6Late Payments, Retentions and Government Procurement
64.Many SMEs are adversely affected by a range of payment issues, particularly when dealing with larger companies and when they are part of a supply chain. They also face problems when trying to partake in public sector procurements. We explored these challenges, the measures taken to address them and the scope for making more progress in ensuring that small businesses are treated fairly in these areas.
Unfavourable payment terms
65.The Government has acknowledged that long payment terms can cause problems for SMEs and that there is evidence that payment terms are getting longer.257 We found that several high street companies we contacted have long payment terms. WH Smiths for instance has standard payment terms of 90 days and maximum payment terms of 120 days, Boots UK have standard payment terms of 75 days and maximum payment terms of 120 days, while Holland and Barrett, who did not reply to our correspondence, have standard payment terms of 90 days.258 This can mean that SMEs are exposed to costs through both long payment terms and when payments are paid beyond these terms. The Federation of Small Businesses (FSB) in June 2018 found that more than a third of small suppliers had had their payment terms increased over the previous 2 years, indicating what it characterises as “supply chain bullying”.259 SMEs can also face other unfavourable terms. The FSB reported that 12% of SMEs it surveyed had been asked for a discount for prompt payment,260 7% for retrospective discounting,261 6% for a fee to remain on a suppliers list and 3% had experienced a discount being applied after goods and services had been supplied.262 We found that Boots UK’s standard terms include a 2.5% discount that they deduct “for all suppliers irrespective of size”,263 while Robert Dyas informed us that they included within their standard terms “a 2% settlement discount, with a policy of 0% for suppliers with less than £100k turnover”.264
66.The FSB found that in the construction industry many SMEs, especially when dealing with single large businesses, found it difficult to influence the terms of contracts with customers or challenge them over payments.265 We found that this was in part because SMEs often lack the internal legal resource to challenge contracts produced by larger companies,266 and because SMEs are so dependent on being part of supply chains,267 with such practices potentially endemic to an entire sector or industry.268 The collapse of Carillion highlighted the problems that can occur when a powerful single supplier can enforce 120-day payment terms on SMEs in its supply chains. And as we found in our report on Carillion, when Carillion collapsed it owed £2bn to its suppliers, sub-contractors and other short-term creditors, some of which was unpaid money due to such unfavourable payment terms.269 Witnesses told us that attempts to gain quicker payment often necessitated a discount, usually 3% but sometimes as high as 7.5%, which could wipe out most suppliers’ margins.270 Kier revealed that they were offering supply side finance to suppliers so that they could be paid “in as little as 21 days compared to standard terms of 60 days” for which there was a 1.2 to 1.5% charge for such early payment.271 Kier defended this practice, which they said was taken up by 60% of their subcontractors, by noting that “others in the industry have charged 5+% for payment in 30 days with standard terms of 150+ days”. Mears told us that they also offer a voluntary early repayment scheme through a “Barclaycard solution” whereby suppliers would “incur standard charges from Barclaycard”, but would not be subjected to “settlement discounts”.272
Late payments and their extent
67.Research has estimated various levels of late payments owed to SMEs. For instance in 2017, Bacs Payment Schemes Limited put the total figure owed to SMEs at £14 billion,273 while the Zurich Risk Index estimated that SMEs were owed £45 billion by larger companies alone,274 having previously reported that SMEs were owed a total of £225 billion in late payments.275 The UK performs worse than other countries both in terms of the proportion of invoices that are late,276 and the total amount of late payments and amount of late payments written off as bad debt,277 as indicated below.
Chart 9: Proportion of Invoices that are Paid Late
Key: South Africa (ZA); France (FR); IE (Ireland); Australia (AU); Brazil (BR); Canada (CA); Singapore (SG); Spain (ES); United States (US); DE (Germany)
Source: Plum, The Domino Effect: the impact of late payments, (December 2017), p 11.
Chart 10: Total Amount of Late Payments and Late Payment Written off as Bad Debt ($bn)
Source: Plum, The Domino Effect: the impact of late payments, (December 2017), p 2.
