Prompt Payment Code

Toby Perkins Excerpts

Thursday 8th November 2012 Commons Chamber

[Stephen Metcalfe]

That is an excellent suggestion and one that should certainly be explored. I am sure that we are all conscious of burdening business with yet more regulation but, because of the impact that late payment has on SMEs, that would be well worth exploring.

[Toby Perkins (Chesterfield) (Lab)]

I congratulate the hon. Gentleman on securing this debate. He has made a number of sensible points, but it is interesting that his focus seems to be on contracts involving public money, as though people have a responsibility to pay on time only if public money is involved somewhere along the chain. The FSB has identified that 77% of businesses say that the private sector is the main problem, so does he agree that his suggestions for reporting should apply right across business, not just if there is public money involved?

[Stephen Metcalfe]

I entirely agree—the hon. Gentleman makes a very good point. I am focusing on the public sector because we have most control over it. I did say earlier that the private sector is the worst offender and that we need to address that as well. Following this debate, I hope we will come up with some suggestions in that regard.

I want to focus my final remarks on the public sector. As I have said, the Government have set the tone and provided a model of best practice, but we cannot stop there. This is not just a commercial problem, but an ethical problem. We have to remember that much of the money that is outstanding to our small and medium-sized enterprises is our money. It is collected from us as taxpayers and it is spent on our behalf, so it is only right to expect any organisation to pass on that money as quickly as possible.

I believe that my proposals are entirely necessary and that they would go some way to addressing the problem. I hope that suggestions will be made this afternoon on how we might address other parts of the problem and I look forward to hearing the ideas and experiences of other hon. Members. At the end of the debate, I hope that the Minister will be able to give us some positive news and say that he will pass on some of our suggestions to the Chancellor in advance of his autumn statement. Ultimately, there are billions of pounds locked up in our economy that are owed and could be paid across to stimulate some real growth.

--- Later in debate ---

[Andrea Leadsom]

I thank my hon. Friend for that interesting point.

Today, I want to give three examples of bad practice to highlight this issue. The previous speakers have done a great job in pointing out some of the very concerning statistics. With the autumn statement fast approaching, they have also made it clear how relatively easy it would be for the Government to take action and insist that all public sector organisations abide by prompt payment terms, and to do more to embed that in the culture of the private sector.

[Toby Perkins]

Does the hon. Lady agree that there are two facets to the issue? First, big businesses set up unreasonable terms and conditions saying, “We are going to pay you over a very long period of time. If you don’t want that, go and deal with someone else.” Secondly, terms and conditions that might be considered more reasonable are put in place but not adhered to. Companies can string payment out for days and even weeks after the agreed terms. I caution her that different industries and different contracts require different payment terms because of a variety of complexities about how a contract might function. That is why it is difficult to legislate on this matter, but does she recognise that central difference?

[Andrea Leadsom]

I recognise that absolutely. In fact, last night I was speaking to Philip King, the chief executive of the Institute of Credit Management, which implements the prompt payment code on behalf of the Government. He explained that payment terms of a set number of days are not required for every business employing good practice; it is simply that they should say what their payment terms are and stick to them. Whether those terms are 30 days, 60 days, 90 days or whatever, once they have been agreed they should stick to them—that is key.

Small business trade bodies could have a naming and shaming website to enable their members to report bad practice without the fear of losing business by criticising their creditor. I will go on to give clear examples, because I agree with other hon. Members that it is difficult to get businesses to speak out for fear of losing business. However, I have one constituent who supplies the NHS and he wanted to tell the story of his company, Q Technologies. The company creates specialist medical equipment that enables surgery to take place with a much lower risk of MRSA and other infections. It is, therefore, life-saving medical equipment. The business employs 14 people and supplies a number of NHS trusts and hospitals around the UK. His overdue and late payment situation with those trusts is that he currently has £76,000 outstanding on a 30-day invoice that was raised in April, and was therefore due to be paid in May for the supply of specialist operating theatre equipment at a hospital in the north-west. The equipment enabled the continuation of vital hip, knee and shoulder surgery.

