With an Autumn Statement that has received mixed reviews, one aspect that has flown somewhat under the radar is the commitment to public sector payment terms in a bid to reduce late payments.
While public sector payments have limited direct impact on the majority of SMEs, it will be interesting to see whether this is the precursor to mandated changes to payment terms, and whether it will shift attitudes about payment delays.
According to Chancellor Jeremy Hunt, the change will incorporate a Publication of a Payment & Cash Flow Review Report that will in turn see the public sector “lead by example” on late payments. It will require any business bidding for public sector contracts worth over £5 million to demonstrate their payment performance.
They will be expected to demonstrate an average of payments within 55 days from April 2024, reducing to 45 days in April 2025, before ultimately falling to 30 days. The question from experts is whether the policy will be influential enough to actually drive meaningful change across the board.
“The Autumn Statement was initially well-received as prioritising businesses and SMEs, incorporating tax reductions, full expensing of capital expenditure, and committing to rates relief, at the same time delivering gains for workers through a cut in National Insurance contributions, and an increase in the National Minimum Wage,” says Jonathan Barber, executive director – UK, Institute of Financial Accountants.
“However, the 110 Backing British Business commitments, have a poorer medium-term outlook, with the Office for Budget Responsibility (OBR) outlining a downgraded medium-term forecast for economic growth.”
Barber goes on to note that further analysis of the measures, particularly the policy around late payment, has received criticism from a number of quarters for not delivering authoritative or mandated change.
“While incentivising public sector suppliers may improve payment terms, it impacts only a small proportion of UK businesses, and encourages rather than mandates a reduction. This is disappointing for those that champion the economic value of timely payments,” he says.
According to the Federation of Small Businesses “Time is Money” report, which advocates payment reform, late payments drive more than 50,000 avoidable business closures each year as a result of cashflow impact.
They define ‘prompt payment’ as paying more than 95% of invoices within 30 days. According to the report’s supporting survey, 52% of small businesses experienced late payments in the preceding three months, and 25% reported an increase in late payments in the same period. This in turn drove increased applications for credit, specifically to support cashflow and not investment.
Additionally, the report also cites the Prompt Payment Code which many large businesses sign to highlight their commitment. “Publicly available data from Duty to Report figures shows that many of these large businesses fail to pay over 95 per cent of their invoices within 30 days and are not suspended or removed from the PPC list.”
The primary concern with continued late payment practice is the turbulence it creates for SME businesses, and the impact this ultimately has on the UK economy. SMEs represent 99.9% of all UK businesses, employ three fifths of UK employees, and generate 53% of all UK turnover at £2.4 trillion in 2023.
Yet, they are the most susceptible to poor payment terms, often lacking the cash reserves to weather late payments. In turn, this can prevent investment into employment and growth, which ultimately support tax revenues and the UK economy.
“Idealistically, I hope the policy will prompt a change in attitudes to late payments. However, requesting that businesses disclose the figures, but not precluding them from applying if they cannot meet them means that poor payment practices can continue in the event that a tender applicant is highly competitive for all other criteria,” says Barber.
“Furthermore, the policy doesn’t extend beyond public sector practices, and as highlighted through the Prompt Payment Code stats, being willing is not the same as actually delivering on these promises. To me, this feels like a missed opportunity to consider tackling the problem of late payment, given that timely payments are instrumental in supporting good business, reducing reliance on credit to fund cashflow shortfalls, and supporting meaningful investment into employment and growth.”
Barber notes it will be interesting is to see whether this practice is a pre-cursor to future change which mandates reporting and introduces penalties for late payment.
For accountants, the Autumn Statement necessitates practical advice for clients, helping them to understand how the 110 policies affect their bottom line, positively and negatively. Many are time bound, so accountants will do well to support their clients with a longer-term view on how the financial boons now can be converted into longer-term benefits and growth.
What’s more, helping them to introduce or improve cashflow management practices, including chasing payments and diversifying rosters to reduce bad debt risk, is a must.