68.The FSB published research in June 2018, which found that 17% of SMEs were paid more than 60 days after providing an invoice and 44% between 31 and 60 days,278 with only 17% seeing all their invoices paid on time and 32% seeing at least a quarter of their invoices paid after agreed terms.279 The FSB also found that more than a third of small suppliers had had their payment terms increased over the previous 2 years.280 It also found that customers failing to pay for services or goods provided were identified as a key risk by 51% of small businesses. Witnesses from the construction industry told us that that late payments were endemic.281 One witness told us that written contracts were often a poor guide to payment practices: “It is not what is written on the paper; it is what happens in practice”.282 For example, a 30-day contract would realistically become a 45 to 60-day payment,283 and 70-day payment terms could exceed 100 days.284 This was because larger companies employed various ruses to delay: “They can use excuses like holidays, sickness or the director not being in the office to authorise things. It is generally just excuses to put off payment”.285 We found that a number of companies we looked at took on average more than 60 days to pay an invoice. For instance, Thomas Cook PLC took on average 88 days to pay their invoices, Britvic Drinks took 86 days, General Electric Energy UK Ltd 77 days, Holland and Barrett 68 days and Waterstones Booksellers Ltd 65 days.286
The impact of late payments
69.Numerous surveys have indicated the impact that late payments have on small businesses. This includes cash flow problems,287 reduced profit performance, delayed payments to suppliers by affected SME themselves,288 owners having to cover shortfalls with overdrafts or their own savings and wider impacts across supply chains and the UK economy.289 Late payments divert internal resources within SMEs to chasing money owed,290 while they also reduce the resources that SMEs can invest in staff recruitment and training, innovation and new technology and processes.291 One witness told us: “It … restricts our ability to employ more apprentices and cuts down on our training budgets and investment within the company, because we have to finance that shortfall”.292 Another told us that it prevented his company from scaling-up:
We do contracts up to £600,000 or £700,000 in total for the project. The next step is to take on contracts of £1 million-plus. I am loath to do that because of the issues of late payment.293
The Minister acknowledged the impact that late payments were having, especially in terms of stopping small businesses from growing.294
70.There is also a wider cumulative effect, where late payments prevent whole industries and sectors becoming more productive and makes them less able to invest in infrastructure and skills.295 We were told that in many instances SMEs write off up to 7.5% of late payments as bad debt.296 In the worst-case scenario, small businesses can go bankrupt because of the cash flow problems caused by late payments. It has been estimated that each year as many as 50,000 small business go bankrupt with loss of up to 350,000 jobs.297 Such problems and the stress caused by them also lead to serious health problems for business owners.298 Because of the levels of late payments in the UK, the UK also compares badly to many other countries in terms of: days lost to chasing late payments; the financial cost of chasing late payments; the impact that late payments have on SMEs (i.e. staff commission, staff pay, annual bonuses, paying other suppliers and investment into the company).299 We are shocked by the extent of late payments and the impact they are having on small businesses. This includes the personal cost to owners and workers but also to the local communities they serve and the wider UK economy. It is completely unacceptable that a number of big companies, including several prominent high street retailers, are setting long payment terms, are on average taking over 60 days to pay an invoice, and in some cases deducting discounts for paying on time. Supply chain finance in the construction industry may offer benefits to many small suppliers but it must not be used to reduce payment times against unreasonable payment terms and discounts, where offered must be proportionate. If late payments and unfair payment terms are not addressed and small businesses cannot invest in skills, technology and better management practices we question whether the Government can address the ‘long tail’ of productivity.
Government action on late payments
71.A number of initiatives have been introduced to improve payment practices.
Interest on late payments
72.Several pieces of legislation have been introduced to allow companies to seek interest on late payments. For example, the Late Payment of Commercial Debts (Interest) Act 1998,300 brought in a staged approach for small businesses to seek interest of 8%, if payment was late.301 Crucially the statutory right to interest was not compulsory; a supplier had to decide whether they would make a claim or not. There have also been two EU Directives which have also sought to give small businesses redress, including the right to claim interest.302 Neither Directive enforce interest; they require a supplier or their representative to seek it. However, we found that many SMEs do not pursue interest on late payments because of their vulnerability within the supply chain or their reliance on bigger companies to sell and market their goods.303 While SMEs can seek redress on late payments through interest charged on them, few do so because they fear they would be ejected from the supply chain. The Government should give serious and urgent consideration as to whether mandatory interest on late payments would offer a greater incentive to pay on time in a way that does not expose individual SMEs to supply chain vulnerability.
Reporting on Payment Practices
73.In February 2017, the Government introduced the Reporting on Payment Practices and Performance Regulations 2017.304 The Regulations meant that from April 2017, all large companies and limited liability partnerships that over the previous years had a £36m turnover, a balance sheet total of £18m, or 250 staff are required to: report twice a year on: how their supplier invoices have been processed; the proportion of payments that are made within 30 days, within 30–60 days and more than 60 days; the proportion of payments that are made late (regardless of how long they took to pay).305 The reports are published on the GOV.UK website.306 The Minister told us that by the end of June 2018, 3,500 companies had reported and that by November it estimated that 15,000 companies would have come within the scope of the requirements.307
74.While the introduction of the reporting practices was generally welcomed, some commentators and witnesses noted that the reporting requirements have a number of shortcomings. They only apply to a comparatively small number of businesses in the UK.308 This duty to report is intended to help suppliers decide who to work with, however, some firms have not yet published their payment practices reports.309 In addition, there are no fines or consequences for poor performers.310
The Prompt Payment Code
75.The Prompt Payment Code (‘the Code’), which was introduced by the then Labour Government in 2008 sets standards for payment practices and best practice and is administered by the Chartered Institute of Credit Management. Compliance with the principles of the Code is monitored and enforced by the Prompt Payment Code Compliance Board. The Code is voluntary and signatories can be removed for non-compliance. The Code covers prompt payment, as well as wider payment procedures.311 Signatories undertake to pay suppliers within a maximum of 60 days (in line with late payment legislation requirements), to work towards adopting 30 days as the norm, and to avoid any practices that adversely affect the supply chain.312 In July 2017, the Chartered Institute of Credit Management stated that 2,000 companies had signed the code, comprising more than 70 percent of the FTSE 100.313
76.We found, after writing to a number of high profile companies, that a majority of those who replied were not signed up to the PPC.314 Furthermore, the collapse of Carillion highlighted a firm that was signed up to the code but who was enforcing payment terms of 120 days.315 In December 2017, City AM reported that Carillion had increased third-party suppliers payment terms from 30 days to 90 and 120 days without their knowledge.316 This was also after Carillion had between 2009 and 2016 seen its average payment days move from 73 to 93 days.317 The Small Business Commissioner told us that there was a credibility gap with the Prompt Payment Code: “Carillion was on the Prompt Payment Code. Nobody has ever been kicked off the Prompt Payment Code. There are some issues there”.318
Construction Supply Chain Charter
77.The Construction Supply Chain Charter is administered by the Chartered Institute of Credit Management on behalf of BEIS and, like the Prompt Payment Code, is voluntary.319 Those who sign up to the Charter must first sign up to the Prompt Payment Code. It sets out 11 ‘fair payment commitments’ to reduce supply chain terms to: 60 days applying to all new contracts from January 2015; 45 days from June 2015; 30 days from January 2018. Other commitments made in the Charter include: making payments electronically; not deliberately delaying or unreasonably withholding payment; agreeing to be monitored for the purposes of compliance, by reporting against a set of agreed key performance indicators (KPIs); consider the performance of its supply chain against those KPI’s when awarding contracts an ‘ambition’ to move to zero retention by 2025. The Charter specifically seeks “to create a more collaborative culture and ensure a strong, resilient and sustainable supply chain”.
