Small Businesses: Late Payments

Lord Sharma Excerpts

Wednesday 27th January 2016 Westminster Hall

[Alok Sharma (Reading West) (Con)]

I beg to move,

That this House has considered late payments to small businesses.

It is a pleasure to serve under your chairmanship, Mr Owen, for the first time in this Parliament.

One of the biggest drags on small and medium-sized businesses—

Sitting suspended for a Division in the House.

On resuming—

[Alok Sharma]

As I was saying, one of the biggest drags on small and medium-sized businesses is the scourge of late payments. Timely cash inflow is the lifeblood of a small business. It is the difference between growth and stagnation, between profit and loss and, in some cases, between success and failure. There are some 5.4 million private sector businesses operating in this country, and more than 99% of them are small businesses, with 4.1 million consisting of just one person. The last thing someone in that position needs is the late payment of invoices by customers.

A recent survey by the Federation of Small Businesses concluded that central Government Departments and Government agencies tend to pay reasonably promptly, with more than 70% of invoices being paid early or on time. By contrast, more than 50% of invoices from SMEs to larger businesses are paid late. Research from Bacs Payment Schemes Ltd, published in February 2015, revealed that more than three quarters of UK businesses are being forced to wait at least a month beyond their agreed contract terms before getting paid. The Bacs research also found that SMEs bear the brunt of late payments. At the time, £41.5 billion was owed in late payments across the British economy. Some £9 billion was owed to larger corporates but a staggering £32 billion was owed to small and medium-sized businesses.

The late payment difficulties for SMEs are further compounded by the additional costs that have to be borne by businesses as a result of late payments, which average around £700 a month per SME, including staff costs for chasing late invoices. That equates to a total cost to small businesses across the year of more than £8 billion. The Minister is working incredibly hard on this, and the Government are committed to cutting £10 billion of red tape over the course of this Parliament. Can colleagues imagine what would happen if we also managed to eradicate £8 billion of late payment costs from SMEs? It would provide exactly the sort of boost to jobs, productivity and economic growth that the Government want to encourage.

Smaller companies have told the FSB about the very real costs of late payments: reduced profitability; lateness in paying their own suppliers; difficulties in paying staff; lateness in paying Her Majesty’s Revenue and Customs, and all the negative consequences of that action; and, ultimately, lost contracts. There is also the very real risk of insolvency.

[Andrew Bingham (High Peak) (Con)]

Turnover and sales are the predominant drivers for a small businessman, but does my hon. Friend agree that cash flow is a big problem and that the smaller the business, the bigger the problem it is? Consequently, when large companies withhold payment, a small business often cannot implement any early payment schemes because the large company can just go to somebody else and another small business will take the hit for them.

[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.

[Albert Owen (in the Chair)]

Before I call the Minister to respond, I remind Members that the debate was suspended for 10 minutes, so it will now finish at 4.40 pm.

[The Minister for Small Business, Industry and Enterprise (Anna Soubry)]

It is a pleasure to serve under your chairmanship, Mr Owen.

I congratulate my hon. Friend the Member for Reading West (Alok Sharma) on securing this debate on an important topic. We know that late payment is one of the biggest complaints that small businesses have. They rightly complain about what are effectively two types of late payment. One is when they supply services or goods to people, and as part of the terms and conditions of the contract they find themselves almost over a barrel. They do not want to turn away business or fall out with an important customer, so they sign up to terms and conditions that in a modern age are, frankly, unacceptable.

Of course, someone can take action against anybody who breaks the terms of a contract. They can go to court, but for obvious reasons there is a reluctance to go to court. It costs money, and it could also sour the relationship between the two parties, which would not be good for the smaller business. It is important to put on the record that, for our purposes, when we refer to a small business we are referring to any business that employs fewer than 250 people. That ranges from a very small business, or even a microbusiness that employs between one and five people, to companies with much bigger turnovers that employ up to 250 people. The small business sector is huge and, as we know, it is absolutely the engine of our economy.

The second type of complaint comes from businesses that have signed up to being paid within a certain period, only to find that term or condition of the contract is broken. As I have explained, they feel reluctant to go to law, but there is a remedy available to them.

