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Reporting on Payment Practices and Performance (Amendment) Regulations 2024

Volume 836: debated on Monday 26 February 2024

Considered in Grand Committee

Moved by

That the Grand Committee do consider the Reporting on Payment Practices and Performance (Amendment) Regulations 2024.

Relevant document: 10th Report from the Secondary Legislation Scrutiny Committee

My Lords, as we all agree, small businesses are the backbone of our economy. They make up 99.9% of UK businesses, employ millions of people and enrich our daily lives. That is why the Government have declared 2024 to be the year of the small business. So far, we have strengthened our “Help to Grow” campaign, established the Small Business Council and are extending the payment performance reporting regulations which we are here to debate today.

However, small businesses are being let down by late and long payments, which contribute to an estimated 50,000 UK business closures each year. In addition, 56 million hours are wasted each year by businesses chasing late payments. I will outline the key elements of this statutory instrument and the Limited Liability Partnerships (Reporting on Payment Practices and Performance) 2017.

The first objective of this instrument is to extend the reporting requirements beyond the expiry of the Reporting on Payment Practices and Performance Regulations 2017 and the Limited Liability Partnerships (Reporting on Payment Practices and Performance) 2017 on 6 April this year until 6 April 2031—a very clear extension. Since the 2017 regulations and the Small Business Commissioner were introduced, instances of late payment by large businesses have fallen across the UK. If the 2017 regulations were to sunset without extension, we would remove payment time transparency entirely. I hope that noble Lords agree with me on that. We would also be removing the healthy dose of competition that drives large businesses to improve their payment time. Without the reporting requirements, businesses would not have to worry about being the outcasts of their peers due to poor payment practices.

My colleague Kevin Hollinrake MP, the Minister for Small Business, launched a consultation early last year which asked the public for their opinion on the regulations and our proposals for improving them. Trade associations and businesses across a wide range of sectors provided us with overwhelming support for the extension of the regulations and for the new reporting requirements which we will be introducing.

The second objective of this instrument requires large companies and limited liability partnerships in scope of the 2017 regulations to disclose additional information and report two new payment performance metrics. We will make it a requirement for businesses to provide the value of the invoices paid during the reporting period. Small businesses told us that this would provide them with even more clarity over how large businesses behave. We will also be introducing a requirement for businesses to report on the percentage of invoices that they dispute. Small businesses told us that they are concerned that some of their customers use frivolous disputes to avoid making timely payments. We listened to them and have taken action to address this.

The third objective of this instrument is to clarify the reporting requirements when supply chain finance is used by large businesses. This amendment will ensure that the impact of the use of supply chain finance is more accurately reflected in the reporting data, providing small businesses with a clearer picture of a business’s payment practices.

Like their predecessor, these regulations will require a review in April 2029, before their statutory expiration on 6 April 2031. It is critical that this legislation remains in place and is further improved to provide small businesses with the transparency that they need. By increasing the level of transparency, we will be arming small businesses with more information to help them make informed decisions about who they work with, while applying additional pressure to large businesses to improve their behaviour. We are incredibly grateful to the 137 respondents to the consultation on these regulations. They included small and large businesses as well as a range of representative trade bodies. There was overwhelming support for the extension of the regulations and for the new metrics that we will be introducing. I sincerely hope that my colleagues here with me today can see the benefits that these regulations provide and can agree with the introduction of this affirmative statutory instrument. I beg to move.

My Lords, I welcome these regulations, although I would have liked them to go even further. Prompt payment, as the Minister said, is vital to smaller construction firms, particularly at present, when a recent report from the Begbies Traynor Group found that the construction sector had the highest number of at-risk businesses in the UK, more so than any other industry. That is 83,000 firms in significant financial distress. Late payment and retentions are key issues exacerbating these problems for small construction firms, as larger companies higher up the supply chain seek to hold cash in their accounts for as long as possible, thereby adding to the challenges for smaller firms of inflation and increased costs of materials, energy and other necessities. Borrowing is often no longer an option for many SMEs. Therefore these regulations, requiring greater transparency of payment reporting, represent a step forward in keeping larger companies accountable and reinforcing the Government’s efforts to support SMEs by establishing prompt payment as the norm, not the exception.

