Prompt Payment Code

Andrea Leadsom Excerpts

Thursday 8th November 2012 Commons Chamber

[Andrea Leadsom (South Northamptonshire) (Con)]

I am delighted to co-sponsor this debate with my hon. Friend the Member for South Basildon and East Thurrock (Stephen Metcalfe) and the hon. Member for Oldham East and Saddleworth (Debbie Abrahams). They have both made incredibly valuable contributions to this vital debate about how we can ensure that businesses not only survive during a very difficult economic period, but grow. As my hon. Friend said in his opening remarks, if every small business employed an extra person, we would be short of workers in this country to the tune of 1.5 million people. We want to do everything we can to enable them to expand and grow.

I also agree with my hon. Friend and the hon. Lady that this is a matter of culture. It is ethically right, in terms of corporate and social responsibility—not to mention good business practice—that companies should pay each other promptly and with the genuine desire to ensure that they meet their bills. I highlight the fact that approximately half of all small and medium-sized enterprises do not have any agreed payment terms. That goes to the heart of the problem of the power of big companies over small businesses. A small company will often be so grateful for winning a contract that it will not insist on payment terms, so there will be no contractual basis under which it can require a large company to pay up on time. That is a fundamental problem. The Federation of Small Businesses and the CBI could do more to ensure that there are agreed standard payment terms that all businesses should sign up to, so that it becomes much more a matter of course and not a matter of who has the upper hand.

[Fiona Bruce]

May I commend the Law Society in that respect? Many years ago, it required all lawyers, before embarking on work for a client, to set out in writing what their payment terms would be. That has gone a long way towards clarifying, for all sides, exactly what the expectations are. That practice, which is now embedded in our profession, would be a fine example for other professions and trades to consider.

--- Later in debate ---

[Andrea Leadsom]

I thank my hon. Friend for that interesting point.

Today, I want to give three examples of bad practice to highlight this issue. The previous speakers have done a great job in pointing out some of the very concerning statistics. With the autumn statement fast approaching, they have also made it clear how relatively easy it would be for the Government to take action and insist that all public sector organisations abide by prompt payment terms, and to do more to embed that in the culture of the private sector.

[Toby Perkins]

Does the hon. Lady agree that there are two facets to the issue? First, big businesses set up unreasonable terms and conditions saying, “We are going to pay you over a very long period of time. If you don’t want that, go and deal with someone else.” Secondly, terms and conditions that might be considered more reasonable are put in place but not adhered to. Companies can string payment out for days and even weeks after the agreed terms. I caution her that different industries and different contracts require different payment terms because of a variety of complexities about how a contract might function. That is why it is difficult to legislate on this matter, but does she recognise that central difference?

[Andrea Leadsom]

I recognise that absolutely. In fact, last night I was speaking to Philip King, the chief executive of the Institute of Credit Management, which implements the prompt payment code on behalf of the Government. He explained that payment terms of a set number of days are not required for every business employing good practice; it is simply that they should say what their payment terms are and stick to them. Whether those terms are 30 days, 60 days, 90 days or whatever, once they have been agreed they should stick to them—that is key.

Small business trade bodies could have a naming and shaming website to enable their members to report bad practice without the fear of losing business by criticising their creditor. I will go on to give clear examples, because I agree with other hon. Members that it is difficult to get businesses to speak out for fear of losing business. However, I have one constituent who supplies the NHS and he wanted to tell the story of his company, Q Technologies. The company creates specialist medical equipment that enables surgery to take place with a much lower risk of MRSA and other infections. It is, therefore, life-saving medical equipment. The business employs 14 people and supplies a number of NHS trusts and hospitals around the UK. His overdue and late payment situation with those trusts is that he currently has £76,000 outstanding on a 30-day invoice that was raised in April, and was therefore due to be paid in May for the supply of specialist operating theatre equipment at a hospital in the north-west. The equipment enabled the continuation of vital hip, knee and shoulder surgery.

My constituent also has a £36,000 payment over 60 days late on a 30-day invoice for vital operating theatre ventilation equipment. This was supplied at short notice in an emergency to a hospital that specialised in spinal surgery. Q Technologies took the equipment out of another hospital, so that there was no disruption to this vital spinal surgery, yet when the chief executive tried to sort out the delay to the invoice being paid, he was told by the NHS trust that managers of three different NHS departments could not decide whose budget the money should come out of. Rather than sorting it out and paying him, therefore, they just did not pay him. The bill was finally settled only after he threatened the trust with legal action.

