Businesses: Late Payments

Kelly Tolhurst Excerpts

Wednesday 19th June 2019 Commons Chamber

[The Parliamentary Under-Secretary of State for Business, Energy and Industrial Strategy (Kelly Tolhurst)]

With permission, I wish to make a statement about the Government response to the “Creating a responsible payment culture” call for evidence, which I have published today.

The Government are committed to supporting small and medium-sized enterprises to start well and grow, including through a network of 38 growth hubs throughout England that provide advice, guidance and support. As part of our industrial strategy, we have an action plan to unlock more than £20 billion of investment in innovative and high-potential businesses. Where we see practices that unfairly constrain SMEs’ finance choices, we are prepared to act. For example, we recently removed a barrier that was preventing some SMEs from using invoice finance because of prohibitive contract terms imposed by their customers. The new measure is expected to provide a long-term boost to the UK economy worth almost £1 billion.

Last year, we launched a call for evidence asking for views on how to create a responsible payment culture for small business. Although a number of measures are already in place to tackle late payment—from the prompt payment code to the ability to charge interest on late payments and the increased transparency through the payment practices reporting duty—the call for evidence told us that there is more to do to improve the payment landscape. That is why I am announcing today that I will now take further and firmer action to tackle the scourge of late payments while maintaining a holistic approach to cultural change by using all the avenues available to us in this space.

I will shortly launch a consultation to seek views on strengthening the small business commissioner’s ability to assist and advocate for small business in the area of late payments through the provision of powers to compel the disclosure of information. I will also seek views on the merit of the commissioner’s potentially being able to issue penalties for poor payment practices. In respect of large businesses that have poor or unfair payment practices, we want to seek views on whether the commissioner should be able to apply sanctions, such as binding payment plans or financial penalties.

I am also announcing today that responsibility for the voluntary prompt payment code is to move to the small business commissioner and be reformed. This will unify prompt payment measures with the commissioner’s other responsibilities and address weaknesses in the operation of the current code. We have seen the impact of the strengthening of the code since our announcement in October: earlier in the year, we saw the removal from the code of five businesses and the suspension of 12 others. The next compliance round is currently under way.

I will take a tough compliance approach to large companies that do not comply with the payment practices reporting duty. The legislation allows for the prosecution of those who do not comply. I will use this enforcement power against those who do not comply, where necessary. We are already writing to the businesses that we have assessed as being within scope to remind them of their duty.

The Government will launch a business basics fund competition, with funding of up to £1 million, which will encourage small and medium-sized enterprises to utilise payment technology. We have recognised that tech adoption has had a positive impact on the productivity of small businesses. This competition is coupled with the small business commissioner’s strategy to deliver advice, signpost and provide a clear pathway for small businesses when they feel that they need support.

I also intend to establish a ministerial-led group to bring together key Government Departments to act on improving prompt payment across both the public and private sectors. We are working with UK Financial Investments and the financial sector to review the role that supply chain finance plays in fair and prompt payments, including the potential for an industry-led standard for good practice in supply chain finance. This review will report back to the Business Secretary by the end of the year.

We also want to bring greater transparency to how supply-chain finance is reported in company accounts and assessed in audits. Working with the Financial Reporting Council, we want to develop guidance and build that into its sampling of companies’ accounts. Supply-chain finance can provide an affordable finance option for SMEs, but they need to be assured that the terms are fair.

Our modern industrial strategy aims to make Britain the best place in which to start and grow a business, and removing barriers to growth is key to that aim. The response to the call for evidence and the package of measures that I am announcing today will ensure that we will continue to tackle the issue of late payments. I offer great thanks to the Federation of Small Businesses and its Fair Pay campaign, which has campaigned so hard for movement from the Government. I also thank the hundreds of businesses that have taken part and engaged comprehensively with the Department in assessing the call for evidence.

Finally, I thank the Business, Energy and Industrial Strategy Committee for its significant work on this issue and the work that it will continue to do. I am sure that it will hold us to account on the improvements that we are announcing today. I will place a copy of the Government’s response in the Libraries of both Houses today. I commend the statement to this House.

[Bill Esterson (Sefton Central) (Lab)]

Unfortunately, I have only just received a copy of the Minister’s statement. I do not know why there was a delay, but it was not particularly helpful in preparing my response. [Interruption.] The Minister has just graciously apologised.