78.However, we found that few major contractors are signed up to the code. Kier, for instance, told us that they, like many of their peers, had not signed up to the Charter because they did not believe that they could “deliver on these commitments given the current contracting environment”.320 They noted that 80% of their supply chain spend is with local SMEs and that they are signed up to the Prompt Payment Code. Their standard terms ranged from 30 to 60 days.321 However, their report on payment practices revealed that 63% of payments were not within agreed payment terms, while 22% of their invoices took over 61 days to pay. Kier told us that those payments outside of agreed payment terms, took on average 57 days to pay. They told us that they hoped to make progress in reducing payment times. Mears Group PLC, who we also contacted, confirmed that they were not signatories to either the Charter or the Prompt Payment Code.322 Mears’ report on their payment practices revealed that they paid 86% of their invoices after 30 days and 44% after 61 days. They said they had no plans to change standard payment terms as they were “appropriate”.323 They also told us that they had made significant investment in their administrative systems. More generally, analysis of the top 19 construction sector companies who have published their payment practice reports shows that on average they take 47 days to pay their invoices.324 The voluntary approach of the Prompt Payment Code and the Construction Supply Chain Charter is clearly not having the desired effect both in terms of companies signing up or adhering to their principles. The requirement to report payment practices has enabled us to see how many companies are adopting indefensibly poor and punitive payment practices but is narrowly drawn and does not enforce better behaviour. We recommend that the Government moves as soon as possible to require all medium and large companies to sign the Prompt Payment Code and quickly adopts a statutory limit of paying within 30 days. This statutory limit must exclude the use of early repayment schemes or discounts to bring companies within compliance. We also recommend that the Government widens the current payment reporting requirements to include more businesses. Poor payment practices are indicative of a flawed corporate culture and should be questioned by auditors and shareholders as part of their role in ensuring that boards behave responsibly and in the interest of all their stakeholders.
The Small Business Commissioner
79.In October 2017, the UK’s first Small Business Commissioner, Paul Uppal was appointed. The SBC is an independent public appointment and covers the whole of the UK.325 Currently, the Commissioner: provides general advice and information to small businesses on matters such as resolving disputes; signposts small businesses to existing support and dispute resolution services through the Commissioner’s website; considers complaints about payment issues between small business suppliers and their larger customers making (non-binding) recommendations on how the parties should resolve their disputes.326 Since the launch of the Commissioner in December 2017 and up until April 2018, the Commissioner had dealt with 19 companies over payment issues: three cases were resolved and withheld payments made; one case was resolved by an informal agreement; 11 cases were beyond the SBC’s remit and cases were signposted to other relevant regulatory bodies; three were unresolved and the complainants did not want to progress further; one case was ongoing.327
80.The reaction to the introduction of the Small Business Commissioner has been mixed. One survey of SMEs carried out in March 2018 found that only 16.2% of SMEs thought that the Commissioner would empower them.328 Several witnesses told us that a lack of legally binding powers regarding late payment disputes was a “limiting factor”.329 Several witnesses had not heard about the Commissioner,330 while it was suggested that his role might cover the construction industry, which is currently not covered by his remit.331 The Commissioner told us that his “main power was to name and shame”,332 and that his role his role would benefit from more powers: “having the ability to fine focuses minds … [and] the ability to fine would certainly bring some gravitas to the role”.333 He also thought that it was his role to produce and report data on late payment, ensure that the issue of late payment was kept on the public agenda,334 and engage constructively with the business community to improve the culture around payment practices.335 He said he was open to carrying out an annual survey of SMEs on late payers and pursuing the 10 top offenders.336 The Grocery Code Adjudicator, for instance, has powers to fine, launch market investigations and produces an annual survey of the grocery sector, which invites suppliers to rate the performance of the 10 top supermarket retailers.337
Why don’t SMEs chase late payments?