The snapshot position of moneys owed to Q Technologies —a company that employs 14 people—by the NHS is £130,000. That is money outstanding over 60 days. The chief executive, Andrew Kemp, writes:

“I am a massive fan of the NHS but a massive critic of the way in which some Trusts manage their work. We try and support the NHS in every way that we can - often delivering equipment at very short notice and often on trust. We always hope that such co-operation and trust will be reciprocated back to us but sadly it often isn’t. Poor cash flow kills businesses, whatever the Balance Sheet might look like. A big debtors’ list doesn’t pay the monthly bills and it forces us to keep more cash in reserve than we would like. It would be so much better if we could use some of it to grow and expand our business and employ two or three more people - but with the NHS being so tardy over payments we just don't feel confident enough to do so… As a taxpayer I cannot understand why the Government…is presiding over such a situation. None of it makes sense”.

That is a pretty appalling indictment of a public sector body that is simply not paying its bills.

A second example was brought to me by a constituent at a drop-in surgery in Brackley in my constituency. She had been commissioned to carry out work by a Fortune 500 company that in turn was commissioned by the Ministry of Defence to deliver a significant IT solution. My constituent runs a small family business with two employees. The contract, which was for £250,000, was a significant sum. She came to me in desperation as the invoice to the Fortune 500 company for work done was six months overdue. Her bank was about to foreclose on the business, as it had run out of patience with her overdraft.

Equally concerning, my constituent was adamant that I should not name her company when dealing with this issue on her behalf, because she was terrified of losing future business. I wrote to the company and made a general point about the Government’s desire for companies to pay on time, and—surprise, surprise!—within a couple of weeks it paid the invoice. That goes to show that the Government can help not through legislation but by changing the culture, pointing out the unfairness of late payment and insisting on the fair application of the prompt payment code.

My third and final example concerns a legal aid firm supplying a public body. This company wrote to me after hearing about today’s debate. It is a small legal aid firm that supplies the Legal Services Commission, an executive non-departmental public body. It reports that the LSC’s payment terms are eight weeks—twice as long as is normal—but even then, it does not stick to them. Invoices are refused for flimsy reasons, so that they can be sent back and be delayed for another eight weeks, and sometimes they are mysteriously lost in the office.

The legal aid firm employs nine people, and last year paid nearly £300,000 in partnership tax, national insurance contributions, rates and VAT. The Government will lose out on this revenue, and the tax paid by the employees, if the LSC’s late payment drives the business to the wall, which it threatens to do. The firm wanted its words to go on the record:

“Although we have explained that we cannot pay the government until the government pays us, that cuts no ice with either the VAT or the PAYE offices, who hound, threaten and fine us if we are a week late in paying.”

Those are three awful examples of how public sector organisations for no good reason are delaying payments to businesses and so existentially threatening their future success and sustainability.

I hope, along with my hon. Friends, that the Government will be prepared to do something dramatic about this issue. It does not require legislation or expensive action by the Government; it simply requires more effort to ensure that the prompt payment code is signed up to by many more companies, and direct action to ensure that all companies in the public sector, whether they are Whitehall Departments or non-governmental departmental organisations, also sign up to prompt payment to small companies on a fair basis.

--- Later in debate ---

[The Minister for Universities and Science (Mr David Willetts)]

On behalf of what I guess we must now call the one nation coalition Government, I welcome this excellent Back-Bench debate, which has raised a very important issue of great concern to businesses, especially small businesses. I particularly congratulate my hon. Friend the Member for South Basildon and East Thurrock (Stephen Metcalfe) on his opening speech, in which he set out some important policy challenges, which I would like to touch on in my remarks. He spoke with passion and was right to do so, because when we talk about finance for business we must understand that despite our endless ingenious schemes to encourage bank lending and access to finance from the City, one of the best forms of financing for businesses is for them to win contracts and get paid for them. That is an extremely effective form of financing for small businesses and we strongly support it.

There was a slight theme in today’s debate about confusion of identity. It is good to know that the person who has tweeted in my hon. Friend’s name is not him—I hope the Chief Whip knows that, too. We then heard from the hon. Member for Oldham East and Saddleworth (Debbie Abrahams), who is no longer in her place—perhaps she has gone off to tweet. She spoke very well and correctly made the point that although the intention of this debate was to discuss the public sector, we should not forget the importance of improving the performance of the private sector. There is a lot to do in that sector and we are committed to doing it.