My constituent also has a £36,000 payment over 60 days late on a 30-day invoice for vital operating theatre ventilation equipment. This was supplied at short notice in an emergency to a hospital that specialised in spinal surgery. Q Technologies took the equipment out of another hospital, so that there was no disruption to this vital spinal surgery, yet when the chief executive tried to sort out the delay to the invoice being paid, he was told by the NHS trust that managers of three different NHS departments could not decide whose budget the money should come out of. Rather than sorting it out and paying him, therefore, they just did not pay him. The bill was finally settled only after he threatened the trust with legal action.

The snapshot position of moneys owed to Q Technologies —a company that employs 14 people—by the NHS is £130,000. That is money outstanding over 60 days. The chief executive, Andrew Kemp, writes:

“I am a massive fan of the NHS but a massive critic of the way in which some Trusts manage their work. We try and support the NHS in every way that we can - often delivering equipment at very short notice and often on trust. We always hope that such co-operation and trust will be reciprocated back to us but sadly it often isn’t. Poor cash flow kills businesses, whatever the Balance Sheet might look like. A big debtors’ list doesn’t pay the monthly bills and it forces us to keep more cash in reserve than we would like. It would be so much better if we could use some of it to grow and expand our business and employ two or three more people - but with the NHS being so tardy over payments we just don't feel confident enough to do so… As a taxpayer I cannot understand why the Government…is presiding over such a situation. None of it makes sense”.

That is a pretty appalling indictment of a public sector body that is simply not paying its bills.

A second example was brought to me by a constituent at a drop-in surgery in Brackley in my constituency. She had been commissioned to carry out work by a Fortune 500 company that in turn was commissioned by the Ministry of Defence to deliver a significant IT solution. My constituent runs a small family business with two employees. The contract, which was for £250,000, was a significant sum. She came to me in desperation as the invoice to the Fortune 500 company for work done was six months overdue. Her bank was about to foreclose on the business, as it had run out of patience with her overdraft.

Equally concerning, my constituent was adamant that I should not name her company when dealing with this issue on her behalf, because she was terrified of losing future business. I wrote to the company and made a general point about the Government’s desire for companies to pay on time, and—surprise, surprise!—within a couple of weeks it paid the invoice. That goes to show that the Government can help not through legislation but by changing the culture, pointing out the unfairness of late payment and insisting on the fair application of the prompt payment code.

My third and final example concerns a legal aid firm supplying a public body. This company wrote to me after hearing about today’s debate. It is a small legal aid firm that supplies the Legal Services Commission, an executive non-departmental public body. It reports that the LSC’s payment terms are eight weeks—twice as long as is normal—but even then, it does not stick to them. Invoices are refused for flimsy reasons, so that they can be sent back and be delayed for another eight weeks, and sometimes they are mysteriously lost in the office.

The legal aid firm employs nine people, and last year paid nearly £300,000 in partnership tax, national insurance contributions, rates and VAT. The Government will lose out on this revenue, and the tax paid by the employees, if the LSC’s late payment drives the business to the wall, which it threatens to do. The firm wanted its words to go on the record:

“Although we have explained that we cannot pay the government until the government pays us, that cuts no ice with either the VAT or the PAYE offices, who hound, threaten and fine us if we are a week late in paying.”

Those are three awful examples of how public sector organisations for no good reason are delaying payments to businesses and so existentially threatening their future success and sustainability.

I hope, along with my hon. Friends, that the Government will be prepared to do something dramatic about this issue. It does not require legislation or expensive action by the Government; it simply requires more effort to ensure that the prompt payment code is signed up to by many more companies, and direct action to ensure that all companies in the public sector, whether they are Whitehall Departments or non-governmental departmental organisations, also sign up to prompt payment to small companies on a fair basis.

--- Later in debate ---

[Toby Perkins (Chesterfield) (Lab)]

It is a tremendous pleasure to respond to this welcome, timely and constructive Back-Bench debate on behalf of Her Majesty’s Opposition. I congratulate the hon. Members for South Basildon and East Thurrock (Stephen Metcalfe) and for South Northamptonshire (Andrea Leadsom) on securing the debate. I also join others in recognising the contribution of my hon. Friend the Member for Oldham East and Saddleworth (Debbie Abrahams). She has pursued this issue tirelessly through her “Be Fair, Pay on Time” campaign, for which she has rightly been nominated for a “Grassroot Diplomat” award by the Federation of Small Businesses. She was too modest to mention that, but I wanted to put on record the gratitude of the whole House for the work that she has done.

