A range of new measures will help contractors to make sure they are paid promptly and in full.

Thursday 28 March 2013

This week the government has announced two measures that will empower contractors to claim their payments on time.

The Prompt Payment Code has been in the news for some time, with two-thirds of businesses calling for the naming and shaming of the FTSE 350 companies who have not yet signed up.

But the introduction of a new EU directive will make sure that contractors who are paid late are entitled to claim extra ‘recovery fees’ from their clients.

Under the Late Payment Directive (LPD), if a contractor is not paid quickly enough, they can now charge interest on the amount they are owed as well as recovery fees of a “reasonable” amount - though the directive does not specify how much this should be.

Public bodies are expected to pay for goods and services within 30 of receiving them, according to LPD, while all other debtors will have 60 days.

Fixed penalties will also be incurred - customers will have to pay £40 on top of any debt under £1,000, £70 for debts between £1,000 and £10,000, and £100 for any debt above that level. When it comes to the additional fees, however, it looks as though contractors will be able to set those independently.

The directive is set to be enforced throughout the 27 member states. When different companies and countries have widely differing practices on the subject of acceptable payment periods, some states become more favourable than others for business - especially for the smallest businesses, where late payments are far more likely to lead to immediate cash flow problems. LPD is designed to level the playing field, meaning that contractors who set their sights on overseas projects will be able to enjoy more freedom to work across borders.

Recovery fees are one of very few new provisions in the directive, which is largely based on expanding current UK practice around the Union. Government policy already states that departments should pay eight out of ten unchallenged invoices within five days, while primary contractors are already expected to make payments within 30 days.

HMRC has also announced that it will be very close attention to companies and individuals choosing to become insolvent to avoid paying their tax debts with the Managing Serious Defaulters strategy (MSD), which was launched yesterday (March 27th).

Businesses and citizens that are known to have evaded tax for five years or more will be subject to increased scrutiny as part of a scheme to wipe out tax avoidance around the country.

If they are believed to have become insolvent deliberately to get away with not paying their tax liability, HMRC will be able to make unannounced visits to company premises, check records and carry out in-depth compliance checks. The taxman will also be entitled to observe and record business activity and cross-check details to keep track of how money moves in the business.

Those who fail to make the grade could face criminal charges and prosecution.

Although the move was designed with tax avoidance in mind, it will impact on business more widely. When a company goes bust, it is often to avoid more debts than those owed to HMRC and other creditors find themselves out of pocket too. If so-called “phoenix businesses” are prevented from becoming insolvent only to re-establish themselves without their debts, contractors may get paid who would otherwise have lost out.


By Victoria McDonnell

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