Late Payments (SMEs)

Fiona O'Donnell Excerpts

Wednesday 14th September 2011 Westminster Hall

[Fiona O'Donnell (East Lothian) (Lab)]

It is a pleasure to serve once again under your chairmanship, Mr Hood, our having served on the Health and Social Care (Re-Committed) Bill. I know that we can look forward to a firm but fair hand in proceedings today.

I join Members in congratulating my hon. Friend the Member for Oldham East and Saddleworth (Debbie Abrahams) on securing this debate. The issue is of concern not only for my constituents but for us all, so I am pleased to see Members from all nations of the United Kingdom present to participate in this discussion.

I thank the shadow Minister, my hon. Friend the Member for Streatham (Mr Umunna), for the work he has already undertaken in his new post in reaching out to businesses across the UK. I apologise for the fact that so far I have not provided him with information from my constituency, but work is ongoing. I am working with my political partner, the MSP, Iain Gray, to assess the challenges facing businesses in East Lothian. Although that is good for joint working, it is not so good for meeting deadlines.

This issue is vital, especially in my constituency, because the hope for economic recovery, for growth, for more money to go into the economy and, importantly, for more jobs lies with the public sector and SMEs. The issue is relevant to my local employers when they are considering taking on new staff.

The one bill that employers must meet every week or every month is that for wages. We have seen evidence of slippage in Whitehall Departments achieving the five-day target. The impact of a Department being a couple of days shy in meeting the target might be viewed as small, but, bearing in mind the fact that private companies may not have signed up to the target, many companies were assured by the good practice set under the previous Labour Government because they knew that money would be in their accounts. That security meant that they could meet their wages bill.

Labour’s opponents criticised its manifesto and plans to increase national insurance tax, saying that it would inhibit growth in jobs, but confidence in the economy and in their cash flow is far more important for SMEs considering taking on new staff. If youth unemployment in my constituency is to be targeted, with an increase in the number of apprenticeships for young people and those retraining and reskilling, it is vital that the Government support the health and stability of SMEs.

My hon. Friend the Member for Oldham East and Saddleworth spoke of the danger of a contagion, and in this respect I can draw on my experience of working in the private sector. As a company’s cash flow starts to become restricted, it must start to decide which bills to pay, and when. The health of the small business sector is under threat because many companies are now having to make such decisions.

SMEs face a resource issue. We did not have the capacity vigorously to chase late payments or to send threatening legal letters, which meant that larger companies and the public sector, aware of our dependence on them, could feel secure in not making payments on time.

[David Simpson]

Although not all the public sector signed up to the five-day target, I acknowledge that it is a good thing, but does the hon. Lady agree that the problem is that if a private sector company is not being paid it will go to the man behind and say, “I’m not being paid quickly enough to pay you”—a chain reaction? How do we ensure that the chain works as we would want?

[Fiona O'Donnell]

I thank the hon. Gentleman for his intervention. It is the job of the Government to set the tone and encourage businesses to change that culture by making it clear that late payment is not acceptable.

The issue must be set in the context of the many challenges facing SMEs in my constituency, across Scotland and across the UK, such as rising energy and fuel costs—having to fill vehicles at the pumps, which particularly affects large rural areas—VAT increases and a shrinking public sector. I appeal to the Minister to recognise that, yes, we need to rebalance the economy—especially in Scotland, where we are far too dependent on the public sector—but also that many small businesses are dependent on the public sector for their health and economic activity and if we shrink the public sector too quickly they will not have a chance to adapt to the challenges the Government are setting them.

We welcome the Vickers report and the prospect of more effective bank regulation, but I appeal to the Minister to ensure that it is not SMEs that pay the cost of that regulation in increased credit charges and more restrictive access to credit.

The Government can act on this issue and make a real difference. Labour started that work in government, but the danger is that we are slipping into reverse. I therefore hope that the Minister gives a positive response to the proposals set out by my hon. Friend the Member for Oldham East and Saddleworth. There is an opportunity for Government to change the culture and to give a lead. I look forward to the Minister’s response.

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[Owen Smith (Pontypridd) (Lab)]

It is a great pleasure to serve under your chairmanship, Mr Hood. I congratulate my hon. Friend the Member for Oldham East and Saddleworth (Debbie Abrahams) on securing the debate, which has been extremely interesting so far. We have heard a huge number of positive and constructive ideas from both sides of the Chamber, which is a measure of the interest in SMEs and the recognition that they are, as we heard in the statistics which my hon. Friend has mentioned—I will not repeat them—the backbone of our economy.

I have experience of running an SME. I worked in a television production company, although not for a huge amount of time. I have also worked in quite a few large companies, so I have seen the interaction from both sides of the fence. The obvious lesson that came from that experience was, first, that turnover and cash flow are critical for small companies, especially in the early days. Late payment is therefore central to their viability in not only the long term, but the short term, especially in the early days. Secondly, as several hon. Members have said, large companies have enormous power to make or break small companies through the contracts that they dictate and put in place and through the payment structure that they observe.

