Business Transactions: Cash Retentions

David Simpson Excerpts

Wednesday 27th January 2016 Westminster Hall

[David Simpson (Upper Bann) (DUP)]

I beg to move,

That this House has considered cash retentions in business transactions.

As I lead off in this debate, I will say first that I know that some of my own party colleagues and others have indicated that they want to make some form of intervention. Time is limited, so I will try to keep my points to a minimum to allow as many people in as possible, Mr Crausby, if that is okay with you. If it is not possible, I hope that anyone who does not manage to get in will please accept my apologies.

Let me start with this point: cash retentions, specifically in the construction industry, are currently responsible for £30 million of moneys being held back from small firms. Normal guidelines state that cash retentions are calculated at around 5% of the amount certified as due to the contractor. I must add that this 5% is very often the firm’s profit margin.

By and large, the lead contractor will get paid in instalments throughout the term of a contract, as very often there is a large turnover on specific jobs. This has been normal practice for many years. However, we then must turn our focus to the issue of subcontractors and fair payment practices.

[Jim Shannon (Strangford) (DUP)]

This is a massive issue and it is good to see the Minister for Small Business, Industry and Enterprise in her place; I hope that she will give a very positive response to the debate. Just today, the news back home in Northern Ireland is that the Groceries Code Adjudicator has found Tesco guilty of holding back moneys and of delaying invoice processing as well. At long last, we have an adjudicator that has teeth. It is just a pity that the legislative power to impose fines was not used, because the inquiry into this case started before it existed. Does my hon. Friend agree that at long last the adjudicator can make companies pay?

[David Simpson]

Yes, I agree entirely with my hon. Friend. We have raised this issue of the Groceries Code Adjudicator in the Environment, Food and Rural Affairs Committee as well. It is good to see some power coming into this area, so that the larger companies can pay this money.

I mentioned subcontractors and fair payment practices. This area is where we begin to see major difficulties and cash-flow problems for companies. I can report in this debate today that £40 million worth of cash retentions were lost by small firms in 2015.

[Debbie Abrahams (Oldham East and Saddleworth) (Lab)]

I congratulate the hon. Gentleman on securing this debate. Was he as disappointed as I was last year when the Government failed to act on this issue and did not implement my amendment to the Small Business, Enterprise and Employment Act 2015, which was specifically about cash retentions? And does he hope that the Minister and the Government will listen as the Enterprise Bill goes to the House, which is another opportunity for this issue to be addressed?

[David Simpson]

I agree that that was disappointing, and I will touch on it further in my remarks later. I think we have a listening ear from this Minister, but we will see when she responds to the debate.

[Bill Esterson (Sefton Central) (Lab)]

I congratulate the hon. Gentleman on securing this debate. He mentioned subcontractors. May I quote to him a subcontractor in my constituency—Steve Murray, the managing director of W T Jenkins? He told me:

“Cash retention is harming our sector and our company in particular. We have to wait far too long for the retentions, if we receive them at all. We have lost a lot of revenue over the last five years due to many companies going into administration and taking our monies with them.”

On Monday in his office, Mr Murray showed me a shelf full of files about firms that owe him money, in some cases for more than eight, nine or even 10 years.

[David Simpson]

Again, I agree with the hon. Member. I could do exactly the same thing in my constituency and I am sure that other Members could do the same in their constituencies. This situation is unacceptable and we will address it as we go through the debate.

[Ms Margaret Ritchie (South Down) (SDLP)]

rose—

[David Simpson]

I will give way to the hon. Lady; I will never be forgiven if I do not.

[Ms Ritchie]

I thank the hon. Gentleman for giving way and I congratulate him on securing this debate. Does he agree that although the Government are now undertaking a cost-benefit analysis of the retention system with the express aim of eliminating these retentions by 2025, there is a need for a statutory retention deposit scheme, which could be brought in through the Enterprise Bill and which would be similar to the tenancy deposit scheme as a means of protection?

[David Simpson]

I think the hon. Lady has seen my speech.

[Jim Shannon]

She wrote it. [Laughter.]

[David Simpson]

We will deal with that as well—great minds think alike.

The figure that is reported is some £40 million, which is horrendous. Small companies come to the stage where they are forced to write off money they are owed, because the cost of recouping it would be far greater than the sum itself and therefore it is futile for them to try to recoup it.

The Government have been very vocal in leading the business community to look forward and they have encouraged businesses on sustained growth and productivity, which is a good thing. I know that the Minister has done that; she is very pro-business. I have been approached by firms in my constituency, and I know that this is a UK-wide problem. The firms in my constituency say they are on their knees, largely due to the retention of moneys they cannot recover from larger contractors that have already been paid for the job they have done.

A firm in my constituency reported to me only last week that it has had to wait up to four years for retention money when contractual agreements state that 12 months is the limit. They have categorically stated that this situation hinders their plans for growth. In the majority of these cases, the contractor has already been paid but holds on to these moneys to counteract discounts.

A significant employer in Northern Ireland forced a loss of £10 million to a large number of subcontractors and suppliers when it went into insolvency. While that big company faced the headlines, many of the small contractors were simply unable to sustain their business; they simply had to bow down and close their doors, which resulted in significant job losses.

