Govt consults on late payment changes

Friday 30 October 2015

The Department for Business, Innovation and Skills (BIS) has launched an open consultation into regulatory changes regarding late payments and “grossly unfair” terms and conditions in conjunction with the Scottish government.

Late payment is a common problem for businesses of all sizes, but it can have a disproportionately negative impact on small to medium-sized businesses and self-employed people, as it can cause cashflow issues.

Overall, UK SMEs are currently owed £26.8 billion - an average of £31,901 per business or contractor. A 2014 Federation of Small Business survey found that 51 per cent of its members had experienced late payment over the previous 12 months, reflecting the widespread nature of the problem.

One way in which late payments can be exacerbated through contractual agreements is by smaller companies feeling unduly pressured to accept contracts which include 60 or 90-day payment deadlines from larger companies, while not being able to negotiate the same amount of flexibility for their own costs.

In addition to this, a multilayer supply chain can lead to the problem being continually passed on until it reaches the smallest trader with the lowest amount of financial leverage and other resources. This situation can amplify the effects of the original problem, making it harder for micro businesses in particular.

In her introduction to the consultation document, small business, industry and enterprise minister Anna Soubry said: “Small businesses are more vulnerable than larger businesses to unfavourable or unfair practices and often do not have the time or resource to challenge them.

“Through the Enterprise Bill the government will create a small business commissioner to help small businesses avoid having to go to court to resolve payment disputes with their larger commercial customers.

“However, in circumstances where small businesses do decide to litigate, the government believes it is important that they have the range of options available to them to take action against ‘grossly unfair’ terms and practices.”

Determining precisely what constitutes a “grossly unfair” practice or contract has never been done in the UK, but is largely set to be left to the legal system to decide. Businesses will be able to challenge a greater number of these things in court, providing they are in keeping with the spirit of the 2011 EU directive on late payment’s definition.

There are also plans to extend the power of representative bodies to challenge terms and practices, but the government says it does not intend to create a list of organisations that are suitable to bring a challenge. This means that whether a body meets the criteria to attempt to overturn terms and practices must be determined by the courts.

The proposed small business commissioner would also be able to have a say in whether the terms of an agreement come under this category, but it is not clear what legal power their opinion would hold.

The consultation will remain open for submissions until November 27th, and can be viewed on the website of the BIS.

By Victoria McDonnell

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