81.Many SMEs find it hard to hard chase late payments and few pursue interest on late payments, even though they are entitled to. Research shows that this is because staff often don’t have time, there is no internal resource to chase payments or they are fearful of being dropped from a supply chain if they complain.338 As we have already noted small business are often heavily dependent on the market reach of larger companies, which places them in a very vulnerable position. The Small Business Commissioner told us that there was a reluctance among businesses to complain because they took the view that they “would rather have a very, very bad commercial relationship than none at all”.339 Several witnesses confirmed that they were wary about raising complaints either directly or with a third party, especially if they could be identified.340
Making more progress on late payments
82.In October 2018, the Government announced a consultation on further measures to tackle late payments.341 It announced that the Small Business Commissioner would join the Prompt Payment Code’s Compliance Board and that the Board will report on all cases of signatories being removed from the Code. It also stated that one of its proposals was a requirement for all company boards to have a non-executive director with specific responsibilities for the company’s prompt payment performance.342 The Minister told us that the review would consider the powers of the Small Business Commissioner.343 However, she said that allowing the Commissioner to use fines might be a “blunt tool”, and could change his current approach which was “trying to achieve good practice through using relationships, encouragement and a change of culture”.344 She said that including the construction industry within the remit of the Commissioner was “not off the table”.345 More generally on late payments she said:
I am not going to sit here and say, “Just legislate,” because sometimes the legislation does not work. Legislation actually has to be enforced, and there are lots of different elements to that, so it is right that we try to change the culture.346
83.SMEs still suffer from late payments, inhibiting their ability to grow, affecting overall UK productivity. As we found with Carillion, late payments are built into the business models of too many companies, leading to many SMEs losing staff, profits and their businesses. This is totally unacceptable, unfair and constitutes a particularly disgraceful form of market abuse. The Small Business Commissioner does not have sufficient powers to focus minds and so far has not named systematic abusers. We recommend that the Government legislates as quickly as possible to give the Small Business Commissioner powers to fine companies who pay late; requires the Commissioner to publish an annual survey of SMEs on companies who pay late; expands the remit of the Commissioner to cover construction SMEs.
Retention payments
84.Retention payments are a sum of money withheld from the payments of a construction sector project in order to mitigate the risk that such projects are not completed either at all, or to the required quality standard. Retentions are mainly used as a means of incentivising contractors and sub-contractors to return to correct defects during a specified period of time, as outlined in contract terms and conditions.347 Typically about 5% of a contract is held back, with up to 71% of contractors experiencing delays in receiving unpaid retention payments.348
85.Though the majority of contractors agree with the principle of retention payments, it is open to abuse. The Building Engineering Services Association (BESA) and the Electrical Contractors Association (ECA), who represent over 4,000 SMEs, told us that bigger companies had a vested interest in withholding payments for as long as possible,349or as one witness said: “an extra day for him can be, even at our low interest rates at the moment, quite favourable”.350 BESA and the ECA estimate that £10.5bn of the construction sector’s overall annual turnover of £220bn is held in retentions with an estimated £7.8bn of retention money unpaid across the last three years.351 One witness told us:
Currently, with a single builder our company has carried out five jobs over the last three years. The value of that turnover is about £1.5 million. At the moment, we are owed £37,500, in round figures, in retention. Some of it has been outstanding for over six months. For a company that has a £3.5 million turnover, that is a big chunk of money.352
86.This has a number of consequences for contractors such as time incurred to pursue unpaid or late retention money, and potentially higher borrowing fees or overdraft charges because of money removed from cash flow.353 It also weakens relationships throughout the construction supply chain and can increase overall costs for construction projects, which impacts on the wider economy in terms of growth and overall business competitiveness.354 The collapse of Carillion also highlighted issues with retentions. For example, one sub-contractor working on a Carillion PFI Project was reportedly still awaiting £200,000 in retention payments,355 while BESA have estimated that Carillion was holding overall some £800mn, all of which was lost to companies and the wider UK economy when it collapsed.356
87.One solution to the problem of retentions is the use of independently held project accounts, similar to tenant deposit schemes, whereby money is held in a central facility and where clients can make a claim if there is a defect that has not been rectified, but the contractor is also protected.357 In January 2018, Peter Aldous MP introduced the Construction (Retention Deposit Schemes) Bill, which would introduce such a scheme,358 and which was supported by the Small Business Commissioner.359 In October 2017, the Government launched a consultation on retentions, which acknowledged the concerns of contractors.360 The Government is still considering its response. The Minister told us that the issue had “not been kicked into the long grass” and that the Government was “trying to get consensus” and that it “was right that something complex as the construction payments sector is given the time and space required to come up with a proper solution”.361
88.We agree that retentions in principle are necessary to ensure quality and that companies fulfil their contractual responsibilities. This is a view shared by most of the construction industry and was reflected by the evidence we received. However, it is open to abuse, with big companies having a vested interest in holding on to owed money for as long as possible to maximise interest. More disturbingly, as the collapse of Carillion demonstrated, there is a concern that many large companies at the top of the supply chain are building this into their business models and if they go bankrupt this money is lost to other creditors. When this happens, it can wipe out the profit margins of smaller companies, sometimes leading to their failure, take money out of local economies and build inefficient practices into the wider economy. This could be addressed by the introduction of independently managed project accounts, to hold retention money. The Government is currently sitting on a review of this issue and we found the Minister’s stance that a lack of consensus was holding up progress disappointing. We recommend that the Government should bring forward proposals as soon as possible to introduce compulsory project accounts so that retention money can be held independently and its release subject to fair and timely oversight.
Government procurement and SMEs
Increasing Government procurement with SMEs
89.In 2016/17, the public sector spent an estimated £255 billion with external suppliers: £195 billion of this was spent on services and £118 billion was procurement by central government. £70 billion of procurement is undertaken by local government and £8 billion by public corporations. The remaining spending was capital (investment) spending.362 Successive governments have looked to increase the amount of public procurement given to SMEs.363 In 2015, the Government announced that by 2020 it would award 33% of central government procurement to SMEs.364 This was subsequently moved back to 2022. The Government has tried to make the procurement process simpler, more open and less bureaucratic, “so all businesses, no matter what their size have a chance of success”.365 This has included: a Crown Representative for SMEs to prevent departments from ruling out financially sound bidders because of low turnover;366 a Mystery Shopper service to allow suppliers to anonymously raise concerns about the procurement processes and practices of public procurers;367 a Contracts Finder website which lets SMEs search for information about contracts worth over £10,000 with the government and its agencies;368 an SME advisory panel, composed of 24 entrepreneurs, working with the government to ensure the 2022 target is met;369 advice and guidance for SME for selling to the public sector;370 breaking up large contracts into smaller lots; guaranteeing prompt payment of invoices to SMEs (5 days where undisputed) and simplifying bidding procedures.371 The Government also stated in its Industrial Strategy that public procurement would help finance innovative businesses.372
Government performance on Central Government Procurement with SMEs
90.Total Central Government Procurement with SMEs fell from 27.1% in 2014/15 to 22.5% in 2016/17.373
Chart 11: Percentage of Central Government Procurement Spending that is with SMEs
Source: House of Commons Library, Public Procurement, (September 2018), p 17.
