Late Payments (SMEs)

Ed Davey Excerpts

Wednesday 14th September 2011 Westminster Hall

[The Parliamentary Under-Secretary of State for Business, Innovation and Skills (Mr Edward Davey)]

This has been a fantastic debate, Mr Hood, and we all owe a debt of gratitude to the hon. Member for Oldham East and Saddleworth (Debbie Abrahams) for introducing it. In pursuing this issue, she has shown both her knowledge and her determination. I am sure that she will agree with me that all Members here have not only shown knowledge of what is going on in their own constituencies and in the sector but contributed some interesting ideas and a number of questions. I will try to do justice to this debate by explaining what the Government want to do.

I was economic researcher for the Liberal Democrat party during the recession between 1989 and 1992, and late payment was one of the biggest issues on which we pressed the then Conservative Government. It is depressing that this issue has not gone away. In 1998, Labour passed legislation allowing compensation to be paid in cases of late payment. I never thought that measures such as that would be a silver bullet, but I hoped that they would begin to change the culture. I therefore welcomed that legislation and felt that it was the right approach. None the less, legislation can never sort out a problem. It can begin to change attitudes, particularly in an area in which millions of contracts are made between many different companies of all shapes and sizes.

Things are slightly better than they were in the early 1990s. Nevertheless, we have heard from some eloquent speakers that there is still a problem here, so we need to tackle it. Sometimes, however, the debate on late payment becomes a little simplistic and lacks real evidence. That is not to decry today’s contributions, but we must look at the evidence to ensure that we get to the real causes of late payment so that we can identify the best means of tackling it. We need to diagnose the problem properly.

Late payment is not exclusive to any sector or to any style of business. Although I sympathise with those who say that this is big business abusing its power, an awful lot of payment is between small businesses. The majority of contracts that any small business has are with other small businesses. We should not say that it is just a big business problem against small businesses, because the issue is about more than bully-boy tactics. Research shows that of the moneys owed by large businesses, around 40% is overdue compared with 30% for small businesses. The problem therefore affects businesses of all sizes.

I acknowledge that it is important for large businesses to give a lead here, to step up to the plate and set a good example. There is support across the Chamber for the Institute of Credit Management’s prompt-payment code, which is backed by the UK’s leading businesses and finance bodies. The code requires signatories to pay according to agreed terms, and there are now more than 1,000 signatories. People may say that that is not many, but they represent more than 60% of the total UK supply chain.

The Minister of State, Department for Business, Innovation and Skills, my hon. Friend the Member for Hertford and Stortford (Mr Prisk), who normally speaks on such matters, launched the new “Be Fair, Pay On Time” campaign in June, which backs up the prompt payment code. I agree with the hon. Member for Streatham (Mr Umunna) that we should work on a cross-party basis to encourage even more signatories to this code. Certainly, that is the Government’s aim. We very much want actively to encourage new signatories to this important code.

I agree with those Members who argue that the public sector should be an exemplar. Indeed the previous Government played a role in developing that policy. At the time, the Opposition parties argued that they should develop that policy, too.

There is some confusion over how the Government are performing, which is mainly due to the confusion over the pre and post-election targets. The pre-election target from the previous Government was 90% in 10 days. The target that we have been operating is 80% in five days. We felt that a quicker period was important. My own Department is paying 93.6% of our bills within five days, which is significantly faster than the target. Our evidence shows that the performance in this area across Whitehall has been continuously improving. Private business is also saying that local authorities are improving and paying faster than ever. On average, they pay in 18 days.

[Mr Umunna]

rose—

[Mr Davey]

I am happy to allow hon. Members to speak, but I must say that our record is rather better than it was portrayed.

[Mr Umunna]

One of the other areas of confusion is that the five-day target is an aspiration; the 10-day target is a requirement.

[Mr Davey]

I believe that that is correct, but we are beating our aspirations.

[Fiona O'Donnell]

Some of the most vital SMEs in all our constituencies are local post offices—I have debated this issue with the Minister before—and they depend on the Government for their health. Has the Minister carried out any assessment of the weakening of the requirements on Government Departments on local post offices?

[Mr Davey]

I must confess to the hon. Lady that I myself have not made any assessment of Government Departments in relation to local post offices. I will see whether my Department or Post Office Ltd have made that assessment. If Post Office Ltd has made that assessment, I am sure that it will want to share the information with her.

The hon. Lady said earlier that the Government should work with the devolved Administrations on this issue. The whole of government—whether it is the devolved Administrations, local authorities or even parties working on a cross-party basis—needs to send out a clear signal that we want companies to pay their bills on time. That would make an important contribution towards ensuring that this economic recovery is as strong as possible.

There is an important point that was not made as often as other points during the debate, but it is none the less important to stress, which is the need to improve the way that companies manage their invoices. Obviously, many companies manage their invoices well, but some companies create the problem of late payment for themselves. Better management of invoices is something that we should emphasise. We believe that more than half of all UK business transactions take place with no pre-agreed payment terms, which is astonishing. Barclays has done some analysis in this area and its data suggest that only one in 10 suppliers regularly credit-checks their customers. Clearly, companies themselves need to do some work.

Under the previous Government, my Department undertook some research with Experian to look at payment of invoices to suppliers by four large FTSE 100 businesses. The total value of the sample invoices was more than £1 billion. There was no evidence at all of systemic late payment by those four companies. Typically larger companies in the UK have moved to electronic purchasing and invoicing, which means that late payment is no longer an option for them. I am not saying that there is not a problem with smaller companies; clearly there is, and we have heard contributions to the debate that show there is. However, it is worth putting on record that electronic payment systems in some of the largest companies are beginning to change things.