The requirement to report on invoices both paid and unpaid by value, not just by volume, is particularly welcome. Even if the number of invoices paid within the time specified—30 days, 60 days or more than 60 days—represents a high percentage of all invoices, the total percentage value of those invoices may be significantly lower, because lower-value invoices tend to be paid more quickly. The requirement for senior management to sign off on the figures reported is also a laudable step forward.

However, there are some disappointing omissions from the regulations. The Government’s consultation response last November promised to introduce “reporting on retention payments”—that is, the withholding of a proportion of payments due to subcontractors for work they have completed—for businesses in the construction sector. Perhaps the Minister can tell us something about when and how this will happen, even if it may be too much to hope that he might give an indication of how the Government might move towards ending the pernicious practice of retentions altogether. It is high time that happened, after so many years of government consultations and considerations but no conclusions.

The consultation response also promised more active and visible enforcement of payment practice reporting requirements, but there is no reference to this in the regulations before us today. Reporting by itself will not solve prompt payment issues, so how will it be backed up by the enforcement measures promised by the Government? What will happen if a supplier to a government construction project reports consistent lateness in paying its supply chain, especially for higher-value invoices? Can the Minister say something about how and when this enforcement commitment will be met, including the plans for implementing changes to the role of the Small Business Commissioner to broaden its powers and increase its effectiveness in supporting small businesses?

I welcome the regulations as far as they go, but I look forward to hearing from the Minister how the Government plan to finish the job by introducing further regulations, hopefully quite soon, to ensure that reporting requirements are actually monitored and enforced and, above all, to begin finally to deal with the far too long-standing bane, blight, canker, plague, scourge—or whatever other synonym one may choose—of retentions.

My Lords, we, too, welcome this statutory instrument in as far as it goes. When I saw that my friend the noble Lord, Lord Aberdare, was speaking, I knew that my speech would get shorter, because he has already covered much of the ground that I wanted to talk about. Late payment is just about the number one issue facing SMEs. If you listen to the organisations that represent them, it is the issue they always come back to. It will not be solved merely by transparency; we know that is the case. We have some transparency, but we are not getting solutions.

There is a culture in certain sectors. As the noble Lord, Lord Aberdare, just set out, some sectors are worse than others. SMEs rely on a small number of large customers. The Minister said that publishing information would help SMEs to make informed decisions about whom they would work with. However, in many cases SMEs do not have the luxury of a decision about whether to sell their product or service to one company or another. That is the market and those are the businesses that operate; if there is a culture of late payment or retention in that business and, if those SMEs want to continue to trade, they have no choice about with whom they will trade. There is very little jeopardy for those companies that continue to practise late payment. That is the point the noble Lord made about enforcement.

I will make one other point about the building sector. Although it is a somewhat dated example, we can go back to 2018 and the Sandwell hospital project, which was managed and run by a company called Carillion. When that company went bust, it was very clear that its entire cash flow was managed through the late payment and retention of its contractors and subcontractors. The transparency situation has not appreciably changed since then.

A big issue that has to change is the Government’s view to their management of public procurement. The issue of late payment came up a number of times when we considered the public procurement Bill. Can the Minister ask his department what it can do, using the new Procurement Act, to help bolster enforcement on these issues? From our point of view, we would make it compulsory to sign up to a prompt payment code then seek ways to enforce it. Without that, the small improvement of this statutory instrument will continue to leave many of our small and medium-sized businesses in a position where their cash flow is used for the benefit of their customers’ cash flow.

My Lords, I thank all noble Lords who have spoken. I declare my interests, as set out in the register, as a director of several businesses and companies. I thank the Minister for setting out the regulations and welcome the Government’s campaign, declaring 2024 as the year of the SME.

I have advocated for provisions such as those provided by this instrument since long before I became a Member of your Lordships’ House. As a businessperson, I welcomed the original instrument’s introduction in 2017, and support the extended sunset clause and the expanded reporting requirements contained in this legislation.

