Small Business, Enterprise and Employment Bill
The Committee consisted of the following Members:
Fergus Reid, Committee Clerk
† attended the Committee
The Chair: We now begin line-by-line scrutiny of the Bill. Before we start, I repeat that Members may, if they wish, remove their jackets during Committee meetings but would everyone ensure that all electronic devices are turned off or switched to silent mode?
As a general rule, I and my fellow Chairs do not intend to call amendments that have not been tabled with adequate notice. The required notice period is three working days—in other words, by the rise of the House on a Monday for consideration on Thursday, and the same on a Thursday for consideration on the following Tuesday. The selection list for amendments and new clauses so far tabled will be available in the room, updated for each day’s sittings and showing how selected amendments on similar issues have been grouped together for debate.
A Member with their name on the leading amendment in a group is called first. Other Members may then catch my eye to speak on any of the amendments in that group. At the end of a debate on a group I will called the Member who moved the lead amendment again, and before they sit down they will need to indicate whether they wish to seek to withdraw the amendment or to press for a decision. Any Member wishing to press any other amendment in the group must let me know. I will assume that the Minister wishes the Committee to reach a decision on all Government amendments.
Decisions on amendments and new clauses take place not in the order in which they are debated, but in the order in which they appear on the amendment paper. In other words, debate occurs according to the selection and grouping list and decisions are taken when we come to the clause which the amendment affects. New clauses are decided after we have finished with the existing text, so after dealing with clause 149 in this case. I will use my discretion to decide whether to allow a separate stand part debate on individual clauses and schedules if there has already been extensive debate on relevant amendments. I hope this explanation is helpful.
Unfortunately under this Government, those problems are getting worse: net lending to business has fallen by £56 billion since May 2010. The Government have tried several piecemeal fixes, which tinker around the edges of the problem but which, as has become an emerging theme of the Bill, have failed to deliver the transformational change that is required. The Public Accounts Committee’s recent report notes that the Government’s most recent scheme, funding for lending, once again falls into this pattern. We would have liked to have seen far more ambition on access to finance in the Bill.
To get to grips properly with the problem, we need to address the fundamentally uncompetitive lending market. More than 85% of the UK’s 5 million small businesses are locked into just 5 big banks, which lend on roughly the same criteria, so businesses rejected by one of the banks are still likely to be rejected by each of the others in turn. In drafting the Bill the Government should have looked more closely at what works in some of our biggest competitors. Community banks in the US were relatively unaffected by the crisis and, astonishingly, in our prime European competitor, Germany, lending actually increased during the global downturn.
Has the Minister considered how we can replicate in the UK the principles of the German Sparkassen system—permanency through state backing, a core duty to support growth and innovation in a defined geographical area, and the professionalism that comes with real banking experts who are rooted in their local market and understand their local customers and communities? The Bill was a perfect opportunity to match the ambition demonstrated by my right hon. Friend the Member for Doncaster North (Edward Miliband) in committing to grow a generation of local banks dedicated to growing the economy in their regions by delivering finance to Britain’s small businesses.
Similarly, we could have seen much greater steps to aid the creation of new challenger banks or to support the fledgling peer-to-peer lending market. It is good to see new entrants, such as Metro bank, developing a major high street presence, but deeper and wider competition is needed throughout the UK. The Government could have used the Bill to bring together the Bank of England, the Treasury and regulators to develop new procedures and support measures to make it easier and quicker for new, specialised banks to become established.
Overall, we would have preferred the clause to be one of a range of measures designed to fundamentally transform Britain’s lending market and create a panoply of measures for small businesses. The Minister clearly feels the Bill is so perfect that it needs no introduction, but it would be helpful to hear more about the thought process behind the clause and what he anticipates it will deliver. Despite our reservations, we will support it.
Many small businesses are able to obtain up-front finance against the value of unpaid invoices by assigning the right to the payment due under those invoices to a
Anne Marie Morris (Newton Abbot) (Con): I am grateful to the hon. Member for Chesterfield for his presentation on the clause, and I am delighted that he is supportive of it, but I take issue with some of his comments about the Government’s lack of engagement in terms of regulation and support for alternative finance. He gave no credit to the Government for the one in, two out system. Also, alternative and challenger lenders have been given a degree of support by the Government, and that has not been recognised by the Opposition.
The Minister for Business and Enterprise (Matthew Hancock): I thought for a moment that this was going to become a part stand part debate on the whole of part 1, but to deal specifically with clause 1, let me say that, coming from a small business background, I understand how important access to appropriate finance is. That is sometimes a bank loan and at other times a bank overdraft, and when waiting to receive payment of an invoice, invoice financing can be the most appropriate form of finance. The clause is about ensuring that small businesses have the option to access that type of finance.
Currently, some business contracts contain a barrier that inhibits small businesses from accessing invoice financing. A clause in those contracts prevents the assignment of a payment that is due under the contract. Businesses often use that ban on assignment clause as a general catch-all to prevent suppliers from subcontracting services due under that contract, meaning that the small business’s ability to use invoices issued under that contract for invoice financing is unintentionally inhibited. The clause will tackle that specific barrier.
That is especially important for new and successful peer-to-peer invoice finance providers and platforms, which are growing rapidly in the UK. Those newcomers are allowing businesses to submit individual invoices for finance—a sort of on-demand service for small business finance—but along with more traditional invoice financers, they currently have to work around the ban on assignment clause. Otherwise, individual lenders would, in effect, be making an unsecured loan to the business. Those work-arounds cost money, increase the difficulty of accessing invoice financing, and in some cases can be the deciding factor in whether a business is declined for invoice finance. Last year in our discussion paper, “Building a Responsible Payment Culture”, we asked whether these barriers should be removed, and the answer was very clearly yes, which is why we are taking action.
The measure is being introduced as a delegated power, which is appropriate because a lot of technical details lie behind it. It will be important to consult on some of the more detailed aspects, and we intend to launch the consultation before the end of the year. For example, the Committee will note that clause 2 sets out the financial services that may be exempted so as to focus the measure on the core purpose of facilitating invoice
Anne Marie Morris: Will my right hon. Friend confirm my view that this is particularly beneficial to the very smallest of businesses, for which invoice discounting is one of the main means of raising cash?
Matthew Hancock: Under clause 1, we are removing barriers inhibiting small businesses’ access to invoice finance. That is typically not provided for financial services contracts, such as loan agreements between a small business and a bank. In addition, for some financial services contracts it is important to maintain the ability to prevent assignment of rights under that contract—for example, a business may want to ensure that it deals directly with its own bank in respect of payments due under a loan agreement or other financial service contract. Clause 1 therefore sets out the power to invalidate certain restrictive terms of business contracts, and clause 2 limits the scope of clause 1 to focus that clause on facilitating invoice finance. To this effect, it provides a list of financial services that can be excluded from the scope of clause 1. The list is based on the list of financial services given under section 40 of the Terrorist Asset-Freezing etc. Act 2010. The list of financial services in clause 2 should be considered only as an indicative list of financial services excluded from the scope of clause 1. In particular, subsection (4) retains the flexibility to define financial service contracts more fully in secondary legislation, on which, as I said, we intend to consult later this year.
This amendment provides that companies can be judged on their performance in practice.
‘(4A) “Performance” has such meaning as may be prescribed, and the information which may be prescribed shall in particular include information on late payment of invoices by the company, to include in a quarterly report which shall include—
(a) lists of all payments to suppliers which were made over 30 days after the date indicated by the suppliers agreed payment terms, without a formal query having been registered with the suppliers within a period as may be prescribed;
(b) confirmation, for each instance listed under paragraph (a), that interest, equalling the Bank of England base rate plus 8% APR, was paid to compensate the supplier for overdue payment; and
(c) assurance, for each instance listed under paragraph (a) where confirmation of compensation under paragraph (b) cannot be provided, of a payment plan in place to compensate suppliers on the basis set out in that paragraph.”.
This amendment defines “performance” against which companies will be judged.
“(g) about the circumstances and process for amendment of payment terms of the company.”
This amendment aims to require companies to include details of the circumstances and process (including who will be involved) by which payment terms can be amended, preventing unilateral and ad hoc changes.
‘(5A) A person making a false report of payment performance commits an offence punishable under subsection (8).”.
This amendment establishes that the financial reporting officer shall be liable for false reporting.
‘(8) It shall be an offence for a company, prescribed by the Secretary of State, to fail to complete a payment plan to compensate a supplier where payment to that supplier has been delayed by more than 30 days after the date indicated by that supplier’s agreed payment terms.
(9) A company committing an offence under subsection (8) shall be subject to a fine not exceeding the amount of the invoice, up to £10,000 on summary conviction.”.
This amendment makes it an offence for companies not to fulfil compensation payment plans.
‘(1) The Secretary of State may make regulations—
(a) imposing a limit on the number of days after receipt of a supplier’s invoice a company can seek to challenge that invoice;
(b) prohibiting the practice of a company seeking to change the payment terms of a supplier company unilaterally; and
(c) prohibiting a company from requiring a supplier company to make a payment in order to join that company’s list of suppliers.
(2) The regulations may make provision for a prescribed breach by a prescribed description of person of a requirement or prohibition imposed by the regulations to be an offence punishable on summary conviction—
(a) in England and Wales by a fine;
(b) in Scotland or Northern Ireland, by a fine not exceeding level 5 on the standard scale.
(3) The regulations may specify the size of company and supplier company to which they will apply.
(4) Before making regulations under this section the Secretary of State must consult such persons as the Secretary of State considers appropriate.
