Prompt Payment Code

Sarah Newton Excerpts

Thursday 8th November 2012 Commons Chamber

[Alex Cunningham]

That is very much the case: there are plenty of examples in the newspapers of companies going to the wall because they owe the taxman money. Even though somebody else might owe them 10 times as much, they still have to face up to that problem.

From my experience of owning a business before entering this place, I know how difficult it can be for small businesses when clients fail to pay up in reasonable time. Large organisations would have 30, 60 or even 90-day payment periods, and although most kept to their terms, that did not help my cash flow. The nature of my business required me to buy and pay for published materials, printed for my clients, who could then take months to pay me. Sometimes I could be owed as much as £5,000 by one client, or about 3% of my annual turnover. I seemed to spend countless hours chasing cash and monitoring my cash flow, when I should have been working for clients and trying to expand my business. Local businesses on Teesside tell me that they face the same challenges. They just cannot get people to pay up. It never ceases to amaze me that it is the bigger companies that take much longer to pay, with many doing so only after delaying tactics and countless promises that the elusive cheque is in the post.

The statistics are troubling: according to the latest BACS figures, more than 1 million SMEs are currently affected by late payment, and the average amount owed to each SME has reached £36,000. Debts to my former business never reached that level, but as much as £15,000 might be owed at any one time, much of it for up to two months. According to BACS, Britain’s small businesses spend 110 million hours a year chasing late payments, at a cost of £683 million. It is amazing to think of the other ways in which that money could be invested. The average small firm spends more than 13 working days a year chasing late payments. Research by the Federation of Small Businesses last year found that 73% of small firms reported being paid late. According to figures from the Department for Business, Innovation and Skills, 4,000 small businesses failed in 2008 as a direct result of late payment. The statistic that puts the issue into the sharpest possible light is that the outstanding funds now owed to small and medium-sized enterprises total £36.4 billion—or much more, as the hon. Member for South Basildon and East Thurrock said. I am sure that Members on both sides of the House appreciate that that is not a good state of affairs. A great deal more needs to be done.

I congratulate my hon. Friend the Member for Oldham East and Saddleworth (Debbie Abrahams) on writing to the FTSE 100 companies about the prompt payment code. I can think of no defensible reason why companies of such size and magnitude should not sign up—60 of them either ignored her or refused to sign up—particularly given the leadership role they are supposed to play in our business community.

[Sarah Newton (Truro and Falmouth) (Con)]

The hon. Gentleman makes a powerful point about the impact of large companies not paying smaller companies. Does he agree that we should consider extending the scope of the Groceries Code Adjudicator Bill, which comes before the House in the next couple of weeks, beyond the supply chain in food production to other small businesses that provide goods to supermarkets?

[Alex Cunningham]

The hon. Lady provides us with a good idea, and I hope that the Minister will take it on board.

I would like to see Members put whatever pressure they can on FTSE 100 companies to pay their bills on time. Worryingly, we do not have a high enough number of new signatories to the code to feel confident that the rate is going up fast enough. A recent answer to a parliamentary question showed that there were 683 new signatories in 2009, just 89 in 2011 and 115 so far this year. Research shows that signatories to the code generally undertake to pay suppliers on time within the terms agreed at the outset of the contract, to give clear guidance to suppliers and to encourage good practice.

I wonder, however, whether getting firms to pay on time in line with their agreements is enough. Those agreements often shackle small businesses to long waits for their money. They do the work, deliver the goods and send in their invoice, yet it can take the client company 90 days from receipt of that invoice to pay up. Should those small businesses be obliged to get into such long-term payment plans? I doubt that a company’s energy supplier would offer them such generous terms—mine did not—so perhaps we should think again about the pressure that big firms can put on small ones over payment periods.

For now, I call on the Government to do more to get firms to sign up to the prompt payment code. There needs to be more transparency to encourage prompt payment, including through more onerous reporting requirements such as looking at whether payment times and amounts owing to suppliers could be expressed in firms’ annual reports.

It is in the interests of small and medium-sized enterprises up and down the country to ensure that prompt payment is better enforced down the supply chains of those firms that win Government contracts. That would create more confidence, allow smaller businesses to expand at a quicker rate and bring about a greater degree of fairness in interactions between big businesses and their smaller counterparts. If the Government really take the issue seriously, they should at least put their own house in order. A number of Government contractors have been shirking their responsibility to pay smaller sub-contractors on time, yet there is no defensible reason why large companies should not be obliged to provide details of payment policies to suppliers as part of their reporting requirements. The Government need to do more to ensure that their own contractors do right by the smaller and medium-sized enterprises that supply them with services. I would advise the Minister to take a close look at Government contractors who repeatedly pay slowly or late, and to consider stripping them of public sector contracts. The taxpayer should not be subsiding bad business practice.

The Government have suggested a new system in which big businesses notify a bank as soon as a supplier’s invoice has been approved. The bank would be given the assurance that the bill would be paid, and would then extend a full, immediate advance of the bill to the supplier at a low interest rate. However, a close look at those proposals shows that they would be a win only for the big company. The system would allow the large companies to keep their money, and allow the banks to charge interest, while the small supplier would have to pay interest on money that they should be able to expect in full payment from their customer, without any interference from the bank. Surely the solution to small firms being ripped off should not end up with them being charged more. The scheme also would not deal with the fundamental problem of large firms failing to pay on time, and its existence would not be necessary if all large companies were paying their bills on time and setting fairer payment terms.

Countless businesses are going to the wall, and many are doing so because they are owed substantial sums of money and cannot recover it. The Government must take action to get large employers signed up to the prompt payment code; they have support from across the House to do so. I also hope that they will ensure that their own contractors play their role in helping smaller companies to grow and meet their bills, which will help to get us back on to a sustainable economic footing.