As noble Lords have said, for too long and far too often, SMEs that have supplied goods and services to larger companies and public sector organisations have not been properly respected regarding payment terms. A relatively small amount of money for a large organisation can be, for many SMEs, a question of whether wages or rents are paid on time. It is stressful enough running a business, and late payments from large customers, whether through inefficient systems or the deliberate withholding of payments, are an all too common factor. Late payments can lead to additional borrowing costs for SMEs. Further, some SMEs may be reluctant to chase late payments for fear of jeopardising the business relationship. When payments have to be chased, good will, time and energy are unnecessarily wasted on both sides.

In tough economic times, as costs rise and margins are squeezed, SMEs are particularly vulnerable to cash-flow problems. Yet, in 2022, SMEs were owed an average of £22,000 in late payments. This has massive negative impacts on reinvestment, liquidity and market operation.

We know that we have a serious productivity problem in our economy. We can also agree that SMEs are the lifeblood of a healthy economy. So I am unsurprised that a consultation on these regulations last year strongly supported their extension and expansion. The expansion requires companies to publish additional information on both the proportion of disputed invoices resulting in payments exceeding the agreed times and the value of invoices paid late, in addition to the number of such invoices—an important improvement, in my view. It also requires companies to report on the percentage of invoices paid before 30 days, within between 31 and 60 days, and after 61 days or longer.

Given that this legislation applies across the whole of the United Kingdom, the estimated implementation cost of up to £5 million seems reasonable when weighed against the potential benefits to SMEs. The increased scrutiny should both draw attention to the issues for boards and act as an incentive for them not to have reputational damage for their companies. In turn, this should create smoother cash flow for SMEs, leading to greater peace of mind, productivity and efficiency.

Are there plans to monitor the financial benefits of these regulations? I hope that this could provide strong evidence to justify the costs to businesses of implementation and ongoing maintenance in publishing these figures. Can the Minister also explain how accessible the data published under these provisions will be? How can we ensure that the data provided by companies are accurate, given the potential reputational damage for poor practice, so that suppliers, customers and the Government can monitor and address this issue when making commercial decisions?

I look forward to the Minister responding to the question from the noble Lord, Lord Aberdare, on retention payments, especially in the construction sector. This is a bone of contention among many construction companies, whereby companies are holding back retention payments to benefit their cash flow. I look forward to the Minister’s response.

I greatly thank noble Lords for their passionate inputs into this debate. This is a serious issue. I should say that, although I do not believe I have any personal conflict, I would recommend that all noble Lords inspect my register of interests because, clearly, I have interests in businesses. Indeed, the noble Lords, Lord Leong and Lord Fox, and I have all had experience of working in small businesses, and late payment is a significant issue. We have these dry statistics, but the reality is that it has an effect on people’s lives, induces stress and wastes time, with an impact on the economy. It is something that we have to take very seriously. We are all in agreement that extending these rules until 2031 makes absolute sense. I am grateful to my colleagues for supporting us in this cross-party and cross-Committee view.

Some relevant questions were asked, and I will try to cover them briefly, but I would be absolutely delighted to have a further conversation. I know that my colleague, Kevin Hollinrake, is certainly available to hear further input from noble Lords, if that would be useful.

The noble Lord, Lord Aberdare, made a point about the Small Business Commissioner. Let me say something; it may help to cover some of the other points made by noble Lords. The Payment and Cash Flow Review Report issued by Minister Hollinrake at the end of last year—I thought that it was a clear and excellent report—covers nearly all of the questions asked by noble Lords today, in particular the point about the Small Business Commissioner. The intention, to which we are absolutely committed, is to introduce broader responsibilities, which will allow said commissioner to undertake better investigations and publish reports; this will help significantly, I think.

The noble Lord, Lord Leong, asked who currently enforces the payments process. It is the Department for Business and Trade. We publish that data—it is on the Government’s website—and we also have a team tasked specifically with ensuring that we monitor late payment. That information is published.

I am sensitive to the point made by the noble Lord, Lord Fox, about the competitive case. As someone running a small business, one is—I was, and we were—obliged to take whatever business one can get. That is not irrelevant when it comes to the publishing of businesses’ competitive positions among each other; it is important. Similarly, the work that we have done on Companies House, with input from many noble Lords opposite, allows us to have better data around companies’ behaviour, which will have a significant impact. As I understand it, at least anecdotally, there is a concept in the consultation of competition between companies in terms of wanting to be a better payer is something that is not to be taken lightly.