(5) Regulations under this section are subject to the affirmative resolution procedure.
(6) For the purposes of this section—
“company” has the meaning given by section 1(1) of the Companies Act 2006;
“prescribed” means prescribed by the regulations.”.
This new clause gives the Secretary of State new regulation-making powers to impose a limit on the number of days after the receipt of a supplier’s invoice a company may challenge that invoice, to prohibit companies from seeking to change the payment terms of a supplier company unilaterally or requiring supplier companies to pay to join that company’s list of suppliers.
Toby Perkins: We have discussed how small businesses frequently identify accessing finance as their biggest barrier to growth. One of the key challenges faced by businesses, and one on which they look to the Government for support, is the significant problem of getting hold of money they are rightly owed, particularly by their business-to-business customers but also by their public sector customers. In speaking to amendments 34 to 37, I will expand on why this is such a significant problem. I will outline why some of the steps taken so far and those that are proposed in clause 3 fail to address the problem, and how amendments 34 to 37 are designed to deliver the step change in legislative power and payment culture that, as we heard so powerfully in oral evidence, is so desperately needed.
I speak both as the shadow small business Minister and as one who has been on both sides of the equation. I was a small business owner for five years before arriving in this place, and in the years before that I was a sales executive, attempting to convince the ladies in our credit control department to release one of my customers from stock because they would pay next time if only we would deliver these goods. They were difficult people to persuade. I know at first-hand what a significant issue it is.
It is small businesses that are the most vulnerable to customers who choose to pay their invoices late. Insolvency specialists have estimated that one in five business failures are simply down to bills being paid late, rather than to failed business models. We should consider that statistic. Some 2,500 businesses in this country every year cease trading, with all the inherent bad debts thus caused. Members of staff, who have often worked loyally for the business for many years or decades, are laid off, plunging those people into unemployment. Massive problems are caused for that business, not because it had a failed business model, because its prices were too low, because it was paying too much for its goods, or because it failed to keep up with the times, but simply because it was not paid money owed to it by its suppliers. This problem is bringing healthy businesses down, creating job losses, creating debtors and putting other businesses under
Mark Garnier (Wyre Forest) (Con): The statistic that the hon. Gentleman talks about is very interesting. Has he seen any analysis of why businesses are late payers? Presumably, they could be badly run businesses and going bust themselves, or they might not be paying because just it suits their cash flow. Has he done any work on that?
Toby Perkins: A tremendous amount of work has been done on this. There is a variety of answers to the sensible question that the hon. Gentleman poses. Often, people pay late because they have been paid late—it becomes a vicious cycle in which businesses that expected to have money coming in are not paid on time, and towards the end of the month their bills come due and they think, “The only way we can get through this is to spin it out until our moneys come in.” Often, businesses do it simply because they would rather have the money in their account, either from a cash-flow perspective or to reduce the interest payments on their own overdraft, so they pay businesses later as a matter of policy. One way they seize their 1% here and 1% there is by doing everything they can to bring money in early and to pay late.
It is not always bad businesses, but Katja Hall, who spoke to us from the CBI, was right to say that this is a cultural problem as well as a business practice problem, but it turns into a failed business insolvency problem. There is a huge variety of reasons why businesses end up paying late and it is an important point.
Anne Marie Morris: Across the Committee, we agree that late payment is a really serious issue that must be addressed, but there is a question about how we resolve it—whether we do it by naming and shaming or by very precise legislation which then involves litigation. There are already steps in place that a company can take, but it entails the expense of litigation. If the hon. Gentleman’s proposals are introduced, the company will still have to litigate, which is expensive. I cannot help feeling that the naming and shaming—the reporting—will be very much more effective. Does the hon. Gentleman have a view?
Toby Perkins: I hope that the Minister heard that. When we had this debate in 2012, the hon. Lady spoke powerfully. The then Minister, now the Secretary of State for Defence, made it clear in advance of the debate that he was going to start naming and shaming. It was the current Minister on coming to office who decided that the Government would renege on the commitment to name and shame.
Anne Marie Morris: Does the shadow Minister agree that what the Minister proposes in the Bill would effectively enable just that, just the naming and shaming? Once information is published, frankly the media are going to be hungry to do something with it.
A point that came across powerfully in the evidence we heard last Tuesday is that there is not a significant reputational risk to businesses that pay late. That is why many of the household names where people shop every weekend are accused of being late payers. Late payment takes two different forms. It could be not paying bills at the agreed time or having very restrictive payment terms with long lead times, because they know that the supplier base has no alternative.
The naming and shaming approach has some potential but is a pretty blunt instrument. As I will go into later, there is a reason why many of the different measures taken with the best intentions by this and previous Governments have failed to get us where we need to be.
Ian Murray (Edinburgh South) (Lab): There is a knock-on effect of late payment. As a small business owner myself before being elected to this place, I found the key to late payment was the knock-on effect on the company’s credit. I often had to pay bills and salaries on credit cards in order to keep the cash flow moving while I waited for payments to come in. It is a huge issue for small businesses.
Toby Perkins: As always, my hon. Friend speaks with the knowledge and passion of one who has been at the sharp end. He is right to say that the knock-on effects, as the hon. Member for Wyre Forest mentioned, are manifold. They can lead to other businesses not being paid and that business having to rely on credit cards taking on interest. That is one reason why removing the incentive to pay late, as we attempt to do with amendment 35, is so important.
To return to the point made by the hon. Member for Newton Abbot, it is important to put on record that, as was reflected by some of the witnesses at last Tuesday’s evidence session, we are talking about an opportunity not to name and shame but to name and praise all the big businesses that, in the reporting procedures we are discussing, can make a clear declaration that every one of their suppliers was paid on time.
We could name and praise all the businesses that had not just signed up to the prompt payment code but were delivering on it. We could all salute those businesses, not just castigate those that were doing it wrong, by having a name and praise regime of all the businesses that pay on time.
Anne Marie Morris: The shadow Minister makes the good point—clearly, praise is as valuable as blame. However, what the Government propose in the Bill will enable just that. Information can be used to praise and blame.
Toby Perkins: That is an interesting point. I suspect that when I get to the end of my contribution, the hon. Lady will have cause to reflect on whether the things proposed in this Government Bill will deliver on what she aims for. I will attempt to demonstrate that an approach which talks about average payment terms can be very misleading. We heard in the evidence sessions that businesses will have a whole range of payments
To return to what I was saying, small businesses are the most vulnerable to customers who choose to pay their invoices late. One in five business failures are simply down to bills being paid late. No one who listened to the evidence could have been in any doubt about that. I want to reflect on some of the contributions made by the business groups that attended our evidence session.
To what extent does the Bill seek to address that imbalance rather than simply provide a little bit more transparency? For the record, we will support the measures that the Government are bringing forward, we just do not think that they go far enough. That is why there is the opportunity for Members of all parties to support our measures, which will build on the Government’s work. To what extent do the measures in the Bill address the imbalance of power in the relationship between creditors and debtors? Mike went on to say,
“as I am sure you are all aware from what we have said, late payment is a huge problem for many small businesses and especially for micro-businesses. In a modern economy we believe that 30 days should be more than sufficient to settle payments”––[Official Report, Small Business, Enterprise and Employment Public Bill Committee, 14 October 2014; c. 4, Q2.]
Mike Spicer from the British Chambers of Commerce said that the large private sector companies tend to be the worst offenders on late payments, which is why we think that, while there should be a focus on the role of the public sector and Government—the Government have attempted to get that practice handed down from first tier to second and third tier suppliers, and we support that—it is strange to confront this issue of late payment as if it is one that is about the public sector.
The survey that the British Chambers of Commerce did on supply chains found, shockingly, that 94% of respondents had experienced late payments. Almost a quarter reported that more than 40% of their payments were received beyond the originally agreed terms. Respondents also reported that private sector organisations performed much worse than public bodies on late payment.
If we have a policy that sets out to take action on this key strategic business challenge, and it does not take any action on addressing that imbalance between creditors and debtors in the private sector, we have to question whether we are going to be able to walk away from the Bill and say that we have done right by our small businesses.
Andy McDonald (Middlesbrough) (Lab): Does my hon. Friend agree that we seem to have been discussing the issue of late payments for decades and that naming and shaming of itself does not ever seem to have embarrassed some of the major players into correcting their behaviour?
Toby Perkins: My hon. Friend is right. We have been discussing this for a long time. Going back to the Late Payment of Commercial Debts (Interest) Act 1998, this is something that Government have wrestled with increasingly over the last 15 to 20 years.
An important point was made in the evidence session about changing that culture. While businesses feel that there is some disincentive to payment, we will consistently see businesses doing this, for all the reasons that I gave the hon. Member for Wyre Forest. The downside for paying late is nothing like as great as the upside: they keep money in their bank account, stave off any cash flow problems and ensure that any debt interest they are paying is reduced, because the money is in their account when it should be in somebody else’s.
David Simpson (Upper Bann) (DUP): I declare an interest in the business world. How do we handle the situation where companies that have been going for 30 years—no matter if they are large or small—all of a sudden get into a cash flow difficulty, whether they sign up to this or not? There is surely a commercial judgment call on this.