As I say, there are two types of complainants: those who find themselves signing up to onerous terms and conditions in the first place, and those who, having signed up to a contract that may on paper include good terms regarding when payment will be made, nevertheless find that the company’s practice is to breach those terms. They do not really want to go to law. I accept, and the Government absolutely recognise, the case that my hon. Friend makes that the situation we find ourselves in is unacceptable. Things have been getting better, but we know there is more to be done.

It is important that I put on the record my thanks to the Groceries Code Adjudicator for what happened yesterday, which in many ways was astonishing. What Tesco was doing was a scandal, but it was a great day for smaller businesses, which found themselves having a champion who did not pull her punches in criticising and exposing Tesco. After a year-long investigation, she made it very clear what Tesco had done, which was a flagrant breach of the groceries code.

As we know, since last April the Groceries Code Adjudicator, which was set up by the last Conservative-led Government, has had the power to impose fines of up to 1% of turnover. That is serious money for any business, but especially for big businesses. So credit where credit is due; yesterday was a good day for smaller businesses, and full credit to the adjudicator and to the last Government for doing all of that.

I will deal with a few important points, then I will come to my hon. Friend’s asks in a minute. The small business commissioner, which will be set up by the Enterprise Bill, will have a specific role of considering the problem of late payment. The commissioner might want to look at other things as well, but primarily he or she will look specifically at that problem.

We know that people can go to law if there is a breach of contract. The small business commissioner will look at the practices that lead to unfair terms and conditions and at those that mean people breach terms and conditions and make late payments. What I am looking for in the commissioner is somebody who will take up the complaints of much smaller businesses, which invariably reflect trends in what bigger companies are doing.

The real aim is to change the culture. My hon. Friend said that the problem stems from a culture that is unacceptable in this day and age, and I want the small business commissioner to change that culture. He was right to ask for the commissioner to have some teeth, but then they would turn into a very different creature and we would have to go down the route of having someone whose role was quasi-judicial. In any event, people can take to court a claim for breach of contract, and we will be wildly encouraging mediation. That will be another role of the small business commissioner. We do not want to create a quasi-judicial role, because we would be beginning to get into quango land. I want someone who has respect and authority, so that when a phone call is made the bigger companies do not flinch but pick up the phone. It is about banging heads together and changing the culture.

[Alok Sharma]

I agree with the Minister, of course; we certainly do not want another quango. That would not help anyone, particularly small businesses. Does she agree that whoever is appointed to the role has to be a serious and hugely respected business figure? They have to be respected by small and large businesses, because it is the office and their individual personality that will help to drive things and get large businesses around a table when heads need to be banged together.

[Anna Soubry]

I could not agree more with my hon. Friend. He is absolutely right. The person we appoint will be critical in achieving what we want. We want someone with gravitas, so that when a telephone call goes to a chief executive, that chief executive does not hesitate to say, “This is a call I have to take. This is someone I have to listen to.” When I spoke to the Australian equivalent, what struck me was that when he has that conversation with a chief executive and tells them, “Did you know what your finance team are now saying has to be in the terms and conditions for small businesses?”, invariably the chief executive says, “I had no idea what was going on. That is absolutely unacceptable, and that is not how we do business.” It is fair to say that the new chief executive of Tesco, for example, was clear yesterday that it will no longer treat smaller businesses in that dreadful way. I welcome the change in policy so that very small suppliers will be paid within 14 days, but we must be clear that they supply only about £150,000 of goods to Tesco. They are very small contracts, and I look forward to Tesco extending its new-found policies to all its suppliers across the piece.

The small business commissioner will be expected to have a website. I want it to be a series of portals that will show small businesses where they can go for advice, especially on mediation. I am not sure about the idea of turning it into a sort of TripAdvisor. I always get a little nervous about people being able to post things, which would require a lot of regulation to ensure that no one was saying anything defamatory. I want to make it absolutely clear that the small business commissioner will produce an annual report, in which they will be expected to name and shame all those who are not doing the right thing by small businesses, especially in relation to prompt payment. What happened with Tesco yesterday was so important because it was all across the media, and damage to a business’s reputation is hugely important and hugely powerful.

