My Lords, with the leave of the House, I shall now repeat a Statement made in the other place by my honourable friend the Minister for Small Business, Consumers and Corporate Responsibility, about the Government response to Creating a Responsible Payment Culture: a Call for Evidence in Tackling Late Payment, which was published today. The Statement is as follows:
“Mr Deputy Speaker, the Government are committed to supporting small and medium-sized enterprises—so-called SMEs—to start well and grow, including through our network of 38 growth hubs across England, providing advice, guidance and support. As part of our industrial strategy, I have an action plan to unlock more than £20 billion of investment in innovative and high-potential businesses. Where I see practices that unfairly constrain SMEs’ finance choices, we are prepared to act. For example, we recently removed a barrier that was preventing some SMEs using invoice finance because of prohibitive contract terms imposed by their customers. This new measure is expected to provide a long-term boost to the UK economy worth almost £1 billion.
Last year, we launched a call for evidence, asking for views on how to create a responsible payment culture for small business. While there are a number of measures already in place to tackle late payment, from the Prompt Payment Code and the ability to charge interest on late payments to increased transparency through the payment practices reporting duty, the call for evidence told us that there is more to do to improve the payment landscape. This is why I have announced today that I will now take further and firmer action to tackle the scourge of late payments, while maintaining a holistic approach to cultural change by using all of the avenues available to us in this space. I will shortly be launching a consultation seeking views on strengthening the Small Business Commissioner’s ability to assist and advocate for small business in the area of late payments, through the provision of powers to compel the disclosure of information, and seeking views on the merit of the commissioner potentially issuing penalties for poor payment practices. When finding that large businesses had poor or unfair payment practices, we want to seek views for the Small Businesses Commissioner’s ability to apply sanctions such as binding payment plans or financial penalties. I am also announcing that responsibility for the voluntary Prompt Payment Code is to move to the commissioner and be reformed: this will unify prompt payment measures with the commissioner and address weaknesses within the current code’s operation.
However, we have seen the impact of the strengthening of the code since our announcement in October, where earlier on in the year we saw five businesses being removed from the code, with 12 being suspended, and the next round of compliance is currently under way. I will take a tough compliance approach to large companies that do not comply with the payment practices reporting duty. The legislation allows for the prosecution of those who do not comply and I will use this enforcement power against those who do not comply where necessary. I can inform the House that we are already writing to those businesses which we have assessed to be within scope to remind them of their duty.
The Government will launch a business basics fund competition with funding of up to £1 million, which will encourage SMEs to utilise payment technology. We have recognised that tech adoption has had a positive impact on the productivity of small businesses. With this competition, coupled with the Small Business Commissioner’s strategy to deliver advice and information, it will provide a clear pathway for small businesses when they feel they need support. I also intend to establish a ministerially led group to bring together key government departments to act on improving prompt payment across both the public and private sectors. We are working with UK Financial Investments and the finance sector to review the role supply chain finance plays in fair and prompt payment, including the potential for an industry-led standard for good practice in supply chain finance. That review will report back to the Business Secretary by the end of the year.
We also want to bring greater transparency to how supply chain finance is reported in company accounts and assessed in audits by working with the Financial Reporting Council to develop guidance and build it into its sampling of companies’ accounts. Supply chain finance can provide an affordable finance option for SMEs but they need to be assured that the terms are fair. Our modern industrial strategy aims to make Britain the best place to start and grow a business; removing barriers to growth is key to that. The response to the call for evidence and the package of measures I am announcing today will tackle the continuing issue of late payments to ensure that this happens.
I want to put on record my great thanks to the organisations that campaigned so hard for movement from government—such as the FSB and its Fair Pay campaign—and to the hundreds of businesses that took part and engaged comprehensively with the department to assess the call for evidence.
Finally, I would like to thank the BEIS Select Committee for its significant work on this issue and the work that it continues to do, as I am sure that it will hold us to account on the improvements we are announcing today. I would therefore like to place a copy of the Government’s response in the Libraries of the House today”.
My Lords, that concludes the Statement.
My Lords, I am grateful to the noble Viscount for repeating the Statement made in another place.
Do the Government have a problem with SMEs? On the one hand, they say:
“Small businesses are the backbone of our economy. Employing 16.3 million, 60% of total UK private sector employment”,
but on the other, they consistently do not provide SMEs with the legislative and regulatory power they need. Earlier this year, in their response to a Select Committee report, they said:
“The Government is undertaking activity across a wide range of policy areas”,
but they offer,
“a Small Business Leadership Programme and supporting local peer-to-peer networks”.
I do not recall any campaign for that rather recherché approach.
The Government also said:
“The Government understands that tackling late payments is a top priority for small and medium-sized enterprises”,
but they offer a voluntary Prompt Payment Code, which is regularly and consistently ignored by virtually all the major companies, and a Small Business Commissioner with no substantive powers to banish bad payment practice or to act on behalf of SMEs against the large companies that rip them off time and again. The Small Business Commissioner is doing a great job and is to be congratulated on what he has achieved, but where in these measures is a policy response to his observation that, since being in the post, he has been,
“struck by the trepidation felt by small businesses when talking about late payment with their large suppliers”?