Toby Perkins: That is an interesting point. We all recognise that sometimes businesses hit hard times, perhaps through force of circumstances. From my own experience, if a business with a long-standing relationship with a supplier contacts it to say, “We have had bad debt, we have had a situation which means that at this moment at the end of the month, we are really tight on money and we would like to make an arrangement to pay you 15 days late this month, or pay you half of the debt on the due date and the other half in 30 days”, the supplier will often accommodate that. Suppliers will appreciate honesty and understand that the business has chosen to confront them and to be honest with them. The right solution is not to not pay the suppliers, which potentially gives that business the same problems that the original business had, because it does not have money coming in that it was expecting. The solution is not to say, “Because we have hit hard times, we are not going to pay you and now it is your problem, now maybe you hit hard times”. That is the vicious cycle. It is not legitimate for a business to sit on the money because it has hit hard times, and let someone else worry about what that does downstream, although I recognise the problem that the hon. Member for Upper Bann raises.
Anne Marie Morris: The shadow Minister is being generous with his time. He has made the point that this is about changing culture and he is absolutely right. There is a role that legislation can play and a role that it cannot. Does he Gentleman agree that one of the challenges, if his amendments were accepted, is that there would have to be some form of incentive for small businesses to litigate? Litigation is expensive. It gives them a bad reputation in the marketplace, therefore the more legislation you include with a lot of prescription, the worse you make matters.
Toby Perkins: I do not think I can come to that conclusion. The hon. Lady is right to say that there is a difference between legislative change and cultural change, but often legislative change leads to cultural change. Let us consider the huge strides that we have made on sexual discrimination and race discrimination. If we went back to the 1970s and had this discussion, people would say, “Well, you can make it illegal to discriminate on the basis of race, but people will just carry on doing it anyway”, but the Race Relations Act 1976 and outlawing discrimination led in time to cultural change. It may not have immediately dealt with 100% of racial discrimination—it never will—but it did lead to a change in the culture.
At the moment we have a situation whereby businesses want to get paid on time but feel that they are not sufficiently empowered to contact their big business customer and say, “We need to be paid on time, and if we are not, we will be charging you interest.” Something that removes the onus from the small business to have to pursue that and places it on the large business instead to have to report it will be incredibly empowering. Many of the business support groups to which we have spoken understood how empowering that would be.
I referred to some of the comments made in the evidence session, which underlined the importance of the issue. Katja Hall from the CBI was not defensive at all, as some people may have thought that the CBI, as the voice of big business, would be. She was absolutely clear that:
“Our view and the view of our members is that late payment is a huge problem for the UK economy…We have got ourselves into a situation in which it has too often become the norm to pay late or to extend contract terms.”––[Official Report, Small Business, Enterprise and Employment Public Bill Committee, 14 October 2014; c. 6, Q5.]
When the voice of big business says that big businesses are often the victims of late payment themselves and want to see people paid on time, we realise that it is not about pitting small business against big business. It is about pitting the businesses that are playing by the rules and doing things in a straightforward manner against those that might choose to use their supply chain as an unofficial credit line. That was an important piece of evidence.
I would like to put on the record my thanks to the FSB, the Forum of Private Business, the British Chambers of Commerce, the Institute of Chartered Accountants in England and Wales, the CBI, R3, and all the others that we have met to discuss the policy area over the course of the past few months, and that have worked with us on the policy formulation process, providing incredibly helpful insights that have helped us to arrive at this point.
I am proud that my party has set out to be the party of small business. I said that the issue unites small businesses. We find it unacceptable that some businesses can use their suppliers as an unofficial credit line. We heard the British Chambers of Commerce say that the major big businesses are the biggest culprits, paying their suppliers weeks or even months after the due date; we need to take robust action against that. The latest statistics available from BACS—bankers’ automated clearing services—demonstrate how significant the problem
Think about the things that we discuss in this place, and the incentives and support that we try to give to businesses. If the Government were able to come up with something that could put £39 billion into the bank accounts of our businesses, just think about what we could do and the growth that we would have—the jobs that would be created, the investment, and the ability those businesses would have to buy new plant and machinery, and become among the best businesses in the world in their industry. We have in our power today an opportunity to vote for something that will—[ Interruption. ] I see that my hon. Friend the Member for Hartlepool shares my enthusiasm. We have the opportunity to take action on something that will put that money where it belongs. Some 60% of Britain’s small businesses report that late payment is a problem, with the average small business waiting for £38,186 in overdue payments. One in four companies spends over 10 hours a week chasing late payments.
Returning to the wider subject, MPs of all parties have done much to raise the profile of the issue, not least the hon. Member for Newton Abbot. I pay particular tribute to my hon. Friend the Member for Oldham East and Saddleworth (Debbie Abrahams), who has been a doughty campaigner on late payments and I am sure will continue to strengthen the Bill as is passes through the House. The hon. Member for South Basildon and East Thurrock (Stephen Metcalfe) introduced a Back-Bench debate on the subject in February 2012, to which I will refer later. He has courageously made a strong case on the issue.
The Bill is hugely important in giving Members a chance to take action to end the pernicious anti-business practice. The Government’s proposals as drafted will be seen by many small businesses as fine as far as they go, but hardly likely to deliver the step change needed to end the practice that unnecessarily causes 20% of all business failures. During the evidence session, we heard differing views on the extent to which the £39 billion of unpaid invoices was a new record or a new statistic, but there seems to be little debate that this serious problem is getting worse. That is why the time is right for our proposed amendments 34 to 37.
In 2012, when he was a Minister in the Department for Business, Innovation and Skills, the right hon. Member for Sevenoaks (Michael Fallon) said he would write to the FTSE 350 companies to warn them that they would be named and shamed if they did not sign up to the prompt payment code. By May of this year, that still had not happened. I have tabled a series of written parliamentary questions to find out whether any companies are due to be named and shamed, given that we have had almost 15 months in which to do that. On the very same day that those questions were due to be answered, the Minister—through The Times—reported that they had officially U-turned on the commitment and ruled out the naming and shaming of companies not paying on time. Far from taking progressive action to do something, they renege on the commitments made in February 2012.
I wrote to the Secretary of State for Business, Innovation and Skills to ask him to make a statement in the House about the change in policy. Although businesses tell us
Previously, the right hon. Member for Kingston and Surbiton (Mr Davey) had promised early implementation of the EU late payment directive but, again, that promise was subsequently reneged on, and the UK Government transposed the directive on to UK law on the very last date they possibly could under the legislation we had agreed. The directive contained measures the Government said they supported, which provided new rights for small businesses suffering under the burden of late payment. It entitled businesses to charge interest of 8% above Bank of England base rate for any late payment, and the opportunity to charge administration costs for chasing late payment. It said they could be claimed by a business on a sliding scale, depending on the size of the debt, and that payment contracts must not infringe a business’s right to claim interest and administration costs for late payment. In many ways, it brought to European law something we had introduced in 1998.
When the Government were asked why the legislation that was basically coming into line with what we already had in the UK—of which the Government were supportive—could not be introduced earlier, the right hon. Member for Havant (Mr Willetts) said that it was down to the Government’s blanket policy of not gold-plating European directives. So we have a policy that the Government support, which brings European policy in line with our policy, and they will not take it forward because they have the illogical policy of not gold-plating European directives, even on provisions they agree with and that will make things better. That demonstrates—putting the 2012 debate in the current context—the extent to which the threat of the UK Independence party to the Conservative party’s electoral prospects is driving the Government, rather than the best interests of Britain’s small businesses, which are, sadly, paying the price.
It is important to understand why measures from the Late Payment of Commercial Debts (Interest) Act 1998, from the prompt payment code, and from the EU late payment directive—all steps in the right direction—have failed to change the culture. The Bill attempts to give businesses a little more empowerment to make the decision themselves. That is really what it is about. It says, “If we give you an average and you see that the company you are dealing with usually pays in 45 days, you cannot be surprised if payment takes more than 45 days.” If a small business is utterly dependent on one supplier for a major amount of its business, it is not clear how having that information empowers it. Anybody who listened to the evidence presented by the Federation of Small Businesses and the Forum of Private Business last week will have heard that it is utterly inadequate.
Clause 3 as drafted gives the Secretary of State the power to direct companies to publish information about their payment practices. We welcome it to the extent
Oliver Colvile: I must declare an interest in the small business that I set up, although I do not work for it. If a business falls out with a client and takes them to court, it cannot expect to get work from them in the future. Frankly, that damages only the business, because it must maintain a relationship with the people with whom it wants to do business.
Toby Perkins: What an incredibly powerful point. That is precisely the point behind our proposals, under which it would not be up to the small business to take their big business partners to court. That is what happens at the moment, which is why it does not work. Under our proposals, it would be for the big businesses to declare any late payments in a quarterly report. Nobody would have to report that business; it would produce a quarterly report and automatically send the interest to any business, such as the hon. Gentleman’s, that had been damaged. The hon. Gentleman’s evidence demonstrates why our proposals are needed and why the clause is inadequate. I thank him for that point, because I could not have put it better myself.
Philip King’s evidence does not look quite as strong after that thunderbolt—I am going to quote the hon. Gentleman for the rest of the debate. None the less, it is still worthy of being listened to. Philip King said on the subject of average payment terms,
“if you quote the average payment terms on which a business makes its payments and there is a range of suppliers for things from rent through to window cleaners and wholesale suppliers, you are always going to have a number that, frankly, is not very meaningful.”––[Official Report, Small Business, Enterprise and Employment Public Bill Committee, 14 October 2014; c. 34, Q67.]