The FSB have said that a number of problems still impact upon SMEs in the supply chain for public sector procurement. It found that only 12% of SMEs in the public supply chains say they have been provided with skills support to make bids.374 We also heard in our review of the Industrial Strategy that the Government more generally was not always maximising the use of public procurement to support UK firms.375 The Minister told us that the 33% target was “an ambitious target” and that it was “right that we are focusing on that”. She explained that part of the reason why the CGP spend with SMEs may have gone down was that a number of small businesses had become big businesses and so been removed from the figures.376 She said that the ambition to increase SME public sector contract was also “filtering down to local authorities and … local authority spend”.377
91.The Government deserves some credit for the various steps it has taken to make it easier for SMEs to bid for public sector contracts. However, progress in recent years has moved in the wrong direction in terms of central government contracts. At the moment the Government is in danger of missing its own target of 33% of such contracts being awarded to SMEs by 2022, a target that has already been moved back from 2020. In addition, it is not clear what progress is being made in terms of the percentage of local authority procurement spend assigned to SMEs. We recommend that the Government at the earliest opportunity needs to bring forward fresh and realistic proposals on how it will get back on track to meet its 33% target by 2022. The Government also needs to explain how it will make more progress on wider public sector procurement, for example ensuring that local councils are increasing SME involvement in their procurements and measuring and reporting their progress.
Prompt Payment by Government and Government suppliers
92.Since April 2015, all central government departments, including their executive agencies and non-departmental public bodies, are required to report on their prompt payment performance. They must publish the percentage of their invoices paid within 5 days and within 30 days, on a quarterly basis. The Minister told us that that Government’s target was for central government departments to pay 90% of undisputed invoices within 5 days and the rest within 30 days.378 She also told us that most Departments were doing “quite well” in meeting the targets.379 However, some are not. For instance, the Cabinet Office has not published data for 2017–18, despite the Government requiring many companies to publish their data.380
93.The Government has introduced measures to improve payment practices by Government suppliers. These include the Public Contract Regulations 2015 which require many public sector bodies to pay their suppliers within 30 days and to mandate 30 day payment terms down the supply chain in new public sector contracts.381 From July 2017, all major Government suppliers signed up to the Prompt Payment Code, committing them to work towards paying suppliers within 30 days. In addition, as noted above, suppliers can use the Small Business Commissioner and the Crown Commercial Service’s Mystery Shopper to report poor payment practices. However, the Federation of Small Businesses found that nine out of ten (89%) public sector suppliers have been paid late and that was true for both suppliers to central government (88%), local government (91%) and those supplying to public infrastructure projects (91%).382 The FSB called upon the Government to ensure that there was effective enforcement through the supply chain of public procurement which require payment within 30 days and better reporting on the effectiveness of Governments departments in ensuring this.383 A Freedom of Information request made in March 2018 found that many local councils were not ensuring that the 30 days contractual requirement was built into the supply chain or monitoring and reporting on it.384 The Government launched a consultation in April 2018 on improving prompt payment by Government suppliers.385 It proposed that for contracts over £5 million per annum, bids would be assessed on a contractor’s previous track record of paying subcontractors.386 It has been questioned whether the £5 million threshold is too high and would result in the proposed initiative being too narrowly applied.387
94.It is deeply disappointing to find that the Cabinet Office has not published its payment practice data for 2017–2018. It will be harder for the Government to have credibility with both small and big business if it cannot set a good example itself. It is equally concerning to find that many local councils do not appear to have processes in place to ensure that its supply chains are meeting targets on prompt payment. It is imperative that the public sector set and adhere to good payment standards. We welcome the Government’s proposals on removing companies from public sector procurement supply chains which consistently abuse smaller companies with their late payments. The Government should publish without delay the Cabinet Office’s payment data. We also recommend that the Government widens the application of its proposals on public sector contracts requiring bidding companies to demonstrate good payment practices within their supply chains. Any company which accepts a public sector contract should sign and adhere to the Prompt Payment Code, which as we have recommended should be mandatory and require payment within 30 days. In meeting this requirement, as we have previously recommended, this statutory limit must exclude the use of early repayment schemes or discounts to bring companies within compliance.
257 BEIS, Creating a Responsible Payment Culture, (October 2018), p 8.
258 Letters from Chair of BEIS Committee and replies from WH Smiths and Boots UK Ltd..
259 Federation of Small Businesses, Chain Reaction: Improving the Supply Chain Experience for Smaller Firms, (June 2018), p 47.
260 This was confirmed by several SME owners who spoke to the Committee privately.
261 Retrospective discounting occurs when larger firms force a discount of an already agreed price.
262 As above, p 56.
263 Letter from Boots UK Ltd to Chair of BEIS Committee.
264 Letter from Robert Dyas to Chair of BEIS Committee.
265 As above, p 57.
266 Q221-Q225, Tony Davis; Q225, Paul Antonio.
267 Q212 Martin Burton; Q213 and Q216, Tony Davis; Q216. We took evidence in private from several SMEs. One who supplied products to larger retailers told us that he was dependent on them as he could not reach his customers without them.