This is not a new problem. Where are the measures to resolve this long-standing issue? Why do SMEs not escalate the interest on outstanding late payments? The truth is that the SME not being paid cannot risk legal or other action for fear of being blacklisted by the large company it supplies. The Government need to do much more.
It is true that regulations, which we supported, were introduced to ban large companies from preventing their SME suppliers using invoice finance, but this is small beer compared with what SMEs need. Today’s announcement is just more of the same, although the very fact that BEIS has to announce some minor changes to the role of the Small Business Commissioner is a clear admission of failure.
The call for evidence told us that,
“there is more to do to improve the payment landscape”,
so why not do what is clearly required? Give the Small Business Commissioner not only powers to compel the disclosure of information about late payment but significant powers to fine large companies that do not pay their SME suppliers promptly. Why not go further and make the directors and senior staff of large companies that fail to meet the reasonable terms for prompt payment to SMEs personally liable? Make the Prompt Payment Code statutory, not voluntary. Transfer the responsibility for maintaining the Prompt Payment Code to the Small Business Commissioner—we agree with that—but give him the powers he wants to fine flagrant abuses of the code. Restricting this to compliance is small beer; it should already be a statutory offence.
Although we welcome greater transparency in how supply chain finance is reported in company accounts and in ensuring that it is properly audited—although the FRC may not be around to see it—is that not a case of just falling into the same trap? Is this not an issue of whether payments contracted for and due are being withheld wrongly and to the detriment of SMEs? Is it not time that the Government legislated to ensure that in such cases, a trust fund or a project account is set up with its own bank account, which would ensure that the SMEs supplying a supply chain receive the payments timeously?
This is not an ambitious package of measures as it will not level the playing field for the UK’s 5.7 million small businesses. If the department thinks that this will deliver the modern industrial strategy’s ambition to make Britain the best place to start and grow a business, it is clearly deluded. As I think Paul Uppal, the Small Business Commissioner, has hinted, BEIS is attacking the wrong problem. He has said:
“Ending the culture of late payments will pave the way to boost SME productivity, remove barriers to growth and improve cash flow”.
“I welcome any additional provisions which will strengthen the influence my Office has in tackling poor payment practice and levelling the existing playing field”.
What we should be doing is ending a culture through strong, effective legislation and regulation. It is a pity that he is not getting the support that he and his office clearly require.
My Lords, I thank the noble Viscount for repeating the Statement, but I have to tell him that the Liberal Democrats have long campaigned to make the Prompt Payment Code mandatory. Given that, we welcome the new powers that the Government will give to the Small Business Commissioner to tackle late payments through fines and binding payment plans. There are also plans to make company boards accountable for supply chain payment practices, which I understand will be undertaken for the first time. Equally, we support the implementation of a new fund to encourage businesses to use technology to simplify invoicing payments and credit management.
We support these proposals but does the Minister feel that they will be sufficient to mollify the 97% of those who responded to the consultation with SMEs who complained that they had experienced late payments from their suppliers, especially as they felt that the situation had worsened over the past three years? Does he intend to make the Prompt Payment Code compulsory, as has already been suggested, for companies with more than 250 staff, and if not, why not? Will he undertake to ensure that future legislation will be robust and fine large companies that do not pay their suppliers within 30 days? Finally, does he accept that Brexit will cause real damage to SMEs through disruption to supply chains and punitive tariffs?
I thank the noble Lord, Lord Stevenson, and the noble Baroness, Lady Harris, for their questions. I am not sure whether there is broad approval, but I think the answer is that the response is rather mixed. I shall try to answer the questions that have been raised. One of the central points was the question of whether or not to legislate. Perhaps I may answer both noble Lords directly by saying that legislation is not always the answer. The French legislated for maximum payment terms and the unintended consequence of that was that the number of disputed invoices went up. They have also had to amend the legislation subsequently to accommodate the payment practices and complex supply chains of different sectors. It is therefore clear that a one-size-fits-all approach is not necessarily the answer, and sometimes legislating can create perverse incentives in the system. Moreover, legislating in the way noble Lords have suggested could create an incentive which dissuades large companies from contracting with SMEs. If the Government were to set a standard length of time for payment terms—for example, 30 days—companies that pay in seven or 14 days may well extend their payment terms to 30 days.
I turn to the question that was raised about the Prompt Payment Code being mandatory. Again, we believe that more legislation is not the answer here and could lead to unintended consequences in complex supply chains as well as creating perverse incentives. The whole idea is that the Prompt Payment Code is a voluntary code which is administered by the CICM on behalf of BEIS. Signatories to the code sign up to pay 95% of invoices within 60 days. Actually, there is light at the end of the tunnel. In quarter 1 in 2014, according to evidence provided by BACS, the amount of late payment outstanding was £46 billion. That has been reduced through a voluntary process to £13 billion.