In a recession and a downturn in the economy, all those problems are compounded. Small companies’ cash-flow problems become exponentially greater. Larger companies—here we come to where the late-payment culture intersects with a wider culture of irresponsibility in our corporate sector—are instantly tempted to renegotiate contracts, and they are often encouraged to do so by their procurement, supply and legal teams. They are tempted to pass on their problems to the supply chain and to screw down on smaller suppliers by squeezing the maximum amount out of them to insulate themselves. I have seen that; it is a common occurrence, and late payments are part of it. It is no surprise, therefore, that late payments have increased in the recession; indeed, that is inevitable because they are standard practice among large firms. Although they do not happen only in this country, they are a particular problem and cultural issue here.

One interesting aspect of the debate is the number of hon. Members from different parties who have said that the Government have a large role to play, rather than that the best thing for our economy would be for the Government to get out of the way. In this instance, there is clearly a real interest in the Government intervening and playing a leading role.

[Fiona O'Donnell]

May I say that television production’s loss is our gain? There was a large gathering of Eurosceptics last night—[Interruption.] I am disappointed. However, does my hon. Friend agree that introducing the EU directive on late payments would be one way for the Government to ease this problem?

[Owen Smith]

Yes. Indeed, they should think of introducing it earlier than anticipated. Europe clearly recognises that late payment is an issue. The Government should recognise that it is an issue, as the Opposition do, and they should introduce the directive. I hope the Minister will tell us he is interested in doing that.

The Opposition have long recognised that late payment is an issue. As we have heard, several pieces of legislation were introduced in the late 1990s. Initially, there was legislation allowing small companies to charge interest and seek compensation. Subsequently, the Labour Government sought to set an example by setting targets. They also talked about the need for a greater culture of responsibility on the part of all businesses. They set an example through the targets that they set Departments, although they should have gone further and pushed that right out across the public sector. The current Government would do well to look to that example. They believe in a big society, and they could use a bigger society to bring about that public good.

Late payments also relate to a wider issue: the culture of dog-eat-dog, devil-take -the-hindmost, beggar-thy-neighbour irresponsibility—call it what you want—that is an absolutely common feature of corporate life in this country. Suppliers are vital for all large firms, but they are inevitably and invariably low on the list of priorities for large firms. Some people, including Government Members, might say that that is inevitable in a system predicated on the primacy of shareholder value, but that system should not preclude other objectives, such as social responsibility. The most immediate form of social responsibility that larger firms can show is responsibility towards the welfare and viability of smaller firms. That is a matter not only of late payments, but of the way in which larger firms move their investments.

In my constituency, there is a filters factory called Sogefi. It is now Italian-owned, having been purchased from a British company a number of years ago. It is downscaling because its order book is declining. Two hundred jobs will probably be lost at that firm, which is in the Rhondda—a part of the country where there are all too few well paid and secure jobs. The knock-on effect of that company cutting jobs and potentially eventually moving on is enormous, because 12 or 13 suppliers throughout the area rely on it. One thing that we have failed to impress on the company is that it has a responsibility to those suppliers, because it clearly does not feel that it has. The culture of feeling that a company’s primary job is to look after its own shareholders and that it is for other companies to worry about themselves is precisely what motivates and underpins the culture of late payment in our country.

What do we need to do? Clearly, the Government need to set a better example. The hon. Member for Kettering (Mr Hollobone) has mentioned HMRC, and other hon. Members will have had builders in their area tell them that the chaos at HMRC—especially over the construction industry scheme—has resulted in enormous backlogs in the reimbursement of taxes already paid by small construction firms. That is but one example where the Government need to intervene to provide the resources to ensure that small firms—in this case, construction firms—do not go under.

This is also a question of the Government pulling their socks up when it comes to hitting the five-day payment target, because they are falling back right now. My understanding is that in the last quarter of the Labour Government we were hitting about 90% of the target figure for five and 10-day payment, but we are now somewhere south of 80%. That looks like falling back to me, but if my statistics are wrong the Minister can correct me—I would be delighted to learn that the figures are better than I thought.

We should be looking at introducing the European directive early and expanding that payment culture to the whole public sector. However, other aspects of intervention and legislation should not be off the table. It is not fashionable to talk about regulation, but clearly regulation is required in the present context; there seems to be a huge amount of consensus about that. I thought that the idea that we heard a moment ago about changes to accounting standards, and naming and shaming, was excellent. It would not necessarily require changes to legislation. Filing requirements at Companies House should also be looked at. Although the hon. Member for Newton Abbot (Anne Marie Morris) has rejected the notion of standard default contracts, the Government should look at the idea of minimum standards in contracts to try to marshal larger firms’ behaviour, so that they do not instantly fall back on screwing people lower down the food chain, which inevitably happens.

The Government have an enormous role to play. It is a myth, as the debate has shown, that the most effective way to get growth and efficiency in the economy is for Government to get out of the way. That myth has been wholly exposed by the recent crisis in capitalism. Late payments are a small but telling example of how the Government have a vital role to play. I hope that the Minister and his party recognise that.

