Commercial Payments Bill improving payment times for small businesses
A stronger legal framework to protect businesses from the financial impact of commercial debts and late payments is a step closer, now that the Commercial Payments Bill has been laid before parliament.
Small businesses, sole traders, freelancers and consultants will particularly welcome tighter rules to reduce the time and financial stress of waiting for (and chasing) unpaid invoices.
Late payments cost the UK economy £11bn every year; and many business owners are crippled as a result of late payments.
The new Bill represents the most significant move to tackle late payments in more than 25 years. The measures will not take retrospective effect; and there will be an important transition period, enabling businesses to prepare.
What’s the background?
Under existing legislation, businesses can charge another business statutory interest where payment is late (usually by at least 60 days). If your contract provides for another rate of interest for outstanding payments, you cannot claim statutory interest.
Directors of large companies and LLPs must also comply with the Reporting on Payment Practices and Performance Regulations 2017; and risk sanctions if they fail to report their payment practices. Yet the scourge of late payments continues.
The Commercial Payments Bill comes after a three-month consultation on the government’s proposals last year; and the appointment of the Small Business Commissioner (whose role is to focus on late payment and unfair payment practice).
The Bill
The headline reforms set out in the draft legislation are:
· Maximum payment terms of 60 days will be imposed on businesses (30 days where the purchasers is a public authority). There will be exemptions, but strictly limited, eg where the purchaser is a sole trader but not the supplier
· Mandating interest on late payments at 8% above the Bank of England base rate
· Suppliers will have the right to a fixed sum where a purchaser raises a dispute late (or without sufficient information)
· There will be deadline of around 30 days to raise a dispute about an invoice, after which interest will start to accrue
· Deduction and withholding of retention payments under a construction contract will be outlawed (a further consultation will be held as to timing)
· The SBC’s powers will be widened and existing powers strengthened to include:
· Power to investigate if a larger business is suspected of persistently engaging in poor payment practices, breaching the legislation and taking enforcement action
· Acting as adjudicator between small and larger businesses – unless, for example, the referral is frivolous/vexatious
Secondary legislation is also expected, requiring larger companies and LLPs to report the amount of interest they have paid, as well as the interest they owe. Persistent late-payers (large companies) will also be required to publish an explanation of their poor performance - and how they are tackling it.
Key takeaway
Timely payments of invoices between businesses is in everyone’s commercial interests, but mostly for small businesses and sole traders who heavily rely on a steady, reliable cashflow.
All businesses – particularly larger organisations – should consider what the new framework will mean for them. They would do well to review their existing payment processes and made necessary changes to ensure invoices are paid promptly.
If necessary, take specialist advice from commercial solicitors concerning the steps you should take.
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