I welcome the Government’s announcement of the potential naming and shaming in the new year of FTSE 100 and FTSE 250 firms that do not sign up to the prompt payment code, in an attempt—for which Labour had called—to change the culture on late payment. I am pleased that Members’ collective efforts have finally forced the Government to act. When researching the Twitter feed of the hon. Member for South Basildon and East Thurrock—it is @SMetcalfeMP, in case anyone is interested; the hon. Gentleman appears to have last taken to the Twittersphere almost exactly a year ago, to inform the world—

[Stephen Metcalfe]

May I intervene to reassure the House that that is not my Twitter feed? It is a fake, which is why there are only six tweets on it. It was never me in the first place.

[Toby Perkins]

They say that impersonation is the sincerest form of flattery. I hope that the hon. Gentleman is flattered that people have taken the time to fake a Twitter account for him, if that is indeed what happened. The person who claimed to be him was proud to be the hon. Member for South Basildon and East Thurrock. In any event, I hope that at the end of the debate someone will be able to announce to the Twittersphere that the Government have listened to the voice of tens of thousands of small businesses, and to business organisations such as the Institute of Credit Management, the Institute of Chartered Accountants in England and Wales and BACS which have been calling for leadership from the Government.

While the contribution to Twitter of the hon. Member for South Basildon and East Thurrock may be a matter of some dispute, his contribution to the debate was consistently constructive, and I agree with much of what he said. I agree with him that late payment is on the increase—although welcome steps were taken in an attempt to reduce it, the Government’s efforts have fallen back in recent years—and I agree with him about the circular effect whereby companies that receive payment late become late payers themselves. It becomes a culture. Businesses see it as part of the overall negotiation with their suppliers: not only do they negotiate on how much they will pay and for how much they will sell, but they try to extend the time that they have in which to pay and bring forward the time at which they will be paid. It is a completely unconstructive way of operating. I agree with the hon. Gentleman on that issue, therefore.

In pursuing this theme, the hon. Gentleman is very much in tune with my right hon. Friend the Member for Doncaster North (Edward Miliband), who has said that if we are to be one nation, we must have more responsibility at the top and at the bottom. I am delighted that my right hon. Friend has expressed his determination to address the unfair—and, frankly, anti-business—relationship between some big businesses and small firms, and his determination that a one-nation Labour Government will not simply walk by on the other side of the road when confronted by such issues.

This debate has provided stark examples of the sorts of unfairness to which my right hon. Friend has been referring. My hon. Friend the Member for Oldham East and Saddleworth focused on the fact that, as the Federation of Small Businesses has revealed, the private sector is the biggest culprit in this regard. She also referred to her letter to the FTSE 100 companies. The fact that she got 14 FTSE 100 businesses to sign up to the code shows that Members of Parliament can influence business practices without always having to legislate. She has taken direct action and it has changed the way 14 of our FTSE 100 businesses operate.

The hon. Member for South Northamptonshire said the Government need to make more effort to ensure that Government organisations pay on time. That point could go across the agenda. She also rightly said that this is not just a legislative but a cultural issue. She also spoke about stipulating fair terms, as did my hon. Friend the Member for Caerphilly (Wayne David) in respect of those which might apply when the new EU late payment directive comes into force. My hon. Friend mentioned the Government’s lack of urgency in the implementation of that directive, and after hearing about the record of one of our major supermarkets, he referred to the possibility of consumers using the performance of major businesses as a factor in deciding where to shop.

My hon. Friend the Member for Stockton North (Alex Cunningham) rightly said that big firms need to play their part in putting the country on a stable economic footing, not only through their contribution to the economy, but in their relationship with their suppliers. The Government have a role to play in bringing big firms to book and in ensuring that fair terms are agreed in the first place and subsequently adhered to.

The latest BACS research shows that more than 1 million small and medium-sized enterprises are currently being affected by late payment. Britain’s small businesses spend a total of 110 million hours every year chasing late payments, at a cost of £683 million.