Late payment is believed to be the cause of 50,000 business failures each year, at a cost to the economy of £2.5 billion, along with thousands of jobs. Those are figures from the Federation of Small Businesses. The Minister is right to pay tribute to that organisation for the brilliant work that it does in advocating for small businesses on this issue and on so many others.

In her press statement, the Minister reported a fall in the scale of the problems facing small businesses, but let me caution her on that. She cited the excellent work of the Business, Energy and Industrial Strategy Committee, but it has suggested that it has evidence that payment terms are growing longer to mask some of these problems. Perhaps she can address that through some of the proposals that she has outlined.

We welcome the steps announced today as an important start in tackling the scourge of late payment. I tabled amendments to the Enterprise Bill that would have given the small business commissioner powers to insist on binding arbitration and fines for persistent late payment. The Government rejected those amendments, so we put the proposals in our 2017 manifesto, along with requirements for anyone bidding for a Government contract to pay their suppliers within 30 days. It is good to see the Government catching up with us today in their proposals.

The small business commissioner does great work with the £1.35 million in his revenue budget and, as I understand it, 12 members of staff at his disposal, but there are limits to what he can do. Although the £3.8 million recovered by the commissioner is important to the businesses affected, it is a fraction of the money withheld by late payers, which is in the tens of billions of pounds on any of the estimates available to us. What extra budget will the commissioner be given to discharge the additional responsibilities that the Minister is proposing, and what is the timescale for the consultation?

Accountability of company boards is a step in the right direction, but it will be important to compare the experience of the supplier with the reported practice in company accounts. How will the Minister ensure that what is reported is the time from the date of supply of goods and services rather than the date of recording the invoice, which any accountant knows can be significantly different and is often subject to delay when invoices are mysteriously lost or queried by accounts departments? How will this add to the existing duty to report? When will the consultation on giving the powers on the duty to report to the small business commissioner take place?

As the Minister told us, a number of companies that are members of the prompt payment code have been found not to comply with the code. The scandal of Carillion is an example of abuse of that code; we saw payment times of 120 to 180 days becoming the norm. Giving the policing of that code to the small business commissioner is a sensible idea, so will the Minister say what additional resources for these powers will be given to him?

The use of project bank accounts would have prevented the £2 billion loss to 38,000 suppliers in the Carillion fiasco. What consideration are the Government giving to extending the use of project bank accounts? I also note that the Government are pledging from 1 September to force bidders for Government contracts of more than £5 million to pay 95% of their invoices within 60 days. That is in line with the prompt payment code, but only with the lower end of its requirements. Why not make it a 30-day requirement?

One complaint of businesses is that the public sector is the source of some of the worst practice. The Minister mentioned the public sector in her statement. Another complaint is that smaller firms are often at fault in delaying payments. When does she expect action to be taken on public sector and other small business delays?

The problems of late payment need significant changes in practice. Today’s statement announces a series of measures which, if properly resourced, could make a significant difference. Businesses deserve a change of culture. The economy and the country need a change in practice. In broadly welcoming these measures, I hope that the Government’s delivery matches the rhetoric.

[Kelly Tolhurst]

I apologise to the hon. Gentleman for the fact that he did not receive a copy of my statement in sufficient time. That was not my intention at all. I hope that he will understand, following the many debates that he and I have had in the House, that that is not how I tend to work with him. I thank him for recognising that this statement should have an impact on the late-payment problems of many small businesses. One thing that has been made absolutely clear to me since I became a Minister—and actually prior to being elected, when I was a small business owner myself—is that late payment is always raised by companies that deal with large organisations. I am very pleased to be able to move forward on this matter.

The amount of money owed in late payments has halved. I wish to recognise the work that has been done by the small business commissioner since he took up his role one and a half years ago. He has collected more than £3.5 million in late payments. The hon. Gentleman is right to question his role and when the consultation will take place. We want that consultation to happen quite quickly. One of the key things that came out of the call for evidence was that people wanted more powers to be given to the small business commissioner. They saw his role as, in effect, an umbrella role encompassing a number of enforcement abilities for him to act on behalf of small businesses.

The consultation will happen soon, and I would like it to take place with speed. I reiterate that, as we seek views on whether we should allow the small business commissioner to apply sanctions such as binding payment plans and financial penalties, that would be a massive step change and step forward. The small business commissioner has been very vocal in requesting more powers to enable him to represent and help the small businesses that come to him.