[Alok Sharma]

The Minister is being generous with her time. I hear what she is saying about the potential risks of a TripAdvisor-type website, although such websites of course operate already, so I am sure that it is possible to construct something that might work. Whatever mechanism is used, we need to ensure that there is a way of getting complaints in and processed in a timely and fast way. I reiterate that the last thing we want is a quango, and I know she does not want that either.

[Anna Soubry]

My hon. Friend is absolutely right. Speed is of the essence. We have reduced the maximum size of company that can make a complaint. The limit will be around the 50-employee mark, because we anticipate that there will be a lot of complaints. Those companies will be symptomatic of a way of doing things in particularly large businesses and of culture. We think that we are aiming in the right direction to get the sort of results that we want.

We introduced new reporting requirements in 2015 for the UK’s largest companies to report on their payment practices and performance, including invoices paid beyond agreed terms. I want to make it clear that those reports will be published in a central digital location, which sounds pretty ghastly, but most importantly it will do the trick. It will bring in the oxygen of publicity, which invariably cleanses things and makes them better. I am going to say something slightly controversial and be very blunt.

[Anna Soubry]

I know. It is not like me, and my officials are now having huge palpitations, but it says on my brief:

“Government is leading by example by paying its suppliers fairly and promptly.”

I wonder whether we really are. Shall we be truly honest about this? My hon. Friend gave an example of a local authority that is not doing that, and I have examples of local authorities that are not doing that. I have an example that was brought to me—I will not go into the detail of it now, but I will be taking it up in a serious way.

We all know that we have to be careful. We can make great headline statements, but when we drill down into the reality—most of us, certainly on the Government Benches, live in the real world—what sounds like a good headline is not borne out in practice. I have seen evidence that by the time something that looks like a Government contract has come through the first subcontractor, the next subcontractor and the next one, the payment terms are something in the region of 120 days, and I am concerned about that. That is not a fault of Government, because we have been clear about what we expect, but the danger with over-regulation is that there is always a way around it. The most important thing is changing the culture and policing it. People will be very clever in looking for the loopholes and different ways of doing things, but we have to ensure that we find them, track them down, expose them and ensure that those sorts of practices cease. I will be keen to take that up so that we practice what we preach.

[Alok Sharma]

The Minister is always at her best when she is being controversial. She raises the issue of how the public sector deals with small businesses, so can I come back to one point? Will she at least have another look at whether the small business commissioner should cover Government quasi-public bodies as well as private sector companies?

[Anna Soubry]

I absolutely do not have a problem with looking at that. I place on record, however, that I am looking at that now. I will not bore Members with all the details, but someone who is not a constituent came to see me. He runs an excellent small business called Caunton Engineering. By bad fortune for some of the contractors, he happens to chair the relevant committee for his sector. I am taking the issue seriously, and we will look into it to ensure that we are doing the right thing.

The last Government made huge strides forward with the prompt payment code and the publications that bigger companies have to make. The directive that my hon. Friend mentioned is wishy-washy. Am I going to say that we should change it? Actually, I do not want to over-regulate. I would much rather that we changed the culture rather than put strictures on small business, but he makes a good point. I will look at all the points he has raised, and I congratulate him on bringing the matter to our attention.

I feel proud: the Conservative party is undoubtedly the party of small business. We get it. [Hon. Members: “Hear, hear.”] My hon. Friend the Member for Sherwood (Mark Spencer) is here, and he runs a small business, no doubt extremely well. We know the area and we understand it. What we now have to do is this: I ask all Members to bring me their examples, and I will not hesitate to take them up with bigger companies and be the champion of small businesses, to ensure that we deliver in the way that we want and encourage small businesses.

[Alok Sharma]

Will the Minister give way?

[Anna Soubry]

Yes—my hon. Friend can have the last word.

[Albert Owen (in the Chair)]

There are 10 seconds left.

[Alok Sharma]

I am really pleased that the Minister has thrown out that challenge to Members. Will she commit to sit down with me over the coming weeks—

[Anna Soubry]

Yes—