268 Q212 Martin Burton (Arnold James Ltd); Q213 Tony Davis (AMD Electrical).
269 See BEIS and Work and Pensions Select Committee, Carillion, (HC 769; May 2018), pp 24–26; House of Commons Library, The Collapse of Carillion, (March 2018), p 36.
270 Q240 Paul Antino (NRT Building Services Group); Q243 and Q248 Martin Burton (Arnold James Ltd); Tony Davis (AMD Electrical).
271 Letter from Keir Group Plc to BEIS Committee Chair. They told us that between January 2018 and June 2018, 3,009 invoices were paid using their two principle early payment schemes totalling £173 million with a total fee deduction of £593,000.
272 Letter from Mears to Chair of BEIS Committee.
273 Shafi Musaddique, Late payments cost smaller UK businesses more than £2bn a year, (July 2017).
274 Zurich Insider, Big businesses prey on SMEs in £45bn of late payments, (September 2017).
275 Zurich Insider, SMEs owed £225bn from late payments, (January 2016).
276 As above, p 2.
277 Plum, The Domino Effect: the impact of late payments, (December 2017), p 11.
278 Federation of Small Businesses, Chain Reaction: Improving the Supply Chain Experience for Smaller Firms, (June 2018), p 47
279 As above, p 52. The FSB found that 52% of SMEs saw up to 25% of their payments paid after agreed terms; 18% saw 26–50% of their payments paid after agreed terms and 14% saw more than half of their payments settled late.
280 As above.
281 Q213 Tony Davis (AMD Electrical).
282 Q277 Tony Davis (AMD Electrical).
283 Q207 Tony Davis (AMD Electrical).
284 Q207 Tim Hopkinson ((Poppleton). See also Q207 Paul Antino (NRT Building Services Group Ltd).
285 Q207 Martin Burton (Arnold James Ltd). See also Q215 Tony Davis (AMD Electrical); Q233–234 Tim Hopkinson (Poppleton).
286 We wrote to a number of companies about their payment practices. Some responded and for those that did not we looked at their payment practice reports. Thomas Cook told us that they did not gather transactional level detail for the whole of their group centrally and that Thomas Cook Group Plc represented 1% of all Thomas Cook Group payments.
287 See also: Q207 and Q227 Martin Burton (Arnold James Ltd).
288 See also: Q 207 and Q273 Tony Davis (AMD Electrical). He noted that he was fortunate that he could negotiate with his suppliers when he was awaiting late payments.
289 See: Dunn and Bradstreet, Small Business. Big Opportunity: The challenges and prospects for UK SMEs, (January 2018), p 7; Sage, The Domino Effect: The Impact of Late Payments, (December 2017), p 16; Federation of Small Businesses, FSB report shows stopping late payments could save 50,000 small businesses, (December 2016). BEIS, Creating a responsible payment culture: A call for evidence in tackling late payment, October 2018), p 16, which notes that late payments can also incur interest charges on loans and overdrafts.
290 A Survey by Bacs estimated that a half of SMEs reported additional costs of over £100 a month because of late payment. See: Bacs, 2017 Q1 Late Payments Research, (2017).
291 Sage, The Domino Effect: The Impact of Late Payments, (December 2017), p 16. See also Q233 Tim Hopkinson (Poppleton). He told us that late payments stopped his company from investing in technology and other improvements. BEIS, Creating a responsible payment culture: A call for evidence in tackling late payment, October 2018), p 19.
292 Q226 Martin Burton (Arnold James Ltd). See also Q233 Tim Hopkinson (Poppleton).
293 Q228 Tony Davis (AMD Electrical).
294 Q318 Kelly Tolhurst, Kelly Tolhurst MP, Parliamentary Under-Secretary of State, Minister for Small Business, Consumers and Corporate Responsibility.
295 Q233 Tim Hopkinson (Poppleton).
297 See: Concur, Invoice Utopia: A Vision of the Future for UK Businesses, (November 2017); Federation of Small Businesses, Time to Act: The economic impact of poor payment practice, (December 2016).
298 We heard from one business owner in the Private Evidence session that late payments had led to the collapse of their company and contributed to a stroke. 24% of UK businesses think that late payments are a threat to their survival, the highest rate amongst European countries - see: Intrum Justicia, ‘European Payment Report’, June 2018.
299 Plum, The Domino Effect: the impact of late payments, (December 2017), p 14–17.
301 Small Businesses were defined as a business with 50 or fewer employees. The Act was amended by the Late Payment of Commercial Debts (Amendment) Regulations 2015. For an overview of the Act see: House of Commons Library Note, Late Payments of Debts, (2017).
302 This included the Directive on combating late payment in commercial transactions (Directive 2000/35/EC), transposed by the Late Payment of Commercial Debts Regulations 2002, and European Directive on combatting late payments in commercial transactions was introduced (Directive 2011/7/EU), transposed by the Late Payment of Commercial Debt Regulations 2013. For a commentary see: House of Commons Library Note, Late Payments of Debts, (2017), pp 10–12.
303 We took evidence from several witnesses in private, who wished to remain anonymous, who made this point. See also: David Prosser, The scourge of late payment: How tardiness is threatening some start-ups’ existence, The Independent, (April 2017); Jon Card, How can small businesses take the pain out of late payments?, The Guardian, (September 2013).