What he meant by that is that some payments have to be paid immediately. People pay immediately when they get their windows cleaned, they pay their rent on the day it is due and they pay by credit card at the cash and carry. Likewise, businesses pay for some things immediately. If an average is taken, with the one-day payments stacked at one end and a load of 90-day payments stacked at the other, it might come to about 40 days. Therefore, businesses may think, “If I deal with that business, I will get paid in 40-odd days”, but the point that Mr King powerfully made is that an average is not necessarily meaningful. I have been contacted by many businesses that deal with major suppliers that say they are paid in 90 days, which is not in line with the terms and conditions that had been agreed. However, the suppliers’ figures to the stock market make it appear that they are prompt payers. Therefore, the statistical averages do not bear much of a relationship with what is being said to the stock market.
Toby Perkins: Apart from the fact that £34 billion should be £39 billion, I could not agree more with my hon. Friend. It is about getting money that should be in the banks of the suppliers who won the contract fair and square, provided the goods fair and square and satisfied their side of the bargain. That money should be back in their account, enabling them to recruit new staff, invest in new plant and equipment, market new products, create new markets, export goods and all the other things we want them to do.
Anne Marie Morris: The shadow Minister is extremely generous in giving way, but I want to take issue with his response to my hon. Friend the Member for Plymouth, Sutton and Devonport. I am not aware of any legislation that makes a bad business good. If a bad business is bad and wants to break the law, it will break the law. At the end of the day it is still down to the small business to have to worry about enforcement. The point was made that many of the concerns of small businesses are about their ongoing relationship with the other contractor; that formed a main part of the evidence we received from a number of groups. They have a real concern about how the relationship can survive any litigation, or even the naming and shaming. I understand that the amendments are well-intended, but the bad boys are not going to become good boys overnight. Whatever legislation the hon. Gentleman puts in place, it is still going to be broken and we still have the fundamental culture change issue of looking at that relationship and trying to make people behave better. I do not think the proposed legislation will achieve that.
Toby Perkins: That is an interesting point. We could follow it to its natural conclusion and say, “Why have a murder law? There will always be people who murder; we can’t stop them with a murder law, so let’s not outlaw murder.” The truth is that of course there will always be businesses that break the law. However, at the moment they are not breaking the law, though they are causing significant problems. We can at least have legislative back-up that says, “You need to pay on time and you will only fall foul of our reporting procedure if you are over 30 days late.” That still gives quite a bit of leeway. Let us put in place something that empowers small businesses but does not require them to prosecute their big business customers, given that it puts the onus on big businesses to report themselves. We do all sorts of things in this country that work on a self-reporting basis, from VAT to paying PAYE and national insurance. Our personal tax system and a whole raft of other things rely on people and businesses making a declaration and quoting accurate records. We are proposing exactly that here, to take the onus from small businesses having to go to court to try to sue their big business customers. [ Interruption. ] The hon. Lady shakes her head, but I can only assume that she has not read the proposed new clause. It would mean that small businesses had nothing to do with reporting; it would be up to any big business
Anne Marie Morris: If the business does not comply, whose responsibility is it to ensure that there is compliance? Surely it is only the small business that can raise its hand, which involves time and money and damages relationships.
Toby Perkins: The point is that a quarterly report goes to Her Majesty’s Revenue and Customs. The hon. Lady is slightly ahead of me, but I will take up the challenge. There is a quarterly report to HMRC, in which a big business says, in the same way that it signs off VAT records, “The following payments are the only ones made more than 30 days late and we confirm that we have paid interest in line with the terms and conditions of the legislation, which is 8% APR above the Bank base rate”. It is up to the financial director of the big business to make a proper claim. In the same way that a business might lie on its VAT return or on anything else, it could be discovered in the future that a business had made a false report because of a report to that business. That report might come from a number of different sources; it might come from a business that had fallen out with the supplier or from a disgruntled former employee, who said, “This is actually the payment record of the company”. There might be a number of different sources. However, the central principle that businesses have to sign something to say, “This is a true and accurate record”, underpins much of the way our economic system works. I do not see why it is so confusing in this case.
Andy McDonald: Does my hon. Friend conclude that his proposal achieves the cultural shift that lots of Members have been talking about? This changes the scene entirely but protects the business that has to interface with those who owe it money directly. Is that not the cultural change we all want to see?
Toby Perkins: Precisely. I am well aware that culture does not change overnight. We do not simply change the law and instantly, the culture changes. Having a measure that takes the onus off small businesses always having to report, and which places it on the supplier, is the most significant contribution anyone has made to the late payment debate. In itself, that is an incredibly powerful principle. Despite the extent of the problem, as we have already heard powerfully from the hon. Members for Plymouth, Sutton and Devonport and for Newton Abbot, small businesses are often reluctant to report late payments as they rely on the custom of large businesses for their very existence.
Even though legislation such as the EU late payment directive and the Late Payment of Commercial Debts (Interest) Act 1988 has already been introduced, just 10% of businesses have even considered using such legislation, for precisely the reason that was powerfully described earlier. Some 22% of businesses say that they have ended a business relationship because of late payment. These were customers that they had already won and were able to supply goods to but they turned the business relationship away because of continued late payment.
Previous policy initiatives have focused on increasing prompt payment from public sector bodies to contractors. That is welcome, and I am more than happy to support any efforts the Government make to draw attention to that issue. The major focus needs to be on large private sector firms, which are at the heart of the problem: 77% of members of the Federation of Small Businesses report that the private sector is the main culprit in late payment. The challenge now for all of us is to shift the burden away from small businesses going out on a limb to ask for interest payments to be paid to them as a matter of routine.
Unfortunately, the clause as it stands does not even begin to tackle this fundamental question. Taken together, amendments 34, 35, 36 and 37 address it by shifting the burden away from the victims and on to the perpetrators. At present, clause 3 only creates a duty for companies to publish their payment policies. Amendment 34 would strengthen the clause so that companies can be judged on not just their policy but their performance in practice. That is a significant change in itself. We stop saying, “What is your policy?” and start saying, “What is your performance?”
Amendment 35 defines the performance against which companies will be judged, in much the same way as VAT reporting by large companies. The exact composition is to be defined by the category set by the Secretary of State, but I suggest we begin with the FTSE 350. Companies must produce a quarterly statement that lists all payments to suppliers which have been paid more than 30 days after the supplier’s agreed payment terms without a formal query having been made. We must recognise that there will always be situations where a business makes a purchase from one of its suppliers and then has a query about the goods. It may be that a short number were delivered. The goods might have been faulty or not entirely as it had ordered. So businesses will still retain the right to say, “No, I am not paying this because I don’t believe it was correct.”
Our amendments specify the length of time that businesses have to raise that query. If a formal query has not been made, they would list all payments than have been paid more than 30 days late. The amendment also confirms that in all those instances, interest equalling the Bank of England base rate plus 8% APR has been paid to compensate the supplier. Where that interest has not yet been paid, it sets out a payment plan to ensure that compensation is promptly paid.
To ensure those provisions are followed, we need to give the legislation some teeth. Unlike the Government, we are not in the business of having a small business miss out and the Government get the money, as we saw with the breaches of zero-hours legislation. There would not be any fine for late payment. However, amendment 36 would establish that the financial reporting officer would be liable for false reporting, in the same way as when signing off VAT returns. If there were false reporting, the business could be liable to a fine equivalent to no more than the amount they owed—the overall value of the invoice—and up to a maximum of £10,000 for false reporting.
Amendment 37 would make sure that the payment plans set out under amendment 35 are strictly adhered to by ensuring that all companies that should comply
I hope and expect that no business would be fined under the provisions of amendments 36 and 37. When suitably amended, the clause would remove the incentive for businesses to pay late. The hon. and learned Member for Harborough (Sir Edward Garnier) asked why late payment happens. It happens because businesses are attempting to save interest and think they are better off not paying than paying. However, once interest is attached and people do not have to pursue businesses for it, but rather, businesses have to declare that they have paid, the incentive to pay late is removed. That is what is so powerful about the amendment, which would put the principles of the late payment directive on to a statutory footing.
Toby Perkins: I am grateful to the hon. Gentleman for correcting the record; I like to get these things right. When I looked at the composition of the Committee, I noted a distinct west country focus among Conservative Members. I was conscious that they all seemed to be from Devon, Cornwall and other western areas, and that was possibly where my confusion arose. With that rather feeble excuse, I apologise, and I am glad the hon. Gentleman has had the opportunity to put the record straight.
Taken as a package the amendments present an opportunity to change not just the payment culture but the entire landscape for businesses that sit and wait for money they are owed. As I said, I hope that no businesses are fined under the provisions proposed in amendments 36 and 37. The clause is not about trying to create a bureaucracy for HMRC. It is not about trying to create a situation where the Government can bring in a lot of money in fines. It is about removing the incentive to businesses to pay late. That would be a really important step. A mandatory requirement to complete the form would bring the issue of late payment to light in a way that all previous Government measures have failed to do.
This exciting plan has won support from across the business community. I particularly want to express my admiration for the work done by the Forum of Private Business, which has been at the forefront of making the case on late payment. Phil Orford, the chief executive, said that these amendments would be a welcome addition to the Bill and would go a long way to reducing the time and money small firms spend on chasing late payments, allowing them to concentrate on growing their businesses and creating jobs. Could there be a more powerful endorsement? The Forum of Private Business makes the case that they would allow businesses to get back to what they want to do, rather than spending all day on the phone chasing up money that is their rightfully theirs.
