Government proposals aim to make sure SMEs, contractors and freelancers get paid on time.
If the government is to be believed, the UK’s “scourge of late payments” will soon be a thing of the past.
Business secretary Peter Kyle recently announced “Time to Pay Up”, a package of measures that aims to speed up the process of getting paid for B2B businesses. The measures include a 60-day cap on payment terms and mandatory interest on late payments.
The question is, will it work? At the moment we just don’t know, but what is clear is that for many contractors, freelancers and SMEs, the legislation feels long overdue.
In the rest of this piece we’ll discuss the extent of the late payment problem, what the new rules actually say and what it could mean for recruitment businesses.
What’s the problem with late payments?
The government says late payments are undermining UK plc and it’s hard to argue with that assessment. Late payments are estimated to cost the UK economy £11bn a year. Other impacts include:
- Around 14,000 businesses close each year because of late payments. That’s 38 businesses every day
- Businesses are owed an estimated £26bn in late payments at any given time
- In affected businesses, staff spend an average of 86 hours every year chasing late payments. That’s 133m hours of staff time across the UK economy
- 15% of surveyed businesses avoid doing business with customers based on their late payment behaviour, holding back economic progress
These eye-opening figures are why many people consider the status quo unsustainable. So, what do the new rules propose and, most importantly, how effective will they be?
Time to Pay Up…or is it?
On the surface, the new rules look to go a long way towards solving the late payment problem. In fact, the government says they’re the toughest in the G7.
The main changes will be a 60-day cap on payment terms when big businesses pay smaller ones, and new mandatory interest and compensation on late payments. The interest rate will be set at 8% above the Bank of England base rate.
To put that into figures, imagine a small business is owed £10,000 by one of its customers. If they are paid 60 days later than the agreed payment date, they will be owed £10,293.15 in interest and compensation.
The other big change is that the Small Business Commissioner (SBC) will be given new powers to investigate repeat offenders, who could be hit with fines potentially amounting to millions of pounds.
Finally, the changes will also include a consultation on new bans on retention payments in construction.
Will the new rules work?
The view from the industry is that something needed to be done about late payments, but do the new rules go far enough?
As with all changes of this kind, the proof of the pudding will be in the eating. For example, new powers will be available to the SBC, but will it have the resources to use them effectively?
The SBC currently has a staff of 12 and a budget of just over £1m. Many experts wonder if such a small organisation can really be expected to get on top of an £11bn problem.
There’s also some concern about the new 60-day payment limit. Public sector contracts stipulate 30-day terms, so why not make that true for private sector contracts too? Another fear is that companies currently paying within 30 or 45 days will actually extend their terms to 60 days to match the government-imposed limit.
Finally, contractors may take issue with the focus on large companies paying smaller ones (or failing to). Quite often, late payments are the result of SMEs failing to pay other SMEs on time. Will this be less of a priority?
Despite these reservations, most people agree with the general thrust of the proposals. The devil will be in the details, but for now the latest attempt at a late payments crackdown feels like a step in the right direction.
What do the changes mean for recruiters?
As businesses that pay contractors, recruitment agencies need to be aware of the new rules. There’s plenty of time to clue yourself up – it will be at least a year before the proposals are passed into law – but it’s good to get ahead of the curve.
Perhaps most importantly, you need to check that current contracts with end clients don’t contain payment terms exceeding 60 days.
If they do, the terms need to be amended, along with any clauses opting out of statutory interest. Talk to end clients about the new rules and make sure they’re aware of the potential damage – financial and reputational – of late payments.
Remember, if you’re paying the contractor or freelancer, you could be on the hook for late payment, even if a client has delayed paying you.
On the flipside, the new rules could also have more positive implications for recruitment businesses. For example, it’s proposed that clients will have a 30-day statutory limit to raise disputes on an invoice. If they don’t act within this limit, they have to pay up, curtailing the practice of clients endlessly querying disputes to delay payment.
Still, there’s no doubt the proposed changes will add to the administrative burden on recruitment businesses, who may already be struggling with the demands of joint and several liability (JSL) legislation that came into force this month.
The takeaway
It’s hard to argue with the sentiment behind Time to Pay Up. Too many contractors and small businesses are waiting months and even years for payment. This delay is leading to severe cash flow challenges and even bankruptcy.
We’ll have to wait and see if the proposals go far enough. There’s clearly a concern that the government has talked a good game but has yet to give the SBC the resources it needs to win it.
For recruiters, the main takeaway is to start talking to clients about the new payment deadlines, and amending contracts accordingly. The changes aren’t likely to come into effect until 2027 at the earliest, but preparing early will give you time to overcome any bumps in the road.
Getting support with legislation
Navigating legislation and ensuring compliance can be challenging for recruitment companies, end clients and contractors alike. The best thing you can do is speak to your supply chain, understand your risks and then you’re in a better place to navigate your responsibilities.
If you’re still unsure or are looking for an expert to talk to, Kingsbridge can offer guidance on compliance strategies, and risk mitigation.
Speak to the Kingsbridge team – they’ll be more than happy to answer your questions.
