AAT: Prompt Payment Code should be made compulsory and payment terms halved

AAT has responded to this month’s government call for evidence on creating a responsible payment culture by recommending that:

• the Prompt Payment Code be made compulsory for companies with more than 250 staff 
• payment terms be halved from a maximum of 60 days to a maximum of 30 days
• a clear, simple financial penalty regime for non-compliance be introduced and enforced by the Small Business Commissioner.

Late payment is a widely acknowledged problem for British businesses, especially SMEs. Almost a quarter of insolvencies (23%) are caused by late payment issues. Even for those small businesses that manage to absorb late payments, the loss of income can stop them from investing and growing, damage productivity, and generally have a negative impact.

Companies in breach of the code

The Prompt Payment Code was introduced in 2012 to try and address this problem, a voluntary code requiring large companies to pay their suppliers within a maximum of 60 days. Only 2,000 companies have signed the code, but even some of these signatories are already in breach of it because they have payment terms beyond 60 days. There is very little enforcement of the code and no financial penalties are imposed for a failure to comply.

Phil Hall, AAT Head of Public Affairs & Policy, said:

Over the past decade or so there has been a stream of tweaks, voluntarism and reliance on big employers to do the right thing, all of which have failed to address the problem of late payments. The time has come for government to legislate to solve the problem once and for all. This should include making the Prompt Payment Code obligatory for large companies, for payment terms to be halved to a maximum of 30 days and for a clear, simple financial penalty regime for non-compliance to be introduced and enforced by the Small Business Commissioner.

SMEs affected

60% of AAT’s members either work for or run their own SME, and our 4,250 licensed accountants provide tax and accountancy services to more than 400,000 SMEs. It’s a big issue for AAT members and an even bigger issue for their clients.

AAT’s recommendations have already won the support of a diverse range of SMEs. Caroline Danks of Caroline Danks Fundraising, based in Cornwall, said:

I strongly agree with AAT: there is absolutely no justification for payment terms of 60 days or longer. Given payment can be made almost instantaneously, five working days seems like a reasonable maximum and that’s why government departments have recently committed to paying 90% of their suppliers within this timeframe. That said, I do recognise that some larger companies may also have cash flow issues and that taking a bit longer may be necessary. Recognising this, it seems more than reasonable to suggest an absolute maximum of 30 days but certainly nothing more. My own payment terms are 14 days and although most suppliers pay on time we do have late payments from time to time which can be a real headache as it’s my only income.

Leanne McConnell of Virtually Perfect, an Eastbourne-based SME, said:

My business partner and I have sometimes had difficulties getting money owed which probably wouldn’t have happened if there was a legal requirement to pay within 30 days and the realistic threat of a meaningful fine if it wasn’t paid. That’s why I support the AAT recommendations for change and really hope the government is listening.

Kate Bell of Zip Us In , an SME based in Salisbury, said:

As a start-up company, late payment caused me several difficulties but even now, as a firmly established and successful company, late payment can have a big impact on me and my company. AAT’s recommendations to halve maximum payment terms from 60 to 30 days and to require all companies with 250+ employees to sign the Prompt Payment Code are definitely steps in the right direction. Enforcement is also key because although imposing obligations is great if companies meet these obligations, there needs to be strong enforcement action against those that don’t – an initial warning followed by a fine for non-compliance would seem like a sensible option.

Read the full AAT response to the BEIS call for evidence.  

Responsible business roundtable

On Thursday 11 October AAT held a responsible business roundtable on how businesses and suppliers can improve their working relationships, with more rigid enforcement of the Prompt Payment Code being included as a key factor. A short white paper detailing the event’s findings will be available within the coming weeks.