I hope that we will unite Members on both sides of the House to recognise that late payment is an issue of basic fairness, and that action is essential to create a level playing field for businesses. However, if Ministers choose to ignore this problem once again, small businesses can be assured that a future Labour Government will take the action that they so desperately need. Amendments 34 to 37 would strengthen the Bill’s language and ensure that the Secretary of State had no way to wriggle out of his or her commitments to regulate in this area. Likewise, amendment 52 would
as well as including details on whose permission is required. That would prevent individual directors from making rash, unilateral or ad hoc changes to a company’s payment practices. It would take us away from a situation where a business, having entered into a long-term relationship and having often made significant investment on the basis of that relationship, suddenly finds itself forced into a position where the payment terms are unilaterally changed in a way that they did not expect was possible.
Amendments 53 to 56, proposed by my hon. Friend the Member for Oldham East and Saddleworth (Debbie Abrahams), are minor technical changes which would simply strengthen the Bill’s language and empower the Minister to take action in this important area.
I urge the Government to support new clause 5, which is in the spirit of amendments 34 and 37. It would strengthen the Secretary of State’s hand by providing them with further powers to make new regulations when it comes to dealing with persistent late payers. As described in subsection (1)(a), the new clause would impose
The provision would ensure that businesses using last-minute queries as an excuse for not paying would have a limit on the number of days after the receipt of a supplier’s invoice in which they could challenge that invoice. We have a ludicrous situation where businesses can make complaints about comestibles that are already out of date by the time the query comes in about that invoice. For example, a company might receive their delivery of pears or apples from their fruit supplier; when their customers have eaten them, the company might then raise a query about whether those products, now eaten, were delivered suitably. This measure would limit businesses’ ability to use queries as a backhanded way of questioning what they have received.
Such practices of retrospective discounting, where large customers find ways to pay their suppliers less than they are entitled to after contracts have been signed, have
Thirdly, subsection (1)(b) says that regulations may prohibit a company from requiring a supply company to make a payment in order to join that company’s list of suppliers, combating another example of blue tape. We have had examples of companies coming to see us when they have been charged to get on a supplier list. They are paying out money before they have even got any business in, simply to get on the supplier list. These are not basic business practices that people with any sense of fairness would recognise. They are not only very unfair to small business suppliers, but unfair to all the businesses that are competing with that business that do not have those restrictive clauses in place, and are able to coin in money in an unfair way. The result is a situation where businesses practices work against the interests of those who work hard and play by the rules and in favour of the interests of businesses that are introducing such restrictive clauses.
To back up the new regulations, subsection (2) sets out a power to create an enforcement regime for breaching any requirement or prohibition set out in the regulations. It creates a power for the imposition of a criminal sanction. Subsection (4) requires the Secretary of State to undertake further consultation before the regulations are made to ensure that the regulations are developed carefully and to take account of the needs of small businesses. Finally, subsection (5) ensures that a draft of the regulations must be approved by both Houses of Parliament before the regulations can be made.
We can either continue with a variant of business as usual or take an opportunity that, I think, has never been presented to the House before, to take action on one of the key issues facing businesses—one of the key blue tape challenges—that small businesses say is preventing their growth, their investment in new plant and machinery, and their opportunity to open new markets and to recruit new staff. We have the opportunity, in supporting amendments 34 to 37, to take action and, once and for all, to take a giant step towards ending the practice of unfair late payments. I commend the amendment to the House.
Bill Esterson (Sefton Central) (Lab): I commend my hon. Friend for his excellent and detailed speech and for the range of issues that he covered. He mentioned several reasons why the amendments are such an important addition to the Government’s proposals. He pointed out that, when it comes to VAT and corporation tax, we would not dream of not making sure that it was collected or that the Government received the money due to them. I thought for a moment he was going to say that if the Government deserve their money, so does every business that enters into a contract with other businesses.
This is an incredibly important issue. I had a very interesting and informative meeting with ACE, small business owners, in my constituency on Friday ahead of this Bill. They confirmed much of what we heard from the Federation of Small Businesses and the other witnesses who gave evidence last week. I am sorry that I was unable to stay for those sittings but I have read the transcripts, which provide valuable background to the discussion and to how important the issue of late payments is for many businesses, especially small businesses. The provision is partly about creating a level playing field between different shapes and sizes of business to ensure that there is fairness within markets, not just dominance and abuse of power, which, sadly, can take place. The issue of late payments is an example of that.
My hon. Friend mentioned that part of the rationale for the amendments was to remove the incentive to pay late; but they would also introduce an incentive to pay early. That is why more is needed than voluntary action and the limited, although welcome, steps that the Government are proposing. I heard from businesses in my constituency that because the payment code is voluntary, it is just not working for them. That was reflected in the evidence given last week.
Toby Perkins: My hon. Friend has done a tremendous amount of work in communicating with businesses in his constituency. He makes an incredibly powerful point about the need for something that empowers them but does not require them to sully their relationships with their big businesses. Does he agree that those small businesses would very much welcome the Government’s taking action, rather than always expecting them to do it?
Bill Esterson: That is why the amendments tabled by my hon. Friend are so crucial and add so much value. I will describe some things that were said to me by the businesses in my constituency shortly. As if anybody here needs reminding, and I am not sure that they will, the importance of small businesses—the potential for growth, jobs, prosperity and raised living standards—is immense. Figures that I got from the Library earlier this year suggested that 4.7 million businesses employ fewer than 10 people. Small business owners are no exception when it comes to the impact of falling living standards. We should take every opportunity to maximise the chance to help those small business owners and their staff.
Small businesses’ reluctance to challenge larger businesses, which my hon. Friend mentioned, is a problem that was raised with me. Small businesses feel that, in an uneven relationship, they have little choice, particularly when they depend on one larger customer for the bulk of
My question to the Government is: why not require publication of payment records on a quarterly basis, as put forward by my hon. Friend and his colleagues? Why not have a system in which there have to be details of—without going into customer details—exactly what is happening and whether there are invoices that are 60, 90 or 120 days old, even if the average is very much lower?
Andy McDonald: Does my hon. Friend know the extent to which this issue affects people who have become self-employed and have set up small businesses? The number of people becoming self-employed has grown, but sadly their income has been considerably eroded. Has my hon. Friend given any thought to whether that is in part due to their being affected by the culture of late payment?
Bill Esterson: I am sure that is true. Many self-employed people who have registered as a business have exactly the same problem. This issue affects businesses of all sizes, but it can potentially do more damage to smaller businesses and it has a huge effect on sole traders. My hon. Friend makes a good point.
Small businesses want a level playing field. This issue was described to me as a culture. Some larger businesses have a culture of delaying payments and using the money they owe as part of their cash flow. They may instruct their accounts department to find reasons to delay payment until the last day possible. I ran a small business for 15 years, and we used to come across that sort of practice. On the last day on which the invoice was due, I might phone up the company or we might get a phone call—whichever way round it was—and somebody would say, “Oh, what’s this item on the invoice?” We would have to re-do the whole invoice because of a small amount out of a much larger invoice, and it would be delayed. That common problem can cause huge delays. I am not surprised that my hon. Friend the Member for Chesterfield said that 10% of a business owner’s time is spent chasing late payments.
Toby Perkins: My hon. Friend is making an important point. A small construction business in my constituency that was taken into insolvency claimed that after it became involved in a major contract, the company for which it was a contractor continually came up with spurious criticism of its work. I do not want to judge which company was right, but the second company’s refusal to pay over things it said were not delivered ultimately led to the first company going bust and other companies in a similar position being taken right to the wire. This important issue will not be entirely covered by our proposals or the Bill, but it is a significant part of the late-payment debate.
The other experience I had, and which other businesses have told me about, is of companies losing invoices. When a reminder is sent to them, they say, “We need a copy of the invoice,” but it could be 30 or 60 days after the original was sent—it could have been sent by e-mail. A number of Members accept that that problem is rife and needs to be addressed.
This is a crucial issue, but how far should we go in legislation? It is clear that voluntary codes can be and are ignored, and that there must be greater support for businesses that take action. What is needed, if not a voluntary code? I accept the point, which has been well made, that expecting small businesses to challenge larger businesses is hugely problematic. The amendment is so powerful because the requirement for publication would support small businesses without their having to take action themselves.
Andy McDonald: Would my hon. Friend also accept that one of the benefits of this imaginative proposal is that businesses would be able to plan much more effectively if they knew they could rely on a regime that secured greater confidence in prompt payment? If businesses can project their incomes forward with the support of this sort of regulation, that surely gives them a better environment in which to work and to plan for the future.
Bill Esterson: Absolutely. That element of security and certainty is crucial for businesses to plan. This is certainly the case in my experience. Businesses need to know that they have a reliable relationship. Businesses ideally want to choose who to contract with, but if they cannot rely on being paid it makes that very difficult. The hon. Gentleman is absolutely right that this is one of the reasons why the amendment will help. There are opportunities here.
I understand why the phrase “naming and shaming” has been used, but this is also about encouraging good business practice. My view is that we should have a number of different ways of encouraging and praising businesses, and making sure that good practice is the preferred way of operating. I would like to see registers for a number of things; living wage employers is another example that springs readily to mind. We certainly have an opportunity to inform the public which businesses are observing good practice and paying promptly, by using information that could be collected and published through a combination of what the Government are proposing and the amendment tabled by my hon. Friend the Member for Chesterfield. That would give customers an opportunity to choose which businesses to support. We should take every advantage of this opportunity to help customers support good business practices and support those companies that act in an ethical way. That is certainly the case in the retail sector and, in my view, also in business-to-business sectors.