The FSB has also been very vocal about this issue. A recent FSB study found that 73% of small businesses had experienced late payment for the supply of goods and services in the past year. Some 77% of its members say private sector organisations are the most likely to make late payments, and two thirds of members report having written off invoices in the previous 12 months, a fifth of which have been for more than £5,000, which is a significant sum for a small business to have to write off.

Mid-size firms can usually employ credit control staff whose daily task is to try to extract from businesses payments that have already been agreed. I remember once, as a fledgling salesperson, having to go down to my company’s credit control office to inquire whether a customer of mine might be able to come off “stop” because they wanted to make a purchase. For me as a young man, that was a terrifying ordeal, because those credit control ladies take no prisoners. I had a tough job persuading Sheila and Gladys in particular that, although the nationwide banks might be a bit slow, they did have the wherewithal to honour our £5,000 invoice. The benefit of history might suggest that Sheila and Gladys were nearer to the truth than I was, but when I had my own business a few years later I soon understood why it took a certain type of person to be a credit controller. I rued the fact that I did not have a Sheila at my side to do the chasing.

The truth is that for small firms the end of the sale is often the beginning of the problems, which is why this debate is so important. The average small firm is spending 13 working days chasing money owed. This time is not being spent on developing sales or marketing strategies, buying more efficiently, training staff, taking on apprentices or developing new product lines; it is simply being spent pursuing money that they are owed for goods or services they have provided. This is not just about the weighted activity that small firms could be doing if they were not chasing money, because some late repayments mean the difference between life and death for firms which, although successful, simply run out of cash. Department for Business, Innovation and Skills figures tell us that 4,000 businesses failed in 2008 simply as a result of late payments. Those businesses were successful in their own right, but were brought down by a lack of cash flow because of not being paid.

The previous Labour Government worked with the Institute of Directors, the British Chambers of Commerce and the Institute of Credit Management to set up the prompt payment code in 2008. Is it transparent, but it is under-publicised. It is certainly not a silver bullet, but it is one of the weapons in the Government’s portfolio. To put the environment in context, there are 4.5 million small businesses in the UK and just under 6,500 large firms. All of us know that small and medium-sized enterprises are very much the lifeblood of the British economy, through their contribution to our tax revenues and to growth, so when we see an issue that is so desperately holding back our small businesses, it is only natural that this House should want to act.

In 2009, Labour’s last full year in office, there were 683 new signatories to the PPC, whereas, as has been said, in the first full year of this Government there were just 89. Even now, less than one fifth of all large firms are signed up, so the Government would be right to push for culture change, which is of course a part of the solution. The fact is that under this Government the situation has got worse. Intrum, Europe’s leading credit management services provider, says that in the past two years the UK’s payment index score has been progressively getting worse; in 2010, British and German performance was pretty much neck and neck, but in the past two years Britain’s score worsened, going from 150 to 161, whereas the Germans’ score went down to 147. German businesses have a known advantage: German small firms now know they will get paid earlier, giving them a clear commercial advantage over British firms.

In this period, too little progress has been made. Progress has been faltering on the PPC and, as has been said, on the EU late payment directive, a key weapon in Government’s armoury, we have seen U-turns and obfuscation. In September 2011, the previous but one Minister, the right hon. Member for Sutton and Cheam (Paul Burstow), said in answer to Labour calls for action that he would transpose these rules into UK law early. He then performed what many hon. Members will feel was a deeply unhelpful U-turn and wrote to MPs to clarify his earlier statement, saying that this would happen at some point by March 2013. Since then, we have had it confirmed that it will not happen a single day early and, as my hon. Friend the Member for Caerphilly said, some are sceptical about whether it will be properly in place by the date when it should be. The directive should now be in place by March 2013—the latest possible date. That sends a negative message from the Government about the importance they place on this issue, about which hon. Members have spoken so powerfully in this debate.

The supply chain finance scheme potentially reinforces the problem; it could positively institutionalise late payment as an acceptable business practice. Under the scheme, a bank is notified by a large company that an invoice has been approved for payment. The bank is then able to offer a 100% immediate advance to the supplier at lower than normal interest rates—but none the less, with interest—knowing that the invoice will ultimately be paid by the large company. That could exacerbate the problem, because large companies could further extend their payment terms as a result, potentially affecting suppliers outside the agreement and exacerbating an existing culture of slow and late payment.