That research, which was carried out under the previous Government, identified clear evidence of poor invoicing by some suppliers. By that, I mean that invoices were completed incorrectly or submitted late. Consequently, data on payment across the UK economy are generally flawed, because of a single factor—due dates for payment are collected using the date provided on supplier invoices and more often than not those invoices reflect the terms assumed by the suppliers rather than the terms assumed by or contractually defined by the customer. So, there can be confusion about how that type of payment operates in practice.

That is why we see the average time for payment in the UK economy coming out at around 16 days beyond agreed terms. What typically happens is that suppliers assume a 30-day payment period, while the period adopted by the majority of larger businesses is 30 days net monthly; that is, 30 days from the end of the month in which the invoice is received. So we need to work really hard to ensure that suppliers have the information support that they need to manage their customer relationships and cash flow. Work is being done to try to help suppliers not only by the Department but by outside organisations. For example, since 2010 there have been more than 250,000 downloads of the simple checklists developed by the Institute of Credit Management to help suppliers manage customer relationships.

Inevitably, legislation was discussed during the debate. As I mentioned earlier, the UK was one of the first countries to introduce legislation setting out the rights of a supplier to agree payment terms and to secure payment. When we consider what other legislation might be introduced, I must point out that the majority of business bodies oppose any strengthening of the current legislation. Partly that is because many suppliers have long-standing relationships with their customers and—as has been mentioned—they are unlikely ever to resort to legal action to chase up payment from those customers. Where suppliers seek to use legislation to secure payment, weak invoicing means that all too often the courts are unable to intervene meaningfully. It is not that the courts are unwilling to intervene to enforce the law. Instead, when these matters have been examined, it has emerged that sometimes it was the supplier that failed to invoice the customer properly.

That is not to say that I do not see legislation as being entirely unimportant for setting the environment in this area. I encourage suppliers to set out their invoices with the agreed payment terms, stating very clearly the fee that will accrue if payment is not made by the due date. That is what the hon. Member for Streatham (Mr Umunna) was advising his clients to do when he was in the legal profession. It is very important that these contracts are set out clearly. If they are not set out clearly, suppliers have no chance of using the legislation, whatever it might be.

There was a question about the European legislation on late payments. Actually, UK legislation on late payments has played a really important part in shaping the EU legislation, and the recently revised EU directive on late payment very much mirrors UK practice. Because the revised EU legislation follows UK practice so closely, we are seeking advice on whether it will entail any changes whatsoever to existing UK legislation.

[Mr Umunna]

I agree with the Minister that the EU regime is essentially very similar to our existing domestic regime. However, the EU regime introduces minimum fixed amounts of compensation for late payment, and I think that it also slightly tightens the time periods for payment.

In the five minutes that the Minister has left to respond to the debate, can he say what more can be done about expanding the compliance with targets of the public sector organisations beyond Whitehall? In Whitehall, the worst offender on late payment is the Department for Communities and Local Government and surely that Department has a role to play in getting local authorities to pay suppliers promptly and on time. As I said in my speech, in some senses local authorities are a bigger problem than central Government in terms of public sector bodies failing to pay on time.

[Mr Davey]

The Secretary of State for Communities and Local Government is keen to ensure that all Government Departments are doing their best, and I am sure that when he reads this debate he will note the hon. Gentleman’s comments.

Regarding the hon. Gentleman’s comments on the EU directive, we will undertake a second consultation in the winter of 2011-12 and will then transpose the legislation into UK law in the first half of 2012, which is earlier than we are required to do. I hope that that addresses some of the concerns that colleagues have expressed during the debate.

In the final minutes that I have left, I want to try to address some of the points that I have not yet dealt with. For example, my hon. Friend the Member for Solihull (Lorely Burt) asked how we are progressing with the approved supplier status, having committed ourselves to trying to simplify the application forms. I recommend that she reads the Cabinet Office report published in July that shows that 14 out of 17 Government Departments have removed the requirement for pre-qualification questionnaires for contracts for less than £100,000. As she is aware, those questionnaires were the really big bugbear that many companies complained to us about. The remaining three Departments are piloting an open group process. So there has been some real progress. Clearly there is more to do, but we are going in the right direction.

There were a number of excellent contributions to the debate. I particularly liked the contribution of my hon. Friend the Member for Newton Abbot (Anne Marie Morris), who showed a lot of knowledge of this issue. She made the point that late payment is, in many ways, a private sector issue, because both this Government and its predecessor have made some headway on late payment within the public sector. She also referred, quite rightly, to the issue of trade credit insurance. That is one of the issues that I asked about in preparing for this debate. In many ways, trade credit insurance is a private sector solution. The market for trade credit insurance is relatively small and—almost by definition—those people who use it tend to be more educated and better trained in managing their cash flow and invoicing. She referred to the sausage firm in her constituency, which is obviously now growing with a bang, and she was quite right to say that trade credit insurance is not the answer for everything.

My hon. Friend was right to say that we should be very careful before we go down the compulsion route. That has always been my view too and the examples that she referred to from Australia and other EU countries that have gone down that route showed that in the end compulsion is not helpful to businesses on either side of the late payment issue.

My hon. Friend also talked about accounting standards. She will be aware that the Government do not want to tie up business in red tape, but as I am the Minister with responsibility for corporate governance and as I am looking at narrative reporting, I will certainly take on board her points and consider them very carefully.

The Minister of State, Department for Business, Innovation and Skills, my hon. Friend the Member for Hertford and Stortford, who is the Minister with responsibility for small businesses, will read this debate with relish, because of the quality of the contributions to it. I thank hon. Members for their contributions, and I particularly thank the hon. Member for Oldham East and Saddleworth for ensuring that we had the opportunity to debate this issue.