Toby Perkins: I absolutely endorse what my hon. Friend says. The Committee heard some very powerful evidence about businesses wanting to see positive business practices being praised, and the focus not always being only on those which have done wrong. That is one of
Bill Esterson: I thank my hon. Friend for his intervention. To finish, we have from the Government the duty to publish a report on payment practices, but the amendment is important because it is not only about businesses’ practices; it is about whether they are applying those principles. It is not enough for businesses to say that they have a policy on something; what matters is what they do with that policy. That is why these amendments are so important. We need to make sure that businesses not only say that they will do something, but actually do it. We, the public and other businesses must be able to see that they do it, and there must be action which can be taken without putting at risk the nature of the relationship between the customer and the supplier. We can make sure that action is taken when needed. We can improve that relationship and improve the balance between large and small companies, and make sure that there is a level playing field to support all businesses.
Matthew Hancock: I am grateful for the opportunity to debate the amendments and this very important part of the Bill. This Government are taking action to tackle late payment. As the Opposition have said, not enough has previously been done on this issue. The introduction of the prompt payment code was a step forward, but clearly it has not been enough. That is why we are taking action through the Bill. Like me, the hon. Gentleman has personally been subject to late payment. For me this issue is incredibly important and, as we heard in the evidence session last week, it is a pressing matter for businesses across the UK. The £39 billion of late payment is a big issue that we are planning to tackle. I will address some of the points that were raised in the rather long debate and then go through the amendments in turn.
On the issue of naming and shaming, we are introducing the ability to have naming and shaming by introducing transparency—full stop—in both the positive and the negative procedures. The long discussion on that seemed to be slightly without regard to the provisions in the Bill. The provisions in the Bill allow for that to happen. That is the first point.
Toby Perkins: The Minister will be aware that there was an article in The Times shortly after he became Minister, which said that he would not be going down the route of naming and shaming signatories to the prompt payment code. Is the Minister now saying that he has U-turned on his U-turn, and that he is going back to naming and shaming?
Matthew Hancock: No. What I am saying is that, as happens if what the hon. Gentleman proposes is true, is that you carry on going in the same direction, and that is exactly what I am doing. It is bringing transparency to this area.
The hon. Gentleman explained at length why average payment reporting was not sufficient. I agree strongly with him, and I agree with almost all the comments made by the hon. Member for Sefton Central. It is very important that we get payment reporting right. That is why clause 3(4) sets out the ways in which reporting can be done in a broad way, but we shall be consulting before the end of the year on the details of how that will be implemented. That will no doubt take into account all the comments that have been made from both sides of the Committee.
I agree strongly with the comments by my hon. Friend the Member for Plymouth, Sutton and Devonport. Those comments were seized on in an odd way, given that they reinforced the importance of the Bill. We have, after all, never had this type of small business Bill before. I am glad to say that the consultation document will be published before the end of the year, and clause 3 provides for different ways of describing the payment terms as requested.
Andy McDonald: I am grateful to the Minister for giving way. What is his perception of the history of naming and shaming, given that we have a £39 billion problem? How effective has it been in years past? There have been endless publications about major companies that have a poor record in this regard, but that has not resolved the problem. Why then is there such resistance to the proposal that we are making today?
Matthew Hancock: There is not resistance to increasing transparency. That is what this Bill does, and that is the point. I strongly agree with the hon. Gentleman that hitherto the transparency has not been adequate. That is why we brought in the Bill. That is why, as Minister for small business, and now as Minister for business and enterprise, I have driven this part of the Bill through to make sure that it happens, because I feel so strongly about it. That is why we are increasing the transparency.
On the EU directive, we think it is based on UK best practice and we are implementing it, so I do not quite know what that point was about. On public procurement, it is true that such procurement is not now a major part of late payment, partly because of the action that has been taken, but improvement of payment practices in public procurement does still have a role to play.
Amendment 34 requires companies to report on their actual payment performance and not just to publish boiler plate disclosures. Amendment 36 establishes specific accountability in terms of criminal liability for false reporting. As I said, the consultation will be published in order to make sure that we get the details right. There is no doubt that the terms of the clause have sufficient latitude to deal with the points that have been raised.
Amendments 35 and 37 would require a company to prepare a payment plan to compensate suppliers that have had payment delayed by more than 30 days. The company would be subject to an appropriate fine for non-compliance and would have to report publicly on compliance.
The discussion paper that we published last year contained a proposal for sliding scales of penalty payments that increase as the payment becomes more overdue,
Sheila Gilmore (Edinburgh East) (Lab): If it is difficult to get small businesses to complain, surely that is an argument for having a system in place where late payment generates a financial cost to the late payer.
Matthew Hancock: The problem is the unintended consequence of larger companies perhaps extending their payment terms so that they were not late on their payment. We therefore do not think that a tier of penalties would help. It could have the unintended consequence of lengthening payment terms across the board so that companies did not fall foul of the penalty.
Toby Perkins: If what the Minister was saying was true, the EU late payment directive may have already had that effect. If the fact that people can charge interest means that people will extend their payment terms, that would already have happened. The central point that he does not seem to get is that the issue is not anything like what he consulted on, because he is talking about small businesses having to make a complaint. The point of our process is that small businesses will not have to make a complaint. The big business will have to make a declaration as to whether it has paid late. It would not be up to the small business to make a complaint. That is what is so powerful about it.
Amendments 53 to 56 would place an obligation on the Secretary of State to make regulations to introduce a prompt payment reporting requirement. We fully intend to do that, so I can confirm that we will consult on a robust and proportionate reporting requirement. Although I understand the spirit of the amendments, that requirement is already going to be in place.
Finally, amendment 52 and new clause 5 raise the important issue of retrospective and unilateral changes to payment terms. As has been discussed, this is not about late agreed terms—long agreed terms—but about late payment against whatever terms were agreed. I strongly agree that it is poor payment practice to subject suppliers to blanket, universal and retrospective changes to payment terms. The code already contains prohibitions against such practices, and we hope that greater transparency will increase accountability for such practices. So, as part of the consultation, we are looking at whether to include a disclosure of blanket retrospective changes to standard payment terms in the reporting requirement. On amendment 52, I hope that hon. Members are assured that the clause as it stands has the latitude to do that, and we will consult on it and make sure that we publish that consultation before the end of the year.
However, the full regulation proposed under new clause 5 poses some difficulties. First, businesses that change their payment terms retrospectively will already word any changes carefully so that they are not legally construed as unilateral. A business would not volunteer that a change to payment terms was unilateral. There was a discussion about the querying of invoices, for instance. Under the proposed new clause, a business could legally go about this in such a way that it is not deemed unilateral, but it then finds an excuse to pay later than under the contract.
Ian Murray: This is a genuine query to look at Government policy across the board. Is it not the case that if it was a supermarket firm supplier, payment terms being changed as in the example you gave would fall under the Groceries Code Adjudicator and be up for potential complaint? I am trying to get a handle on this. On the one hand the Minister is saying that, in this sense, proposed new clause 5 should not be enacted, but, on the other, there can be a complaint to the Groceries Code Adjudicator.
Matthew Hancock: The hon. Gentleman is absolutely right. The Groceries Supply Code applies and has been brought in in some sectors. However, it is even better than that. It is already possible to take a company to court for breach of contract if there is a unilateral change to the contract and if that brings damages. The proposed new clause is already the case in contract law. The difficulty—as has been part of the discussion all along—is getting small companies to take their large customers to court. That would not be changed by this new clause, so I do not think that it would add anything. However, it is very important that companies are open with their suppliers about payment practices and policy.
Bill Esterson: I am listening carefully to the Minister, but I cannot understand how he is proposing that this ensures that small businesses do not have to challenge a larger customer or complain about it and risk that relationship. I am not hearing from him how that is going to work and what will be different about it after the proposed amendments.
Matthew Hancock: It is because we are bringing about transparency over payment practices and therefore that information on the length of payment time will be published. Precisely how that transparency happens and what information is published is very important and we look to get the details of that right. I take entirely the point that a simple, single-figure average payment term would not be enough. None the less, it does the job that he asked for in that case.
Andy McDonald: Is the Minister ruling out the possibility of that declaration and that reporting including a provision to say whether interest has been paid to those customers who suffered late payment?
Matthew Hancock: No, far from it. Indeed, proposed clause 3(4) allows for that. I am happy to consult on whether the prompt payment reporting requirement should include disclosure of whether a business requires a supplier to pay to be on its supplier list as well. The
If the company does not pay any interest to its suppliers, and if it has suppliers—as the hon. Member for Plymouth, Sutton and Devonport suggested—who do not feel able to bring it up, it would be able to declare that it never paid any interest. It would look as though the company had done fantastically. Surely that is not in any way supporting small businesses. It may provide transparency about whether a company has ever paid interest, but it does not actually support small businesses in getting that interest.
—which means payment terms that are not standard, including payments that are late—together with other parts of paragraph (4) allows us to bring forward powers to deal with that point. We think that the scope of paragraph (4) within clause 3 is broad enough to deal with that point of transparency.
I hope that hon. Members are reassured by that response. It is very clear that on the Government’s side we share a strong ambition to tackle the late payment culture. I am glad to hear that the Opposition has a similar ambition. The substance of those amendments that are practical can be dealt with within the clause.
Ian Murray: I am slightly confused. The Minister seems to be suggesting that he accepts some of the amendments. Therefore, I find it strange that he will not support them, in the spirit of comradeship across the Committee.