It is not just Labour saying that. Janet Barton, a freelance credit controller and specialist in helping businesses manage their cash flow, has said:

“I have no idea why the Prime Minister thinks this is such a good idea. The large companies get to hold on to their money.”

Phillip King, chief executive of the Institute of Credit Management, said that his preference would simply be for people to pay on time.

One-nation Labour believes that everyone should play by the rules. It is unfair that local family firms should be threatened because large companies effectively use SMEs’ money to bankroll themselves. In government, we passed the Late Payment of Commercial Debts (Interest) Act 1998, which enables firms to charge interest and obtain compensation on overdue payments from customers. We set targets in the March 2010 Budget, tightening rules on late payment by the public sector and setting Departments the goal of paying 80% of undisputed invoices within five days and requiring them to do so within 10 days.

We realise that the problem cannot be resolved by legislation alone and that is why we set up the prompt payment code to make a moral case for large businesses to pay their suppliers on time and in a fair and responsible way. We worked alongside business bodies such as the Institute of Directors, the British Chambers of Commerce and the Institute of Credit Management to launch the code and to get 650 companies signed up. The code does not lay down specific tight deadlines on when payments must be made or place undue burdens on businesses. For large businesses with huge cash flows, it is not an onerous measure to sign up to. That is why we entirely support the spirit of the motion.

One nation Labour’s approach would be about much more. We have a small business taskforce that is informed by people throughout the business environment who consider how all Labour’s policies impact on small businesses. We want to see more transparency to encourage prompt payment, including in reporting requirements such as payment performance and through policies in firms’ annual reports and accounts. We will encourage Labour MPs to champion the prompt payment code on behalf of SMEs in their constituencies and to try to ensure that as many companies as possible in their constituencies are signed up. We are calling on Ministers to ensure that prompt payment is better enforced down the supply chains of all those firms that win Government contracts. Government contractors who repeatedly pay slowly or late should be stripped of public sector contracts.

We recognise that legislation alone is not the answer to the problem and we need the Government to demonstrate real leadership, making it clear to big businesses that late payment is not acceptable. We do not feel that Ministers have done enough to sign firms up to the prompt payment code.

A push on the prompt payment code is overdue but it is just the tip of the iceberg. The Government ultimately must decide whose side they are on. Will they send a one-nation message that they will support British firms in accessing their own money or will the collective voices of those small firms have to harry them along every small step on the way? The time for action is now.

--- Later in debate ---

[Mr Willetts]

Frankly, I do not know the exact history, but I can say that we are taking this action now. We have already taken other actions, such as the intervention by my right hon. Friend the Minister for the Cabinet Office and a steady increase in payments in line with the prompt payment code. As I was so generous to the hon. Lady, in her admittedly brief absence from the Chamber, I hope that she will not be too grudging about the actions we are now taking.

Let me refer briefly—I think it is important to allow my hon. Friend the Member for South Basildon and East Thurrock time to speak at the end—to the EU late payment directive, which a few hon. Members have mentioned. We support the revision of the directive because it seeks to introduce a number of improvements to the original. That will save business money and help create a level playing field for UK suppliers trading across the single market. We believe that the recast directive essentially recognises current UK legislation and practice as an exemplar and mirrors existing UK provisions. Indeed, we have introduced across the public sector targets that are in many ways more onerous than those set out in the directive.

[Toby Perkins]

The Minister is basically saying that the directive will make relatively little difference because the Government are already doing that, broadly speaking, so I am confused about why there has been such resistance to implementing it and why they will not do so until March 2013.

[Mr Willetts]

Let me explain that point. Our intention is to transpose the directive by 16 March 2013. That is a commitment I can give the House. However, it is a long-standing commitment of this Government not to gold-plate EU legislation. We do not implement early or rush to implement EU legislation. We comply with the legal requirements. We have confirmed many times our intention to transpose the 2011 EU late payment directive by 16 March. However, our approach, learning from the process in many other countries, is that we do not feel obliged to rush to implement any EU directive before the deadline by which it has to come into force. We in BIS try consistently to apply that approach, which I commend to the House.

I congratulate hon. Members on leading this debate. We recognise that changing the culture of late payment is a challenge that requires both Government and business to play their part. We expect business to do so, and we expect Government and all public sector bodies to do so too.