Late Payments (SMEs)

Debate between Chuka Umunna and Fiona O'Donnell

Wednesday 14th September 2011 Westminster Hall

[Mr Chuka Umunna (Streatham) (Lab)]

I congratulate my hon. Friend the Member for Oldham East and Saddleworth (Debbie Abrahams) on securing this debate. Frankly, the subject has not received the attention that it deserves, given the adverse impact of the fact that the economy has flatlined over the past nine months.

Everybody knows that there are disagreements about the Government’s economic strategy, but the Opposition agree that growth, which we all hope will return, will ultimately be driven by the private sector. If Britain’s 4.47 million small and medium-sized businesses do not thrive and prosper, our economy will not thrive and prosper. The simple reason is that they are the bedrock of our economy. Many of the owners and entrepreneurs running these businesses have identified a gap in the market, left their jobs and risked all to set up shop. They have had to cope with a difficult economic climate and have had many struggles.

My hon. Friend the Member for East Lothian (Fiona O'Donnell) spoke of the problems of SMEs in accessing finance. At the end of the day, they work hard and employ local people. They treasure every customer. It is not only about making money and a decent living; many of them have a huge passion for their businesses and many of their customers are the large companies about which we heard so much during this excellent debate.

The eight speeches that we have heard so far amply demonstrated the trials and tribulations of businesses in this country, but many of those businesses are going under not for want of sales, but because they have been let down by their customers. The culture in this country is that customers and those who receive supplies seem to think that it is okay not to pay for goods and services on time. I shall give an example of that attitude.

About 20 years ago, a well known businessman famously said how skilful he had been in stringing along his company’s creditors. That businessman was Lord Heseltine, currently the chair of the independent advisory panel for the regional growth fund. When challenged about that statement, he did not withdraw it but said:

“Anyone who has started a small business knows they are likely to need tolerance. Small business people know it, creditors know it, bankers know it”.

The problem is that such unacceptable attitudes still continue today. It is not surprising that 73% of members of the Federation of Small Businesses, responding to a survey in May, reported that they experienced late payments.

The Opposition carried out a survey in July and August of more than 150 businesses, and 83% of them said that the problem had become worse over the past year. My hon. Friend the Member for Oldham East and Saddleworth cited the situation of Ann and Harry Long, whose business was forced under by late payments. The hon. Member for Burton (Andrew Griffiths) spoke of his family’s engineering business’s struggles in dealing with late payments.

The consequence of all this, as my hon. Friend said, is that SMEs are owed a staggering £24 billion—more than the entire budget of the Department for Transport. It is not only a question of lost cash. There is also a huge loss of productivity; 158 million man hours are wasted every year in chasing bills. The latest figures from the Department for Business, Innovation and Skills show that 18% of business failures are a direct result of late payment.

I turn to where the problem resides. We know that it is primarily a business-to-business problem, although we heard today from many Members that it is a problem also for the public sector. Indeed, the hon. Member for Kettering (Mr Hollobone), who is no longer in his place, referred to the irony of HMRC owing moneys and paying late, yet demanding the payment of taxes. My hon. Friend the Member for Pontypridd (Owen Smith) also referred to HMRC.

Shortly after Lord Heseltine made his famous comment, the Labour Government responded to the growing problem with the Late Payment of Commercial Debts (Interest) Act 1998. That Act enables firms to charge interest and obtain compensation on overdue payments. If a firm has agreed a credit period with the purchaser of its goods, interest applies from the expiry of the credit period until the invoice is paid; if no credit period is agreed, a default credit period of 30 days applies instead. I appreciate what has been said, but although that Act serves as a deterrent it requires a certain amount of courage for businesses to litigate in such circumstances.

Following the 2008 crash, the Government worked with others to set up the prompt payment code. In the March 2010 Budget, shortly before the election and leaving Government, we tightened the existing rules governing payments by the public sector, setting Departments the goal of paying 80% of undisputed invoices within five days, and requiring them to do so within 10 days. Departments were also compelled to include clauses in contracts with suppliers, to ensure that contractors paid any subcontractors within 30 days.

Clearly, more needs to be done. In her excellent speech, the hon. Member for Newton Abbot (Anne Marie Morris) talked about some of the things that SMEs can do themselves, including ensuring that they have a written contract. When I worked as a solicitor, I always encouraged my business clients to have a written contract. She also talked about the need for SMEs to carry out credit checks.

The hon. Member for North Swindon (Justin Tomlinson) also talked about the need to ensure that invoices are chased in a timely fashion. A number of suggestions have been made about what more we need to do. I have publicly said that I welcome the Government’s decision to carry on with our prompt-payment code. I should like to work with the Minister and his colleagues on a cross-party basis to get more companies, particularly large ones, signed up to that code.

We need to ensure that not only Whitehall Departments but all public sector organisations meet the 10-day and five-day targets. It is interesting to note that in the Federation of Small Businesses survey, those who reported problems with late payments from local government exceeded those who reported problems with late payments from central Government Departments and agencies.

[Fiona O'Donnell]

Given that the health and strength of the economies of the devolved nations of this country benefit from being part of the United Kingdom, is it not important that the Minister should also work with them to ensure that the practice is spread across the UK?

[Mr Umunna]

How could I possibly disagree with such a fantastic suggestion?

The Government need to be ever vigilant in enforcing the public sector targets because the figures obtained by the Opposition in July showed that seven Departments had not paid around £3.5 billion worth of invoices within the five-day prompt payment target. The Government must improve their monitoring of Departments to see whether they are meeting the target. At the moment, monitoring is quite patchy.

The hon. Member for Solihull (Lorely Burt) said that the prompt-payment target should be enforced all the way down the supply chain, and I could not agree more. The EU directive has also been mentioned. Although some Conservative Members are not famed for their love of Brussels, the Minister himself is. Perhaps he will ensure that the EU late-payment directive is transposed some time before the March 2013 deadline.

In conclusion, successful firms with sound business models are going under because customers abuse their position of power and disregard their contractual obligations to pay on time. Given that we all agree that SMEs have a key role to play in contributing to the future prosperity of the country—I should be careful to say here that I know that the micro, the small and the medium-sized business are all very different—we must do all we can to ensure that they are paid in a timely manner.