We then heard an excellent speech by my hon. Friend the Member for South Northamptonshire (Andrea Leadsom), which included some powerful examples of the kind of problems that small businesses face. I thought, to be honest, that her examples, from Q Technologies and its experiences of dealing with the NHS to experiences of being paid for legal aid, were, quite simply, shocking and indefensible. I do not think that any Minister with responsibility for this sector would wish to defend that. It is very important that the message goes out loud and clear from the debate today that public agencies are expected to pay bills promptly. It is minimum good practice, which we expect across the public sector.

The hon. Member for Stockton North (Alex Cunningham) also drew attention, rightly, to the importance of the performance of the private sector. We heard from the hon. Member for Caerphilly (Wayne David) and I hope, if time permits, to touch on the EU directive and what we are doing about it. Finally, we heard from the Opposition spokesman, the hon. Member for Chesterfield (Toby Perkins), whose recollections of his experiences with Gladys and Sheila brought the House to life.

Let me make it clear where the Government stand on this important issue. We understand that we are committed to supporting small business by ensuring that businesses get prompt payment. Small and medium-sized businesses are responsible for almost half of the £900 billion private sector output of this economy and 60% of private sector jobs. Cash flow is critical for them. That is why, as the British Chambers of Commerce recently set out in their prompt payment report, there are two main challenges, which we are determined to address—first, payment terms which are too long, and secondly, payment terms which are not adhered to. The estimate from the BCC is that UK SMEs are owed almost £36.4 billion in overdue payments, mainly by large companies. This is unacceptable and it needs to improve.

Opening the debate, my hon. Friend the Member for South Basildon and East Thurrock said that the position was deteriorating. There are different ways in which it could be measured. The latest late payment index from Experian shows that UK businesses paid their bills approximately 1.3 days earlier in the third quarter of 2012, compared with the same period last year, but we are not complacent. We know that we still have to do a lot better.

We already have in the UK legislation that gives businesses a statutory right to claim interest from other businesses for the late payment of commercial debt, and we would encourage companies experiencing late payment to use those legal powers that exist. Part of the problem is that many businesses fail to agree payment and invoicing terms before entering into a transaction. That is an area where business practice can improve. But businesses overwhelmingly tell us that they do not want new legislation. We heard that in many of the contributions from hon. Members in all parts of the House this afternoon, so the challenge for the Government, which we accept, is to take positive action, leading by example as a payment exemplar and working to educate businesses and change the culture of late payment.

We entirely accept that the Government must set a good example. Central Government Departments now aim to pay 80% of undisputed invoices within five days. Indeed, in September this year my Department, BIS, paid more than 90% of invoices within this deadline.

[Andrea Leadsom]

It suddenly occurred to me that I would never be forgiven if I did not mention at this point that my district council, South Northamptonshire, is among the top 10 best payers in the country.

[Mr Willetts]

Excellent. I join my hon. Friend in congratulating her council on that excellent performance.

We need to go further. This is a point that was made in several interventions. Let me make it clear. To ensure that the benefits of prompt payment are felt throughout the supply chain and reach small businesses, all Departments have included a clause in their contracts that requires main contractors in turn to pay their suppliers within 30 days. That is a major step forward, but they now have to deliver on it.

To ensure that is delivered, on 9 March this year the Minister for the Cabinet Office and Paymaster General, my right hon. Friend the Member for Horsham (Mr Maude) announced that the Government’s mystery shopper service would be extended to include issues relating to unfair practices in the supply chain. Suppliers can use the service anonymously to escalate concerns about problems in Government supply chains to the Cabinet Office.

My hon. Friend the Member for South Basildon and East Thurrock asked what the Government could do and whether we should identify individual officials and their Departments. We think that the mystery shopper service, which has a direct e-mail connection to the Cabinet Office, where concerns can be pursued, is an effective way we can hold individual Departments, their suppliers and linked public service organisations to account.

In addition, we are committed to ensuring that the prompt payment code is adopted by as many organisations as possible. Signatories to the code commit to paying suppliers within agreed and clearly defined terms and to ensuring that there is a proper process for dealing with any issues that arise.

We are coming up to the fourth anniversary of the code and continue to work with industry bodies to encourage their members to sign up. Only this week, the Minister of State, Department for Business, Innovation and Skills, my right hon. Friend the Member for Sevenoaks (Michael Fallon), who has responsibility for business and enterprise, wrote to the FTSE 350 chief executives to encourage those that have not yet signed up to do so. I commend his excellent letter to the House. If it has not already been placed in the Library, I will ensure that it is. It contains a real sting in the tail because it says that there is significant public interest in the issue of late payment, and that in order to recognise companies’ efforts, he intends to publicise the names of all FTSE 300 companies that have signed up to the code, and to acknowledge those that have not, early in the new year. That is an important step forward.