[Alan Brown (Kilmarnock and Loudoun) (SNP)]

I congratulate the hon. Gentleman on securing this debate; he has made some good points. On that point about cash flow, I am a civil engineer and have worked in the construction industry, so I am well aware of the effects that cash-flow problems can have on small firms.

Is the hon. Gentleman aware that the Scottish Government are currently trialling in the area of public procurement the operation of project bank accounts, which are underpinned by legal trust status? The system allows payments to be made into a project bank account, where the money is legally protected for subcontractors, so they actually get their money quicker. Of course, that system can be used to manage retentions as well, completely eliminating the cash-flow problem. Does he agree that the Minister should perhaps consider that system and speak to the Scottish Government about that trial?

[David Simpson]

I thank the hon. Member for that intervention and his point certainly has validity; it is worth looking at, to see whether something could be done in that field to try to resolve this issue for small companies.

I know that the Government are pro-business; the Democratic Unionist party and other Northern Ireland parties have seen our economy in Northern Ireland grow. It is the role of Government, MPs and other politicians to create the circumstances for businesses to develop. I speak as a businessperson myself—my business interests are set out in the Register of Members’ Financial Interests—and it has taken my company 36 years to get to where it is today. Government have played their part in that, but this issue of cash retentions goes right to the core of small businesses.

[Jim Shannon]

I thank my hon. Friend for giving way again. I know that he and the hon. Member for South Down (Ms Ritchie) have been involved in the Patton Group issue. When the Patton Group became insolvent, almost £10 million in cash retention was lost. Does he agree that the reintroduction of the aggregates levy scheme and the exemptions within that scheme would enable and help cash flow?

[David Simpson]

I think so, yes. I will touch on that later. My hon. Friend mentioned a company that I referred to earlier, although not by name. It was a major blow for subcontractors in Northern Ireland. In 2012, poor payment practices were discussed in the Northern Ireland Assembly, and my hon. Friend the Member for East Antrim (Sammy Wilson), who was the then Minister of Finance and Personnel, was questioned on why Government should intervene. His answer was:

“The reason that it is so important is that the businesses at the receiving end of this unacceptable practice are, more often than not, small and medium-sized enterprises…on which we are depending to help rebuild our economy.”

That is not just the economy of Northern Ireland, but the economy of the whole United Kingdom.

[Alison Thewliss (Glasgow Central) (SNP)]

I thank the hon. Gentleman for securing this important debate. Does he agree with the points that SELECT, which is the Scottish electrical contractors association, raised with me? If companies are ending up propping up larger businesses, they have less money to invest in education, training and innovation within their own business.

[David Simpson]

That is right, and that is exactly the problem. The issue needs to be addressed. Speaking from Northern Ireland’s point of view, it has been a major obstacle to small and medium-sized companies moving forward. To add to that, those SMEs have no protection against cash retentions. Banks do not consider unprotected retentions as sufficient security for lending purposes, and that is a major problem for SMEs. Even though that money is on the books, the banks will not let them use it as security for overdraft facilities. In addition, and perhaps most alarming of all, public bodies and large companies are using millions of pounds of small firms’ retentions to boost working capital. That is happening with a lot of the major supermarket chains. They are using the money that they hold back to move their companies forward, to buy premises and to buy land. That has been the story for some considerable time. That is not just speculation; it is happening in today’s society while the Government are reviewing the matter but have not yet agreed to legislate, and we need to see that legislation.

My next comment is on a somewhat disappointing matter. In 2015, the Under-Secretary of State for Business, Innovation and Skills, Baroness Neville-Rolfe, acknowledged the problem and said:

“issues with retentions go to the heart of the industry’s business models…low levels of capitalisation mean that the industry is heavily reliant on cash flow.”—[Official Report, House of Lords, 3 March 2015; Vol. 760, c. 127-28.]

In addition, she said that the Government had no plans to legislate to tackle the issue. That point was raised earlier, and I again emphasise that the Government need to look at that.

While the sector is delighted that the Government recognise that there is a problem—they are to be supported in their efforts to eliminate cash retentions by 2025—and I very much welcome their long overdue review of the retentions system, we need to see some action.

[Ms Ritchie]

I thank the hon. Gentleman for giving way again. He is making a compelling case for the elimination of cash retentions. Would he agree with me that the situation, particularly in Northern Ireland, for those involved in the construction industry was compounded when the aggregates levy credit scheme was withdrawn? That was remedied in the European Commission and the European Court of Justice some months ago, but the British Aggregates Association is now taking a further case against the Commission ruling. That could plunge our industry into further peril and financial difficulties.

[David Simpson]

That is an excellent point, and we have been lobbied on that over the past days and weeks. That case could have a devastating impact on the construction industry in Northern Ireland, so it will be fought tooth and nail. We hope that the Government will support people in that.

