What You Need To Know About Changes To Prompt Payment Code

Late payments cripple businesses. UK SMEs alone are reported to be chasing up a combined £50 billion in late payments—showing just how pervasive this problem is.

Large businesses often get into the habit of paying their suppliers late. But why? Well, put simply, because they can. Late payments are so addictive that they have even been described as “the crack cocaine for larger companies”.

However, not all companies agree with this practice. Some have committed to ending late payments by signing up for the Prompt Payment Code (PPC)—though this is merely a voluntary commitment, as opposed to legally binding legislation.

This post will explore why late payments are such an issue, outline what the PPC is, and clarify what you need to know about the recent changes to the PPC.

By the way, if you need help with sorting out your company’s paperwork, we can help you with that. Stay on top of your invoices and build a strong and healthy cash flow with the help of our steady and experienced accountants in the UK.

The Late Payments Problem

Late payments wreak havoc on small businesses—especially during economic downturns. There’s nothing worse than not having enough money to pay your bills or staff, especially when a client’s payment is well overdue.

Figures show just how common, and devastating, late payments are within the UK:

• 92% of financial decision-makers admit to paying suppliers late;
• The average UK SMB wastes an hour and a half per day chasing late payments. This translates into just under 400 hours per year;
• 50% of small businesses fail in the UK each year due to late payments alone;
• On average, each UK SMB is currently owed £31,055.
• 71% of small business owners have sleepless nights due to late payments.

Where the Prompt Payment Code (PPC) Comes In

Late payments are devastating to small businesses. While the UK lacks formal legislation to punish late payers (as is the case in Germany, for example), the PPC is an attempt to encourage large businesses to pay what they owe, when it’s due.

The Prompt Payment Code, established in 2008 by the Office of the Small Business Commissioner (SBC), is a voluntary code of practice. When companies sign up for the PPC, they pledge their ongoing commitment towards three goals:

1. Paying suppliers on time, within the agreed terms;
2. Giving clear guidance to suppliers on terms, dispute resolution, and promptly notifying them of any potential late payments;
3. Supporting good practice throughout their entire supply chain by promoting—and encouraging adoption of—the code.

The PPC currently has 3,138 signatories from across the UK. However, given that there are over 6 million businesses currently operating in the UK, it’s clear that there's still a fair way to go yet before late payments are eradicated once and for all.

Changes to the Prompt Payment Code (PPC)

On the 19th of January 2021, the government announced a significant new wave of changes to the PPC.

These are as follows:

• Signatories must pay 95% of their invoices within 60 days;
• When specifically paying small businesses (those that employ fewer than 50 people), 95% of invoices must be paid within 30 days. This comes into effect on the 1st July;
• Small and medium-sized businesses must provide an annual report outlining their payment performance;
• Signatories must recognise that suppliers are within their rights to charge late payment interest/additional charges if an invoice is paid late without any reasonable justification.
• Suppliers should always be provided with a point of contact regarding all payment queries;
• Applications to join the code must be signed by the Chief Executive, Finance Director, or the company owner in the case of a small business.
• Large businesses that pay fewer than 90% of their invoices within 60 days will be suspended from the code until they achieve this percentage or higher.

Why Have These Changes Come Into Effect?

Late payments are always damaging to small businesses. Right now, however, they’re lethal. 41% of small business owners feel like their business is currently at risk of going under. Therefore, if it’s big enough, a single late payment might topple them over the edge.

The government is understandably keen to keep as many businesses afloat as possible. Small businesses alone contribute £2TN annually to the UK economy, so their contribution will be greatly needed as the country seeks to recover from the pandemic.

According to Paul Scully, the UK government’s Small Business Minister:

“Our incredible small businesses will be vital to our recovery from the coronavirus pandemic, supporting millions of livelihoods across the UK.

Today, we are relieving some of the pressure on small business owners by introducing significant reforms to the UK payments regime – pushing big businesses to pay their suppliers on time.

By signing up to the Prompt Payment Code and sticking to its rules, large firms can help Britain to build back better, protecting the jobs, innovation and growth which small businesses drive right across the UK.”

A Useful Barometer — But More Can Still Be Done

Late payments across the UK take a daily toll on small businesses: their owners, employees, family members, and more. It’s time to put an end to late payments once and for all.

The PPC, and its recent changes, are certainly a step in the right direction. They encourage better payment practices and attempt to hold businesses accountable. However, their standards are still perhaps a bit lax—and most importantly, aren’t legally binding.

The UK certainly lags well behind international competitors when it comes to clamping down on late payments. So while we think the PPC is a good first step, we encourage all businesses to personally commit to never paying their suppliers late.

Don’t pay on time because you've signed up to a code—pay on time because it’s the right thing to do. We can only break the late payments cycle by purposefully shifting our collective mindset.

And that starts with you.