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[Andrew Griffiths]

Thank you, Mr Hood.

The hon. Lady had all of us in the Chamber nodding in agreement and support. We all—from all the parties, and all the nations represented here—want to do more to support small and medium-sized businesses, but such businesses in my constituency, and, I am sure, in the hon. Lady’s, do not want us to engage in party politics. They want us to work together and not to make party points.

I know that time is short and others want to speak, but I want to focus on an issue that has been raised with me in my constituency several times. We all go and talk to people who run small businesses, who tell us that things are tough, but that they are surviving. They tell us about difficulties with finance and the banks, and they have faced difficulties with late payments for many years. My family had a small engineering business and had to endure the “cheque in the post” argument when we chased payment of invoices after waiting a long time. However, a new phenomenon has begun to hit businesses in my constituency, and elsewhere. Large companies are arbitrarily extending their supplier payment terms. In recent months some larger businesses have decided to extend their normal payment terms of 30 days to 60, 90 or, in some cases, 120 days. Small businesses, which are desperate for the contract and do not want to lose the potential for future business, must live with having to finance an extra two or three months while they wait for payment.

I pay tribute to the Federation of Small Businesses, which has done a great deal of work on the issue.

[Fiona O'Donnell]

Does the hon. Gentleman agree that in that competitive and hungry market many SMEs take the risk of doing business with companies that they know may not have the best record of invoice payment, because that is the reality in these tough economic times?

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[Justin Tomlinson (North Swindon) (Con)]

I realised that there might be a bit of a gap, Mr Hood, so I thought I would try to build on some of the excellent speeches that have been made. My remarks will be brief. Before I became a Member of Parliament, I ran, for 11 years, a small business that would have fitted excellently within the category that my hon. Friend the Member for Newton Abbot (Anne Marie Morris) has championed through her work on micro-businesses.

In the spirit of praising the public sector, we should recognise that if a small business can secure a contract with the public sector it has a far better chance of being paid quickly. As several hon. Members have said, cash flow is king, and that makes a difference. However, it is extremely difficult for a small business to secure those public sector contracts, which are nearly always snapped up by the big boys who then subcontract the work on to small businesses. I welcome moves from the Government towards opening up the books and the contracts to smaller businesses, but I should be interested to hear more about how that will work in the real world.

Many businesses that struggle are either start-up businesses or are simply caught unawares. Those who start up businesses believe that, with a bit of hard work and some graft and enthusiasm, things will be great. They do not anticipate other businesses paying late or choosing deliberately not to pay. I therefore have a couple of requests. I understand that the Government want to create 40,000 business mentors for start-up businesses. I urge that the No. 1 priority for those mentors should be to teach start-up businesses about the necessity of invoicing quickly and using contracts and other available methods, because all too often new businesses are caught unawares.

Banks, too, have a role to play when start-up businesses ask for a new business bank account. The banks could provide training—or at least information on how to invoice and chase up late payments. I have often championed financial education in Parliament. I predominantly want to equip the next generation of consumers, but I also want to encourage entrepreneurial skills, and part of that is about basic accounting and ensuring that businesses understand how to invoice.

A tip from my own experience is that one should talk regularly to customers and suppliers, because there are times when even good businesses will struggle because of the knock-on effect of some of their customers not paying. If others are aware that there are likely to be problems, everyone can plan accordingly. There is nothing worse than waiting on a cheque from a supplier or customer when you have to pay the wage bill, but one can at least talk to the bank about it.

The majority of suppliers that I knew which had folded, folded because their customers continued to spend money even though they knew that they were highly unlikely to be able to pay, and in the end it dragged them down. I would be interested to know the Government’s thoughts on that.

[Fiona O'Donnell]

I thank the hon. Gentleman for giving way. Will he indulge me by going back to what he said about the pay roll? The Government say that their Work programme is about not only creating jobs, but making those jobs sustainable. Does he agree that those SMEs that we hope will create jobs for the unemployed in our constituencies are far less likely to create sustainable employment if they have cash-flow problems?

[Justin Tomlinson]

Absolutely. Cash flow is the most crucial element for small businesses. In my case, I did not even have an overdraft. There were times when things were comfortable and times when we were anxiously waiting on customers to pay us. If they did not pay, that had a knock-on effect for suppliers. Access to cash is crucial, and banks need to be sympathetic and not simply say that the computer says no. The banks should take account of the fact that a business with a successful track record has a couple of customers who are taking longer than normal to pay.

There are some customers who continue to spend money that they do not have. If I go into a high-street shop as a customer, put things in my bag and walk out without paying because I cannot afford to do so, I will be done for stealing. All too often, however, I see good businesses that have traded for many generations being brought to an end because some of their customers have taken advantage of their credit terms, knowing that they could not pay. The consequence is that many jobs are being lost, and things need to be tightened. I would welcome the Minister’s comments on that.

[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.

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[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.