We will also be seeking views on whether the small business Minister should have the ability to refer topics to the small business commissioner for investigation. The small business commissioner will currently investigate only once a complaint has come from a small business, so we are looking at other ways in which investigations could be carried out. Obviously, I am giving hon. Members just a sample of what will be included in the consultation.

The hon. Gentleman is quite right on the matter of boards. On the back of the Chancellor’s announcements in the spring, we are pleased to give audit committees the power to review payment practices and for that to be included in the annual report. We are working with the Financial Reporting Council and the frameworks department at BEIS to work out the best way for that to happen. The new strategic reporting requirement was introduced in January. We are asking the FRC how the payment reporting duty is covered by that new duty, if at all. I assure the hon. Gentleman that we will legislate to make that happen if necessary.

The Chartered Institute of Credit Management has worked hard on this issue over recent months, especially on the strengthening of the voluntary prompt payment code in October. We are pleased that cross-examining the data gathered under the payment reporting duty has helped with compliance with the voluntary code. We and the CICM believe that the best place for that duty is with the small business commissioner, so that the commissioner is, in effect, a one-stop shop and an easily identifiable pathway for small businesses.

The hon. Gentleman is right to talk about project bank accounts. Some hon. Members present, including my hon. Friend the Member for Bury St Edmunds (Jo Churchill), have lobbied me in the past on the matter of retentions. We have told the industry that we expect it to come to a consensus on a way forward, and we will take action if it does not.

As the hon. Gentleman knows, we have announced that from 1 September any company bidding for Government contracts over £5 million will be expected to pay 95% of their invoices within 60 days. If they do not achieve that target, they will not necessarily be able to bid for further contracts. In April 2019, we announced our new ambition that 90% of undisputed invoices should be paid to small businesses within five days.

[Mark Pawsey (Rugby) (Con)]

Like the Minister, I ran a small business, so I recognise the challenge of late payments for small businesses. It is to the credit of this Government that they created the role of small business commissioner. The Minister said that she is holding a consultation on additional powers for the small business commissioner, who has often said that he needs more powers. Will she be a little clearer about when those powers might be available to him, and whether they will include the power to fine businesses that fail to honour their commitments? The Business, Energy and Industrial Strategy Committee has heard about many businesses that signed up to the prompt payment code but failed to adhere to its terms, and the small business commissioner needs a little bit more beef to get his teeth into that issue. Finally, will she consider making it mandatory to add interest to overdue accounts, because that would give businesses that are delaying payments a real incentive to get their payments made on time?

[Kelly Tolhurst]

Primary legislation would be required to give further powers to the small business commissioner, so we will seek views and consult. We do want to give the small business commissioner further powers—for example, the ability to apply sanctions to businesses that do not comply with requests for information, court orders or financial penalties. Such sanctions could include binding payment plans.

My hon. Friend asked whether we would consider making it mandatory to apply interest to overdue accounts. There is currently low take-up of the application of interest to invoices, so there needs to be an education piece for small businesses, which we very much hope to achieve through the small business commissioner. With all these elements coming under one roof, he can launch an ambitious PR strategy to enable small businesses to understand what powers already exist for them.

[Drew Hendry (Inverness, Nairn, Badenoch and Strathspey) (SNP)]

I thank the Minister for advance sight of her statement, which in our case arrived in plenty of time for us to look at. We welcome initiatives to curb late payments, but let us be frank: this does not go nearly far enough. For anyone tuning in to last night’s Tory hard Brexit hustings, it will come as no surprise that the UK Government remain opposed to taking the steps required to protect Scottish business. Does the Minister have the good grace to agree that it is now beyond a joke that, in place of serious policy steps, her statement merely proposes some minor technological measures and platitudes on best practice? And she did not fully answer this question, so can she confirm that she has looked at the Scottish Government’s project bank account scheme? Has she learned any lessons about how that is protecting smaller contractors and subcontractors on public procurement projects?

With the Federation of Small Businesses stating,

“If all payments were made on time 50,000 more businesses could be kept open each year”,

it is clear that small business needs legal protection, so does the Minister now regret her Government’s failure to support the Construction Industry (Protection of Cash Retentions) Bill, with which my hon. Friend the Member for Kilmarnock and Loudoun (Alan Brown) aimed to stop late payments in that sector? Indeed, does she regret her Government’s failure to extend that sort of protection across the economy to all small and medium-sized enterprises?