Finally, the whole point of these measures is to look to increase the powers of the commissioner and consider the possibility that he could support larger business compliance and better practice in the payment culture, as well as develop greater confidence within the SME community in the Government’s commitment to support small businesses in addressing late payments. Going back to what the noble Lord, Lord Stevenson, said at the beginning of his remarks, we do not have a problem with SMEs at all. That is exactly why we want to get behind the commissioner and look at the possibility of giving him more powers, although not draconian powers, to support a very important part of our economy.
My Lords, this is an old problem and your Lordships have been debating it for years. As I read it, the Government’s latest paper is a clear improvement, but while I welcome the fact that five businesses have been removed from the code and 12 are being suspended, that is a very small number as compared with the problems that other businesses have faced. I assume, although perhaps the Minister can confirm this, that the five removed businesses and 12 suspended ones are very large concerns. If they are not, someone has lost track of the large ones which I think are causing many of the problems.
The code needs to be enforced, as mentioned by other noble Lords. Have the Government considered the rather more nuclear option, which may be necessary, of ensuring that companies which are removed from the code are also removed from the tender list for major government contracts for a certain period of time? That would make them sit up and think, because they would lose business. I know that that would need to be worked out and monitored carefully, but it would affect their bottom line. Being named as having been removed from the code may well simply be shrugged off. I will be interested to hear the Minister’s response.
To answer the second question, it is the case—although I do not have the figures here—that if a company on a public contract does not pay on time, it will be removed from further contracts; that is already there. He asked me to point out names; I do not have the full list here. As for naming and shaming, he will know that Holland & Barrett and G4S are in the public domain as having been thoroughly reprimanded for their poor payment practices. I also know that some companies, before being named, have realised that they were on the brink of going the wrong side of the line, as it were, and have voluntarily taken action. We believe that this is working and that the voluntary approach is right.
My Lords, what thought have the Government given to introducing ring-fenced bank accounts for major government projects delivered by the private sector, so that subcontractors are guaranteed prompt payment and do not have to worry about the main contractor’s financial health? I understand that the policy is supported by the Federation of Small Businesses and was recently adopted by the Welsh Government. As an example of the problem, before its collapse Carillion’s average payment time was 43 days—with some firms waiting up to 120 days for payment—despite it signing the Prompt Payment Code and being subject to the Public Contracts Regulations.
This takes us into the territory of the sometimes complex ways of financing supply chains or projects. On project bank accounts—this is perhaps more focused on construction, but I hopes it helps answer the noble Lord’s question—the current policy is to use these types of accounts unless there are compelling reasons not to do so.
My Lords, I agree with those who have said that this is a long-term problem; I was involved in it many years ago and have been since. I welcome the tougher approach signalled by these proposals, particularly the strengthening of the commissioner’s powers. But I am not quite clear—perhaps my noble friend could assist—as to the stronger attitude to compliance that will be taken. Is it just a stronger attitude to compel the disclosure of information and that side of it? That is fine, but is it the commissioner or the department that will potentially issue penalties for poor practice among large firms? Those are the ones that will really bite hard, but of course it means you have to define, in ways that will stand up in court, whether it is a poor payment practice.
My noble friend makes a good point, to the extent that the idea behind the announcement today is to look at giving the commissioner more powers. As my noble friend will know, the commissioner has been operationally independent since December 2017, but at this stage it is sensible to assess and re-evaluate powers. The commissioner has recovered over £3.8 million for small businesses since 2017, so there is a head of steam up here. We will have to look carefully at what extra powers we give. To answer the noble Lord’s question, that could include issuing penalties, but we are not at that stage quite yet.
My Lords, I raise a point on an area I hope the Government are currently improving. In the past I was the managing director of a small plastic manufacturing company. We were very pleased to get business contracts and strove hard to get the contracts from the Government themselves. Will the Minister therefore look at the Government’s record currently? In the past, the pressure was on small firms to get the contracts but not always on ensuring the payments were made on time.
Yes, a distinction should be made between private enterprise and public contracts. On the public contracts side, the noble Lord may know that, from 1 September, for contracts over £5 million, 95% of the invoices has to be paid within 60 days. The Government are very aware of their obligations on that side. I even have some figures for different government departments, but we will not go down that route just now.
I ask the Minister for a little more information about the definition of late payments. Small businesses often experience difficulty in the process that leads up to issuing an invoice, such as delays in purchase order numbers or complexity around who to send the invoice to. When I speak to small businesses, they often say they have lost months trying to get through that maze before they can even issue the invoice to the right person. I just want a little more information about how late payments are defined. Some organisations almost have a PhD in this now.
Yes, the noble Baroness can be forgiven for thinking that. I hope I can give a succinct answer, again differentiating between private and public enterprise. Just to clarify, the Prompt Payment Code—which is voluntary, as I have mentioned—is administered by the CICM. Signatories to the code sign up to pay 95% of invoices in 60 days, with an ambition to move towards 30-day payment terms. The code currently has over 2,000 signatories. However, on the public side the payment terms are 30 days. It could well be the case that, depending on the contractual agreement between the two companies, a different arrangement can be made. If both sides are happy with that separate arrangement, that is fine, but I am talking about the default—we lay out the framework and that gives the default. I hope that gives the noble Baroness a basic answer to the question.