304 The Explanatory Memoranda for the Regulations can be found here. Previously, Section 3 of the Small Business, Enterprise and Employment Act 2015 had introduced a new power to enable the Secretary of State to require certain companies to publish information about their payment practices. Provisions to report generally in the Annual Report on issues such as the treatment of suppliers existed already but the Act significantly extended the requirements.
305 BEIS, Business payment practices and performance: reporting requirements, (October 2017). See also: Concur, Invoice Utopia: A Vision of the Future for UK Businesses, (November 2017),p 21; The Prompt Payment Director, FAQs, (accessed 19 April 2018); Wall Street Journal, ‘New Rules Force U.K. Companies to Disclose Supplier Payment Data’, (April 2017).
306 BEIS, Check when large businesses pay their suppliers, (accessed 2 November 2018).
307 Q316 Kelly Tolhurst MP, Parliamentary Under-Secretary of State, Minister for Small Business, Consumers and Corporate Responsibility.
308 The Guardian, Late payments took me to a frightening place, (May 2017).
309 For instance, GlaxoSmithKlein have not published their payment practice reports and they told us that the relevant information had not been collated.
310 We heard from several witnesses in private who questioned whether the reporting practices or the Prompt Payment Code made any difference to the payment practices of larger companies.
311 Signatories should: agree to pay within the terms agreed at the outset of the contract and without attempting to change payment terms retrospectively or changing practice on length of payment for smaller companies on unreasonable grounds; give clear guidance to suppliers by providing suppliers with clear and easily accessible guidance on payment procedures, ensuring there is a system for dealing with complaints and disputes which is communicated to suppliers and advising them promptly if there is any reason why an invoice will not be paid to the agreed terms; encourage good practice by requesting that lead suppliers encourage adoption of the code throughout their own supply chains.
312 Paying with 60 days is a requirement and is met by paying 95% of invoices within this period, unless there are exceptional circumstances.
313 Prompt Payment Code, CICM says Code playing its part in improving payment practices, (July 2017).
314 For instance, the following companies were not signed up: WH Smiths; Boots; Siemens; Nike; Yodel; Thomas Cook; Punch Taverns; Warner Music; Manchester United Football Club; Arcadia; Robert Dyas; Aston Villa Football Club. Companies who were signatories included: GlaxoSmithKlein; Waitrose; Reed; Barratt; Capita; G4S. The following did not reply to our request: Manchester City Football Club; Britvic Drinks; Waterstones; Holland and Barrett; General Electric.
315 BEIS Select Committee and Work and Pensions Committee, Carillion, (HC 769; May 2018), p 4. Construction Enquirer, Carillion M&E firm collapse spurs call for late payment law, (March 2018).
316 City A.M., Revealed: Behind the scenes of Carillion’s annus horribilis, 21 December 2017. See also Daily Telegraph, Carillion accused of using ‘delay tactics’ and withholding payments by suppliers, (February 2018) and The Construction Index, Survey indicates Carillion subcontractors take average hit of £375k, (January 2018).
317 House of Commons Library, The Collapse of Carillion, (March 2018), p 37.
318 Q32 Paul Uppal, Small Business Commissioner.
319 Chartered Institute of Credit Management, Construction Supply Chain Charter, (accessed 20 October 2018).
320 Letter from Kier to BEIS Committee Chair, (31 October 2018).
321 As above.
322 Letter from Mears Group PLC to BEIS Committee Chair, (29 October 2018). Mears Group PLC is a provider of housing management and care services.
323 As above.
324 Tom Fitzpatrick, Put up or shut up time on fair payment, Construction News, (July 2018).
325 The SBC is independent but works in partnership with BEIS. When the SBC went live it had 4 staff and has since recruited two senior case workers and a Business Manager. The SBC’s grant-in-aid budget is £1,375,000. Letter from Paul Uppal to BEIS Select Committee.
327 Letter from Paul Uppal to BEIS Select Committee.
328 SmallBusiness.co .uk, SMEs don’t trust small business commissioner to strengthen business, (March 2018).
329 SB0029 Leeds City Region Enterprise Partnership and West Yorkshire Combined Authority. See also SBP0011 Specialist Engineering Contractors’ (SEC) Group.
330 Q255 Tony Davis (AMD Electrical).
331 Q268 Tim Hopkinson (Poppleton).
332 Q7, Q40 and Q45 Paul Uppal, Small Business Commissioner. He said this would happen if there was a pattern of abuse, though he thought it was important that those accused of late payment were given a right of reply and that the SBC was covered from a legal perspective.
333 Q20 Paul Uppal, Small Business Commissioner.
334 Q26 Paul Uppal, Small Business Commissioner.
335 Q5, Paul Uppal, Small Business Commissioner; Letter from Paul Uppal to BEIS Select Committee.
336 Q51 Paul Uppal, Small Business Commissioner.
337 See: Groceries Code Adjudicator, Groceries Code Adjudicator Annual Report and Accounts, (HC 85; 207). This includes an overview of the Adjudicators powers (pp 10–11) and the annual survey of the grocery sector, carried out by YouGov (p 18–21).
338 Plum, The Domino Effect: the impact of late payments, (December 2017), p 18. See also: BEIS, Creating a responsible payment culture: A call for evidence in tackling late payment, October 2018), p 16.
339 Q22.
340 Private Evidence Session with several suppliers. The suppliers told us that they would only give evidence in private because they feared they would be removed from their supply chains.
341 BEIS, Creating a responsible payment culture: A call for evidence in tackling late payment, (October 2018). The Consultation closes on the 29 November 2018.
