the Government are alive to those opportunities.