[Kelly Tolhurst]

I stand here today and make announcements, but we also need to recognise that this is about culture. We want to use all the tools in the box to legislate and take action where possible, but we also want to work with the industry and businesses to change the culture. It is not right that large firms take advantage of smaller businesses through late payments, so today we bring forward our response to the call for evidence, to stem the scourge of late payments.

The hon. Gentleman mentions project bank accounts. As I briefly outlined in my response to the previous question, project bank accounts and the use of retention is obviously a concern for many people. It is part of the whole late payment arena. That is why, as I have said, we have worked with the industry and heard the views of both sides. A consensus has yet to be found in the industry. The challenge that we have set is that the industry must come to a way forward or we will take action.

To answer the hon. Gentleman’s question, I have indeed looked at some of the work that has gone on in Scotland and at what has happened in Northern Ireland. I highlight what the Federation of Small Businesses said today:

“Small businesses will be delighted with today’s announcement. FSB has worked very hard with government to create a whole-board approach to late payment within the UK’s large companies, and empower Audit Committees to look after the supply chain. Together with measures to strengthen the Small Business Commissioner’s powers and reform the Prompt Payment Code, the measures today could finally see an end to poor payment practice.”

[Andrew Griffiths (Burton) (Con)]

The words that my hon. Friend just spoke were those of my constituent, Mr Mike Cherry. There can be no greater praise than that from such an advocate for small business. The FSB supports these measures, so I commend her on them.

Does my hon. Friend agree that one of the main challenges is not late but prompt payment? Far too many big businesses continue to extend payment terms—150 days, 180 days or even more. That is simply not acceptable and is unfeasible for many small businesses. Will my hon. Friend add that to her to-do list and really make a difference for small businesses?

[Kelly Tolhurst]

I thank my hon. Friend for his question and recognise his particular interest as my predecessor in this post. He is absolutely correct: prompt payment is a particular concern for small businesses, and some large companies alter their payment terms. We are seeking views on giving the small business commissioner more powers because he acts for small businesses that have struggled with getting prompt payment. Currently, his powers are not binding; we feel that if his powers were binding, that could be part of his suit of armour in tackling late and non-payments.

[Mr Deputy Speaker (Sir Lindsay Hoyle)]

I call the Chair of the Business, Energy and Industrial Strategy Committee, Rachel Reeves.

[Rachel Reeves (Leeds West) (Lab)]

Thank you very much, Mr Deputy Speaker.

When our Select Committee looked into this issue, many small businesses insisted on giving evidence in private, so worried were they about retaliation from the big businesses that they supplied. Larger businesses, including Morrisons, Aldi and WH Smith, are not signatories to the prompt payment code, while Boots pays suppliers at a discount for the privilege of their being paid on time. The power imbalance is so great now between bigger and smaller businesses that. I urge the Government and the Minister to look again, make the prompt payment code mandatory and bring down the period to a benchmark of 30 days.

[Kelly Tolhurst]

I thank the hon. Lady and highlight again the significant work that her Committee has done on this issue, including with our Department. She is absolutely right to highlight the power imbalance, which is why many small businesses feel that they are unable to speak out. That is why we are seeking views in our consultation on powers for the small business commissioner. We will seek to enable the Small Business Minister to make a referral to the small business commissioner; to give the commissioner investigatory powers similar to those of the Groceries Code Adjudicator; and to empower him to carry out an investigation without the small business involved having had to report the issue. There is a suggestion that the process could be anonymised.

The hon. Lady raises an important point, and I am very much aware of it. It will be very much part of my drafting, with the team, in regard to the consultation.

[Sammy Wilson (East Antrim) (DUP)]

I welcome this statement from the Minister and I know that she is committed to ensuring that small businesses are dealt with fairly.

The project bank accounts introduced by the Northern Ireland Executive have already been mentioned. That measure now applies to hundreds of millions of pounds of Government contracts and ensures that the money goes not to the main contractor but directly to the subcontractors when they have completed the work. That stops the main contractor holding on to the money or bargaining with the small companies and means that the small companies do not have to take the initiative, which they are sometimes afraid to do. Will the Minister work with Northern Ireland officials to ensure that the lessons learned there can be applied here?