342 As above, p 6.
343 Q312 Kelly Tolhurst MP, Parliamentary Under-Secretary of State, Minister for Small Business, Consumers and Corporate Responsibility.
344 Q314 Kelly Tolhurst MP, Parliamentary Under-Secretary of State, Minister for Small Business, Consumers and Corporate Responsibility.
345 Q320 Kelly Tolhurst MP, Parliamentary Under-Secretary of State, Minister for Small Business, Consumers and Corporate Responsibility.
346 Q318, Kelly Tolhurst MP, Parliamentary Under-Secretary of State, Minister for Small Business, Consumers and Corporate Responsibility.
347 BEIS, BEIS Research Paper 17: Retention Payments in the Construction Industry, (October 2017), p 16. Building Engineering Services Association and the Electrical Contractors Association, Retentions - What Are They?, (2018).
348 As above.
350 Q263 and Q266 Tony Davis (AMD Electrical);
352 Q270 Martin Burton (Arnold James Ltd). See also Q272 Paul Antino (NRT Building Services Group Ltd). He told us that his company had £252,000 in retentions being held.
353 BEIS, BEIS Research Paper 17: Retention Payments in the Construction Industry, (October 2017), p 16.
354 Q 269 Martin Burton (Arnold James Ltd); See also: BEIS, BEIS Research Paper 17: Retention Payments in the Construction Industry, (October 2017).
355 Construction News, ‘Catastrophic losses’: Carillion retentions crisis looms, (January 2018). See also: Financial Times, UK building industry clears rubble of Carillion’s collapse, (January 2018).
356 SBP0021 Building Engineering Services Association and the Electrical Contractors Association; Q 269 Martin Burton (Arnold James Ltd).
357 Q272 Martin Burton (Arnold James Ltd); SBP0021 Building Engineering Services Association and the Electrical Contractors Association.
358 Construction (Retention Deposit Schemes) Bill 2017–19. The Bill is due to have its Second Reading on 29 November 2018.
359 Q153 Paul Uppal (Small Business Commissioner).
360 BEIS, Retention Payments in the Construction Industry: A consultation on the practice of cash retention under construction contracts, (October 2017),
361 Q324 Kelly Tolhurst MP, Parliamentary Under-Secretary of State, Minister for Small Business, Consumers and Corporate Responsibility.
362 House of Commons Library, Public Procurement, (September 2018), p 11.
363 See: National Audit Office, Government Spending with Small and Medium-Sized Enterprises, (HC Paper 884; March 2016), p 21–31;
364 As above, p 4.
365 HM Treasury, Making public sector procurement more accessible to SMEs, (2013).
366 See Cabinet Office and Crown Commercial Service, Meet Emma Jones, our new Small Business Crown Representative, (July 2016).
367 Cabinet Office and Crown Commercial Service, Mystery Shopper: scope and remit, (January 2017).
368 Gov.uk, Contracts Finder, (accessed 2 November 2018).
370 This includes: Crown Commercial Service, Selling to the Government, (April 2017); HM Government, Government is Open for Business, (accessed 8 October 2018).
371 House of Commons Library, Public Procurement, (September 2018). In July 2018, the Government announced that it had launched a new simplified Public Sector Contract designed to make it easier for small businesses to apply for Government contracts, b removing duplication from the process and streamlining procurement frameworks. Crown Commercial Services, Simplified ‘Public Sector Contract’ Cuts Red Tape for Small Businesses, (July 2018).
372 BEIS, Industrial Strategy, (Cm 9528; November 2017), p 70.
373 House of Commons Library, Public Procurement, (September 2018), p 17. See also: Tenders Direct, SMEs to miss out on £33.5bn worth of government contracts by 2020, (April 2018).
374 FSB, CHAIN REACTION: IMPROVING THE SUPPLY CHAIN EXPERIENCE FOR SMALLER FIRMS, (June 2018).
375 BEIS Select Committee, Industrial Strategy: First Review, (HC 616; March 2017), pp 44–45.
376 Q327 Kelly Tolhurst MP, Parliamentary Under-Secretary of State, Minister for Small Business, Consumers and Corporate Responsibility.
377 Q326 and Q328 Kelly Tolhurst MP, Parliamentary Under-Secretary of State, Minister for Small Business, Consumers and Corporate Responsibility.
378 Q341 Q328 Kelly Tolhurst MP, Parliamentary Under-Secretary of State, Minister for Small Business, Consumers and Corporate Responsibility.
379 Q341 Kelly Tolhurst MP, Parliamentary Under-Secretary of State, Minister for Small Business, Consumers and Corporate Responsibility.
380 Cabinet Office, Cabinet Office prompt payment data, (accessed 2 November 2018).
381 See Cabinet Office and Crown Commercial Service, Prompt Payment by Government Suppliers, (April 2018), p 4.
382 Federation of Small Businesses, Nine out of ten public sector suppliers hit by late payments, (April 2018).
383 FSB, Chain Reaction: Improving the Supply Experience for Smaller Firms, (June 2018), p 14.
384 INSTINCTIF Partners, ECA Freedom of Information Survey 2018, (2018). 321 Councils were approached and 195 replied.
385 Cabinet Office and Crown Commercial Service, Prompt Payment by Government Suppliers, (April 2018), p 4. The Consultation closed on 5 June 2018.
386 As above, p 5.
387 Building Engineering Services Association and the Electrical Contractors Association, ECA and BESA Response to Consultation, (April 2018).
Published: 5 December 2018