I refer noble Lords to the report, looking at concepts such as late payments to be embedded in environmental, social and corporate governance standards, and so on. This will all have ultimately important impacts.

I have two other points, before I conclude, about the construction sector. Again, we have been very clear that we are looking to severely control the principles around retention payments, how they can be levied and how that operates in the information that we publish on that. We have been working very closely with an organisation called Build UK, which now publishes league tables on payment performance within the construction industry. This is a very clear flagged issue and something we are certainly working on. I am happy to write to noble Lords with further information if that is useful.

Lastly, the noble Lord, Lord Fox, raised a very important point about government procurement: how can we ensure that the Procurement Act is used more effectively to ensure that, through the supply chain, government procurement, which accounted for however significant a percentage of all procurement in the UK, is used to drive payment terms from its suppliers? That is a core element of this and it is worth saying that, since legislation was brought in in 2017, average payment times have reduced from 81 days to 36 days, which is a significant reduction. That is a single statistic, and I am very aware that it does not represent the value of the deals or go into a huge amount of detail, but that is the information that I have been given and I think it is very encouraging. Clearly, there are outliers and industries where there are still issues over payments. The Government take this point extremely seriously. It is a cornerstone part of our policy agenda to help small businesses, and indeed help the economy, to function properly. I am very grateful to all noble Lords for their input.

The Minister mentioned the drop in procurement payment from 81 days to 36 days. That is obviously very encouraging, but do the Government have figures for how long it takes the main contractor to pay its subcontractors?

I am grateful to the noble Lord, Lord Leong, for that point. We will have this data. I am looking, and average payment times between businesses peaked in December 2020 at 30 days and is now down to 35.6. I do not have the data in front of me for what it was before these regulations came in, but there is a very clear downward trend that can be seen in a chart in the report. I am happy to show noble Lords and to write with more specific information. The whole point about this exercise is to have the information to demonstrate what the trends are and who is not following the right courses of action.

Before the noble Lord sits down, if that is the right phraseology, I have no doubt about the Government’s commitment to some of these further developments in reporting on retentions, for example. My question was very much about how and when that is going to happen, and why it does not happen. Here we have regulations which seem to me to be ideal for that quite simple reporting of retentions. It does not go nearly far enough, in my view, towards actually scrapping retentions, but it does at least produce the sort of transparency that the Minister is talking about.

I thank the noble Lord, Lord Aberdare, for those points. The timeline is genuinely as soon as possible. We felt it was more important, given the timing of the cliff edge and the sunset around this legislation, to make sure that we extended that to 2031. I am aware, without speaking on behalf of my ministerial colleagues, that retention payments and issues around construction are absolutely on top of the priority hopper, so I hope the noble Lord will be satisfied with that.

My Lords, finally—I am not to be outdone—the Minister sets a lot of store on the public embarrassment issue. I come back to the balance of jeopardy: the Minister is a businessman of the world and he knows that, if you have a publicly listed company, it can make sure it reaches its numbers by the end of the year by extending its outgoings into the following year—it happens all the time. Which is more embarrassing to the board, not meeting its financial projections to the Stock Exchange or having a rather dirty note in its annual report 12 months later?

I am grateful to the noble Lord for the direction of his question. I do not necessarily think that I can answer it specifically. It would be unfair to deviate away from the main thrust of what we have been discussing today: a very sound extension of the right type of legislation for gathering information and including new areas within which to gather information, such as on value, to ensure that the supply chain funding and the data from companies using that system are not distorted. This is sensible, frankly, and has the support of everyone here.

However, the Committee is absolutely right to put pressure on the Government regarding potential payments around the construction industry and, importantly, the Small Business Commissioner. The plan is that the commissioner will be given significantly more powers—and not simply to publish the league tables, which I agree with the noble Lord is soft power. As I understand it, we are looking at opportunities to give the Small Business Commissioner, or whatever office it evolves into, real teeth when it comes to ensuring that companies are fulfilling their obligations.

There is more work to be done. This is a quite a new concept for the UK economy. We are looking at legislation that is just under 10 years old whereas, previously, we did not have any such legislative structures.

Motion agreed.