In a significant move that aims to support smaller businesses, the UK government has unveiled draft proposals that could impose penalties on large firms for consistently failing to pay their suppliers on time. This initiative, introduced by Business Secretary Jonathan Reynolds, seeks to reform longstanding issues related to late payments that often plague small enterprises, drastically affecting their sustainability and operation.
Research associated with the proposals indicates that late payments are a primary cause of business failures, with thousands of companies collapsing each year due to such financial pressures. Under the new regulations, invoice terms for payments will be strictly limited to a maximum of two months, with a further reduction to 45 days envisioned within the next five years. This restructuring of payment timelines is specifically designed to mitigate the financial strain on smaller firms, which typically have limited cash reserves and face greater difficulties when dealing with delayed payments.
In his announcement, Reynolds emphasized that late payments are the foremost concern raised by small business owners, highlighting the urgency of addressing this pervasive issue. The government estimates that about 1.5 million businesses in the UK experience the detrimental impacts of late payments, with an eye-watering £26 billion owed at any given time. This rampant problem disproportionately affects smaller enterprises, exacerbating their challenges as they often lack the resources to efficiently pursue owed funds.
The proposals also outline a significant empowerment of the Small Business Commissioner, a role established under the Conservative government in 2017. This office would gain the authority to impose fines on large companies that fail to comply with timely payment obligations. The regulations aim to target firms with over 250 employees, which are already required to report their average payment times biannually. A failure to pay a quarter of their invoices on time within this reporting period could lead to financial penalties. The proposed fines would equate to double the amount owed by the business in late-payment interest, which is currently set at 8% above the Bank of England base rate—an initiative meant to hold companies accountable for their payment practices.
While the government’s proposal has garnered support from various sectors, it has not been without opposition. Critics, particularly from the opposition parties, argue that despite the reform intentions, current economic policies, such as the recent hikes in National Insurance, are imposing undue burdens on small businesses. The Conservative shadow business secretary, Andrew Griffith, pointed out that the increase in National Insurance constitutes a significant financial strain on employers, dubbing it a “£25bn jobs tax.” This sentiment resonates strongly among the Liberal Democrats, who also voiced concerns regarding the detrimental impact of National Insurance hikes on small firms.
Furthermore, the measures set forth will initiate a 12-week consultation period where stakeholders, including business representatives and trade organizations, will have the opportunity to provide feedback on the proposed regulations. As consultations progress, the government has pledged to introduce this legislation as soon as parliamentary schedules allow, reflecting a commitment to expedite the resolution of this long-standing issue.
The proposed changes mark a potential watershed in payment policy reform in the UK, as they aim to level the playing field for small businesses negotiating with larger counterparts. Current practices often allow larger firms to impose longer payment terms, leading to negotiations that favor the more powerful companies, which the government intends to rectify by eliminating the option for extended payment periods greater than 60 days.
As this bold initiative unfolds, it highlights the crucial need for systemic reform in how businesses interact financially, with hopes that it will foster a healthier entrepreneurial landscape in which smaller businesses can thrive and survive amidst competitive pressures.