Matthew Hancock: No; my point is that I accept the spirit of some and they can be dealt with within draft clauses as set out in the Bill. Where there is agreement on the goal—for instance, on having a robust and clear reporting requirement—that is already provided for in the Bill. There is no need to amend the Bill to provide for something that is already in the Bill. That is why much of the debate today has been about why the Bill is so important and why it is important to get the details right, rather than whether we should put into the Bill that which the Bill already does. Because we are tackling late payment, and because the Bill takes forward the changes necessary to increase transparency, I have confidence that we are dealing with the issues that were raised about naming and shaming and around transparency and the reporting of late payment. We can take this debate away and make sure that it is implemented as part of the statutory instruments that will give effect to clause 3 of the Bill. Therefore, on this basis, I hope that the Opposition will withdraw these amendments.
Toby Perkins: Given the debate and discussion over what is a really exciting potential provision that would enable this Committee to remove the onus that has dogged small businesses for many years in that they
Organisations such as the Forum of Private Business, which said that the amendments were a welcome addition to the proposals outlined in the Bill and would go a long way to reducing the time and cost small firms spend on chasing late payments and allow them to concentrate on growing their businesses and creating jobs, will listen to that reply and think it is a pretty inadequate response to our amendments. It was a quick flick through, “there might be a few unintended consequences”, and that is your lot. People expect better than that, frankly, as a response by a Minister to a debate about an incredibly serious issue.
There will be little change. I listened to the Minister’s comments; he spoke as though the situation in the past was terrible and now, with his very minor clause, it is all going to be sorted out. It brought to mind someone who booked to go on the cruise of a lifetime and arrived to discover that their cabin did not have any wall and their bed was left out on the side, with water was pouring in over the side of the boat. They were expecting to have a nice time, water was crashing down on them, they complained about it and someone from the boat company said, “Have a hat, maybe that will make it better”.
Matthew Hancock: Since the hon. Gentleman is making quite a meal of this, perhaps he can tell me, given that we consulted broadly on the options available and followed the consultation responses, why did the Labour Party not even bother to put in a response, if they care so much?
Toby Perkins: There is an aah. The truth of the matter is that we have put forward a very detailed series of amendments that would make a significant step forward. We have done a tremendous amount of work since Second Reading. We have met with at least 10 different organisations to work through the amendments, which are changing daily, as people have made other suggestions. It was right that we made sure that the amendments were correct, that we saw what the Government were proposing, and tried to improve it.
Toby Perkins: Absolutely. I think someone once said, “When the evidence changed, I changed my mind.” That is an important contribution. The Federation of Small Businesses said that, over the course of time from the initial consultation, it had a sense that things had got worse, and it decided to change its view on what was required.
It is also true to say that the ideas that we are proposing here were not part of his initial consultation. It is a new approach and for that reason has won support from across the business community. It is genuinely innovative and tackles some of the challenges that have prevented small businesses taking action in the past and enabled them to take action in the future. On the subject of changing your mind when the evidence changes, you would have thought that someone who U-turned on a U-turn would have understood that.
Andy McDonald: Would my hon. Friend agree that the FSB would more than likely be scratching its head as to why this eminently sensible proposal, a provision with teeth, is not being wholeheartedly embraced by the party opposite?
Toby Perkins: I absolutely do. I think there will be a tremendous amount of disappointment, not just because it appears that there is not going to be support for this proposal, but that it has been dismissed with such feeble evidence as to why it was a bad idea. We are discussing 10 or 11 amendments, four of which are substantive, significant changes. They are attempting to take action in a new way on a long-standing problem that previous measures have failed to address. At the very least, this Committee would have expected that the Minister would have come with a substantial body of evidence as to why it was not a good idea. We are lucky he got here at all.
Ian Murray: I am grateful to my hon. Friend because the Minister did not respond to amendment 35, which is the critical one. In my experience previously, when I have been waiting for an invoice to be paid, and I have levied 8%, it started the process of the invoice again. It has therefore sometimes been a disincentive to pursue some kind of compensatory element, because the company involved said, “It may be 90 days, but if you add another element to the invoice, we will have to start the process of payment again and you could be looking at almost 180 days.” It is therefore very important that companies can report on what they have done, so that we can analyse whether they have achieved what the legislation says.
The Minister agreed with his hon. Friend in that small businesses often feel that it will spoil their relationship with big business customers if they have to approach them to say that they want interest on late payments. The relationship is not even. The Minister says, lightly, that small businesses can take companies to court; that does not bear any relationship to the reality—the difference in the resource and the power in the relationship between small and big businesses on the subject of late payments, changing terms and conditions, changing payment terms, introducing retrospective discounts, or any other. The idea that small businesses can just lightly toss a law suit in the direction of one of the major supermarket players and expect it to be taken seriously is, frankly, ludicrous.
Andy McDonald: Yesterday we had a lot of debate about the heroism Bill, as I call it. It was about sending messages out to people. In this place, we should not be in the business of sending messages out, but if we do, they should go out with teeth. Is this not the provision that says that there are consequences for people who do not pay for goods and services on time, and says to small businesses, “We are on your side.”?
Toby Perkins: That is precisely the message that I want them to hear from the amendments that we have proposed, and from the Labour party when, in the event of the amendments being voted against, we pursue them in the future. That is incredibly important. It would be a shame if the Committee does not send that message because small businesses that have experienced the problem, former small business owners who have seen their businesses go bust, and staff who have lost their jobs as a result of late payment will look at the response to the amendments with a pretty mirthless smile; they will consider that is pretty inadequate.
The Minister said that he agreed with the point made by the hon. Member for Plymouth, Sutton and Devonport that it is difficult for small businesses to act and that is what is wrong with our amendment. That is absolute nonsense; our amendment precisely prevents small businesses from having to pursue, and puts the onus squarely at the foot of the business that has paid. Once a quarter, the business—initially any businesses with more than 250 employees, although we might choose to start at FTSE 350 level as a pilot, which is perfectly sensible—would go on to its accounting software and press a button that would tell it all the late payments that it had and produce a report. If any payments are more than 30 days later than the supplier’s terms and conditions, the business would list them, confirm how much interest is owed, quickly fill out a form detailing those late payments and, more importantly than anything else, ensure that it did not happen again. The business would say, “Next time we are not going to fill out a report that confirms that we have to send interest to our suppliers because we didn’t pay on time. Next time we’re
Toby Perkins: That was nicely put by my hon. Friend with his customary elegance. If businesses watch this debate and see the Minister saying, “It was not working in the past but, now that we have clause 3, it will all be okay and businesses will be empowered,” I think they will take a pretty dim view of that. The idea that small businesses will just get in touch with their legal team and ask them to take big companies to court fails to understand the reality for many of our small businesses.
Andy McDonald: On the whole issue of litigation, is it not a defeat and an absolute condemnation of the whole process if someone is driven to take that step? It will be even further into the future when small businesses find out whether they will get their hands on their money. Saying that people can always take companies to court—we have outlined the difficulties that facing up to a bigger player brings—just kicks it into the long grass. Litigation will make the problem worse if it is the only route available to someone with an unpaid debt.
Toby Perkins: My hon. Friend is entirely right. The truth of the matter is that the Government have done this in a variety of ways. For example, the barbaric reduction of legal aid available has seen huge reductions in the number of people able to seek justice after being wronged in the workplace or elsewhere. While cutting back on the legal aid available to the poorest, the Government are saying to small businesses, “Go on. Get yourself off to court and take on major supermarket chains which have more lawyers than you have employees.” That approach says, “You need to seek litigation because we, as a governing party, are too weak to do so in our legislation,” and that is a pretty damning indictment.
We heard this in debates on the Deregulation Bill, when the Government kept saying, “If they don’t like it, they can go to court.” It was as though they were trying to push lots of these relationships to be settled in court. That would add to the length of time taken and also the cost, with businesses spending money on lawyers when they should be spending it on developing new products, employing staff and investing in their business. I have
Andy McDonald: Absolutely. Let us not damn all lawyers—just some. The problem with pushing people towards a litigious solution is not only the delay factor but also the damage it does to relationships. We have talked about attempts to preserve relationships. The solution that my hon. Friend proposes would keep that conflict out of the heat of a litigious environment. Does he agree with that?
Toby Perkins: I entirely agree. The principle behind our amendment is precisely that the conflict does not go to a courtroom. The amendment would also prevent small businesses from having to say to their customers, “Here is an invoice for the interest.” As my hon. Friend the Member for Edinburgh South made clear, that conflict can lead to a delay in invoice payment, and to a legal process that delays payment even more. All the time, the small business is sat there saying, “All I want is to be paid for the goods and services I provided.” It should not be asking too much to expect the Government to support them in achieving that.
My hon. Friend the Member for Edinburgh South made some important points. Businesses that have witnessed this debate—if any have made it through to this stage—may consider that what is emerging from it does not reflect the realities they experience on the ground. I will press amendments 53, 34 and 35 to a vote and I hope, following their acceptance, amendments 36 and 37. There is an opportunity to do things in a different way. I appreciate that amendments 53 to 56 propose minor technical changes. I cannot imagine anyone objects to those.
It is important that small businesses suffering under the yoke of late payments know who is there to speak up for them when the opportunity comes to take the onus off them and place it on their customers. Under the amendments, they would know who was willing to stand up for them and who was walking by on the other side of the road; I will press them with tremendous pride.
Ian Murray: On a point of order, Mr Brady. May I seek your guidance on whether we will have a stand part debate on this clause? My hon. Friend the Member for Chesterfield has spoken to the amendments eloquently and at length and the Minister has responded favourably, but we have not actually heard the Minister promote the clause.