[Kelly Tolhurst]

I thank the right hon. Gentleman for raising that. I highlight his particular interest in this area and the fact that he was one of the Ministers responsible in Northern Ireland when project bank accounts were introduced there. He is right that there are absolutely some merits in such accounts; as he knows, I have taken a particular interest in the subject and I will continue to work on it. The Government are clear that where project bank accounts can be used with Government contracts, they will be, although they are not always a suitable measure in some large contracts.

Today, I have announced a suite of tools to tackle late payments. Am I going to stand here and say that in future we will not have to do anything more? Of course not. Part of government and what we need to do in a changing economy and business environment is to make sure that we keep looking at ways to make things easier for small businesses.

[Chuka Umunna (Streatham) (LD)]

I thank the Minister for advance sight of her statement. She talked about the challenges facing small businesses. Brexit, of course, will cause huge disruption to small businesses’ supply chains, given the added bureaucracy and tariffs.

This statement on late payments is welcome, but may I ask the Minister again the specific question put by the Chair of the Business, Energy and Industrial Strategy Committee, the hon. Member for Leeds West (Rachel Reeves)? Why not make the prompt payment code mandatory—compulsory for large businesses? Why is there is further delay with consultations and what have you? She should make it mandatory, as we have been arguing for.

[Kelly Tolhurst]

I thank the hon. Gentleman for welcoming the statement and the moves that the Government have made today. He is absolutely right about the prompt payment code: it is voluntary. As it stands, there are more than 2,000 signatories to it; they sign up and commit to paying 90% of their invoices within 60 days. As he will know, the Government initiated the new duty on companies to report biannually on payment practices. To date, we have had more than 15,000 reports for over 7,000 companies. That data has enabled the Chartered Institute of Credit Management to scrutinise the voluntary code payment data.

We have seen action. Five businesses have been removed from the code and 12 have been suspended. As I have outlined today, when people are not complying with the legislation, we will take action. We are continuing to move forward to strengthen the prompt payment code and close any holes and weaknesses that there are.

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

When it comes to cash retentions, the Minister said twice that it was up to industry to find a way forward, but they are actually a Government responsibility. It is about 40 years since it was first recommended that the use of cash retentions in the construction industry be phased out. In my time as an MP, the Government have consulted twice on the issue, voted down amendments to the Enterprise Bill, and refused to back both my private Member’s Bill and that of the hon. Member for Waveney (Peter Aldous). Instead of listening to the large, tier 1 contractors, will the Minister pledge to take action and give a timescale for the phasing out of the use of cash retentions in the construction industry?

[Kelly Tolhurst]

The hon. Gentleman raises the issue of retentions. He says that this is not for industry, but for the Government. I have spoken to industry representatives and businesses about this issue, and it is clear that the industry has not come to a single way forward to deal with this. We hope that the measures that I have announced today on supply chain finance will make a big difference. With regard to cash retentions, I have been clear that if industry cannot come to a consensus on a way forward, the Government will step in and take action.

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

I welcome the Minister’s statement, and I thank her for meeting me after I introduced my Public Sector Supply Chains (Project Bank Accounts) Bill earlier this year. However, the measures she has introduced are actually recommendations from the 2013 inquiry that I led into late payments. Six years on, this is a little late, although I recognise her commitment. These measures will be no comfort to Neil Skinner, who owns a business in my constituency and lost £176,000 when Carillion collapsed. That was not a one-off; we know that there are other Carillions out there. Some 380 small businesses closed directly as a result of Carillion’s collapse. I cannot understand why she is so reticent after decades of this issue and why she will not act on project bank accounts.

[Kelly Tolhurst]

I recognise the hon. Lady’s passion and commitment. As I have said to her in previous meetings, I am happy to continue to work with her on this issue. Project bank accounts have value. I have announced the measures we are taking, following the call for evidence. I understand that she is disappointed in the time it has taken to bring these measures forward, but we are taking action. These bad practices have been happening not only in recent years but for decades, and this Government are finally taking action.

The hon. Lady is right to mention her constituent and the losses that his business suffered through the collapse of Carillion. Carillion’s debt was estimated to be £900 million at the end, which excluded £500 million of supply chain finance. That is why we will work with the Financial Reporting Council to find ways to bring transparency to companies’ accounts and reporting, which we hope will address any larger failures in the future.