It is not enough for the Government to talk about removing retentions by 2025; we need to see some form of legislation to stop retentions. We cannot sit back and ignore a potential loss of £360 million over the next nine years, as calculated by the loss of £40 million in 2015, while the Government work towards elimination but have no plans to legislate. That is grossly unfair and frankly hugely debilitating to the construction sector and the UK economy.

There has been huge interest in the debate. I am sure that many Members, like me, have been briefed by the Specialist Engineering Contractors Group, which has been the voice for SMEs on this poor payment practice. Like many here today, I recognise that cash retentions work in theory. They were originally established as a protection against any defects that might have been left when a job was finished or left unfinished. These days, since all contractors have to go through a lengthy pre-qualification process to be able to take on any job, there should no longer be any need for retentions to be withheld. However—this is quite embarrassing for the UK—we still have not legislated to have retention moneys placed in safe keeping. France, Germany, America and Australia are already leading the way and have put in place effective processes to secure the money, should the larger contractors go into insolvency or adopt poor payment practices when releasing the finance to their subcontractors.

[Gavin Robinson (Belfast East) (DUP)]

My hon. Friend is being very generous with his time. Does he believe that there is a parallel with the legal industry, where a solicitor can exercise a lien over something of importance until the contract is concluded, whether that is deeds, money or cash? That is regulated by the Law Society. Lessons could be learned from the regularised and legislated procedure of a solicitor’s lien.

[David Simpson]

That question could only come from a barrister, but my hon. Friend is right. There is a role for that. As MPs, we all have companies that come to our offices or that we go and visit. Time and again, retentions are the issue that is raised, and some companies and subcontractors are begging us to try to resolve it.

I listened carefully to what the hon. Member for Kilmarnock and Loudoun (Alan Brown) said, and there is an option to look at that, but as the hon. Member for South Down (Ms Ritchie) said, we already have a suitable model in place under the Housing Act 2004 with the tenancy deposit schemes. Deposits paid in connection with shorthold tenancies must be placed in a Government-authorised deposit scheme. Similarly, retention moneys could be placed in a secure deposit account, as already happens in many other countries. That option is there, so perhaps the Government could look at that to try to ease the burden.

The Government and the Minister know that the construction industry in particular has gone through a devastating time. That is perhaps not so much the case in London and the big cities on the mainland—I think there was something like 12% or 13% growth last year in the City of London alone—but the regions of the United Kingdom have found it difficult to try to get the construction industry moving again. Money is being held back and banks will not take retentions as guarantees. The industry is struggling with cash flow.

I will finish now because I am excited to hear what the Minister is going to say to us, but I must ask the Government why they would object to developing a model for the funds that would allow our SMEs, which I and other Members often champion in our constituencies, to be the backbone of our growing economy. We need protection against poor payment practices and the misuse of SME funds, because it is their money.

--- Later in debate ---

[Anna Soubry]

Never. I can absolutely assure the hon. Lady that I take the issue very seriously and know that we need to make progress. There are reasons why we would want some sort of retention, but not in a way that is onerous, particularly for small businesses. As I said earlier, Simon Bingham came to see me and gave me real-life examples of how some of the bigger companies effectively use retentions for their cash flow. The money can sit with them for year after year, and the small business takes a serious hit.

[David Simpson]

I accept what the Minister is saying, and it will be of some comfort to some companies. However, she will surely agree that large companies should not be allowed to hold on to money and use it to their own advantage to build their own businesses while small companies suffer.

[Anna Soubry]

I absolutely agree with the hon. Gentleman. What happened yesterday with the Groceries Code Adjudicator has already been mentioned. I am grateful for the comments of the hon. Member for Strangford (Jim Shannon) on that. It was a very important day to see the Groceries Code Adjudicator not holding back, not pulling any punches, and absolutely making it clear that Tesco had flagrantly breached the groceries code in a way that was completely unacceptable. That will have consequences for Tesco, although it will not be subject to a fine because the provisions have only just come in. I pay tribute to the Groceries Code Adjudicator. Bigger companies have got to learn and understand that none of us will tolerate their not playing fairly and properly, especially in relation to smaller businesses.

Our definition of smaller businesses, which is accepted by everybody, is any company that employs fewer than 250 people, so they can be quite large small businesses, not just sole traders who might employ one or two people. My officials are keen for me to say that the Government tell various agencies that when they handle taxpayers’ money, they must follow guidance and not engage in poor practices. It is not mandatory, but we provide subtle hints and nudges. Apparently the Highways Agency does a good job, but not everybody does, so there is much more work to be done. I undertake to take the matter forward with my officials to see whether we can make progress.

Good points have been well made today. Such practices must be brought into 2016. We must make sure we do the best thing by our small businesses.

[David Simpson]

We can all sympathise with the companies in their difficulties with banks and so on, but sympathy does not get the job done. That is what the companies tell me when I meet them. I can go on to the next case or deal with another constituency issue, but they want action. I am grateful for what the Minister has said thus far, and I trust that the Government will deliver on it.

[Anna Soubry]

I could not have put it better. I will definitely see what progress we can make. I am happy to continue to work with the hon. Gentleman and with the hon. Member for Oldham East and Saddleworth to try to sort this out once and for all and as soon as possible.

Question put and agreed to.