The Chair: My inclination is that we have had a lengthy and full debate, and that it is unlikely that a clause stand part debate would be appropriate. Mr Perkins has indicated that he would like to press amendment 53.
This amendment provides that companies can be judged on their performance in practice.
‘(4A) “Performance” has such meaning as may be prescribed, and the information which may be prescribed shall in particular include information on late payment of invoices by the company, to include in a quarterly report which shall include—
(a) lists of all payments to suppliers which were made over 30 days after the date indicated by the suppliers agreed payment terms, without a formal query having been registered with the suppliers within a period as may be prescribed;
(b) confirmation, for each instance listed under paragraph (a), that interest, equalling the Bank of England base rate plus 8% APR, was paid to compensate the supplier for overdue payment; and
(c) assurance, for each instance listed under paragraph (a) where confirmation of compensation under paragraph (b) cannot be provided, of a payment plan in place to compensate suppliers on the basis set out in that paragraph.”.—(Toby Perkins.)
This amendment defines “performance” against which companies will be judged.
This amendment is a minor drafting change removing a definition which is no longer required.
Matthew Hancock: Ensuring that UK businesses can access the finance they need is crucial and remains a top priority for this Government. Nowhere is that more true than for smaller businesses, which is why we and the Bank of England introduced the funding for lending scheme two years ago to tackle the big problems with credit conditions, and why we are reforming the banks.
Matthew Hancock: In the past 12 months we have seen a recovery in the rate of change of net lending and an increase in gross lending, but there is clearly more to do. I welcome, for instance, RBS’s recent announcement
Matthew Hancock: The British Business Bank supports the growth of business-lending organisations. It gets far more money into small business by investing in institutions such as the challenger banks and new lending platforms such as peer-to-peer lending. It is busting open the market, which shrunk and shrunk in the years up to about 2010 and is now expanding again. With Metrobank, the first new banking licence in 100 years was issued. The latest data I have show that 20 new banking licences have been issued since 2010.
Mr Wright: I am unsatisfied with the Minister’s response, frankly. Can he give the Committee figures for the Government’s intervention in British investment? As a result of the British Business Bank, how much extra money is being lent to small businesses?
Matthew Hancock: The figures I have show that over the next five years we will unlock £10 billion of financing for viable small businesses. In the year to the end of June 2014, British Business Bank programmes facilitated £2.3 billion of new lending and investment to smaller businesses, which is supported by other schemes. Getting the big banks on a stable footing is undoubtedly one of the biggest things we can do, but we must also bring on the new competitor institutions. The point I was trying to make is that the British Business Bank does not directly invest in small businesses; it invests in institutions that can themselves unlock more investment. The £2.3 billion figure is far bigger than it would be if we used the British Business Bank to invest directly in small businesses, rather than in those that can expand the market for credit.
Ian Murray: My hon. Friend the Member for Hartlepool asked the Minister whether net lending to small businesses has gone up or down, and he replied that there has been a recovery in the rate of change. Does that mean up or down?
Matthew Hancock: It was going down, and it is now almost flat, but gross lending has gone up. The key point is that we must understand what drives net lending, which is the combination of the amount of gross lending after the amount repaid is subtracted. As the economy has recovered, thanks to our long-term economic plan—
Thanks to the long-term economic plan there has been a strong economic recovery—it is the strongest economic recovery in the G7, but I do not want to labour that point because risks still remain, not least if we were to abandon the plan. In part because of the recovery, repayments have increased. While gross lending—access to finance—has expanded, repayments have also expanded.
Given that context, we want to make that expansion go further—hence the provision of a stronger legal structure for the sharing of credit information to aid competitor banks and allow the market for finance to bust open. We are not satisfied with the situation that we inherited, in which there were basically only five major banks and a number of smaller institutions. Access to finance was difficult, and we put huge effort into turning it around. In 2008, we had the biggest banking failure in British history and the history of the world, so it will take time to turn it around, but we are determined to deal with it by increasing competition in the banking system and supporting other methods of finance, such as peer-to-peer lending, which have a lot to offer.
The Bill shows that we are not taking our foot off the accelerator. We are legislating to ensure that challenger banks and alternative finance providers can access the same amount of credit information about smaller businesses as big banks. Small businesses often do not want to move from their bank, whatever the quality of the relationship, in part because it is hard for other institutions to know the credit information supporting the small business. Larger businesses, which can often also access the capital markets, have credit ratings that many banks can understand. That is much harder for small businesses and we aim to tackle that with these measures.
These amendments seek to support the measure by further levelling the playing field, and opening up the credit markets for small and medium-sized businesses. At the moment, many small businesses that need finance go straight to their main bank first, and if their bank says no, they often give up on getting the borrowing they need. That is widely acknowledged. We want to make sure that those businesses know what other options are available to them. There is a missed opportunity on both sides when this does not happen, because while these business are unaware of alternative lenders that may be willing to finance them where their banks would not, the alternative lenders are similarly unaware of the businesses that need to borrow.
The amendments seek to address that problem by bringing the two sides together. They enable regulations that will require designated banks—especially the bigger banks—to offer small businesses that they reject for finance the option to have their key information shared with online platforms. Those platforms will be designated
The system will have a number of significant benefits. Smaller businesses will have improved access to alternative finance providers. The system will support greater competition in the provision of finance to small and medium-sized businesses, and should lead to better-quality products and services for those businesses; and we hope that alternative lenders will benefit from greater visibility to smaller businesses. It opens up opportunities to support business lending to small and medium-sized businesses.
Mr Wright: Could the Minister talk us through what would happen? A small business would go to its existing bank for finance. The bank says no. Would the bank then say, “We have looked at your application. We do not believe it is viable for our criteria but here is a range of other smaller banks with different risk profiles that might be interested”? Is that what will happen?
Matthew Hancock: That is broadly what will happen, with a couple of amendments. First, the bank in question, the originator bank, which has turned down the small business, must pass on the details should the small business consent and want that to happen. Secondly, that data will then go to an intermediary that can offer different options across the board and ensure that the data is protected. This measure is good for business, undoubtedly good for competition and good for the UK.
Ian Murray: I want to press the Minister a little further on the process. Is there a provision within the Bill regarding the process that my hon. Friend the Member for Hartlepool referred to in his previous intervention, to prevent the biggest banks—the high-street banks—from disinvesting themselves from certain sectors because they feel that they should pass on the responsibilities for those sectors? I am thinking about property and hospitality—the traditional sectors that have found it very difficult in the current climate to get finance.
Matthew Hancock: There is no doubt that in response to the crash many banks took the decision to cut off whole sectors, irrespective of the individual business decisions. We do not foresee that as a response to this Bill because they will still be seeking the business that they find attractive within those sectors in the same way as they do now. They will merely have a simple requirement, if they say no, to pass on the credit details to another provider.
Matthew Hancock: That capital is increasingly available and there is an increase in lending to small businesses, in part because that sort of capital is increasingly available. In the grand scheme of things we would put a small amount in. We would put a more significant amount in through the British business bank. As I mentioned, last week RBS announced that it was putting another £1 billion of capital into small business lending. The capital is increasingly available. This is about ensuring that the two sides can come together, and that platforms can ensure that if a business is turned down it gets offers from elsewhere, or at least its details are then passed on to others to make offers. Too often small businesses that are turned down by their own bank, which they may have had a relationship with for a long time, simply give up. We do not want that to happen.
Mark Garnier: It is also worth pointing out that as a result of pressure from the Government the banking system has introduced a scheme whereby refusals for lending can be reviewed internally and independently within the banks. As a result, 40% of appeals have been upheld for lending decisions. The banks welcome that because it gives them an extra opportunity to take a second look at a banking proposition at a higher level. So there is the 40% first and then on top of that there is the review brought about by the Government.
Mr Wright: Is the Minister not concerned that the traditional banks will cherry-pick the safer bets when it comes to loan applications from businesses and then pass down higher-risk applications to challenger banks, which may put at risk the resilience of their balance sheet in capital requirements? Has the Minister looked at that?
Matthew Hancock: Of course, if an opportunity to make a loan comes first to one of the major banks then that happens anyway. They already have the opportunity to turn somebody down and to pick what they think fits best for their business. One of the exciting things that is happening in the challenger bank and peer-to-peer market is that banks with different risk profiles are coming forward looking to take on, for instance, higher-risk, higher-return business customers than the big banks are interested in and managing them in a different way. I think that is great. It is a proliferation of the banking market.
No other industry that I know of had no new entrants for 100 years. Imagine what we would all be wearing if there had been no new entrants in the fashion industry. [ Interruption. ] So this competition is good. It did not happen in the past. The lack of competition contributed to the scale of the crisis because our big banks were just so big after so many mergers. This measure is an important step forward and will expand the competition.
Ian Murray: I am delighted that the fashionable Minister for the 1920s allows me to intervene. May I pursue this issue? We are looking at perhaps a disinvestment from sectors. We are looking at risk profiles being passed to challenger banks. Has the Minister given any analysis to the cost of lending? One of the major barriers to small businesses coming forward to look for lending is the cost. What will happen? Is there a mechanism that a challenger bank will say, “You have been refused at X and therefore we will charge you y plus 5%?
Matthew Hancock: We think that this will bring the cost of that lending down. It is difficult to know exactly what the impact will be because it depends on the behaviour of the banks. But we think it will bring it down because of increased competition in the sector. So I think it is good for business and good for competition.