As the issue of late payment continues to overshadow the construction industry, Phil Hall, head of public affairs & public policy at the Association of Accounting Technicians (AAT), says maximum payment terms must be shortened and a clear, simple financial penalty regime for persistent late payers is essential
Almost a quarter of insolvencies in the UK are caused by late payment issues. The construction industry is no exception, in fact, it probably has more than its fair share of payment-related collapses.
Carillion may be the most notable builder to fold and owe millions to suppliers but there are countless more, from Lakesmere and Omnis Construction to AN Egremenont and Helm Construction.
Collapse is not the only problem. Even for those that manage to absorb late payments, or in some cases non-payment, damage to these organisations’ investment, growth and productivity are likely. Furthermore, in many cases, late payment can have a real impact on the mental health of both business owners and sometimes other members of staff.
Large construction firms often set a poor example. Laing O’Rourke was removed from the voluntary Prompt Payment Code in 2019, although they were subsequently readmitted after some much-needed improvements. Likewise, Balfour Beatty was removed from the code last year, followed a few months later by Kier, who was removed in November 2019.
It is fair to say that late payment affects the whole economy but its impact in the construction sector is particularly pronounced.
So, there is broad agreement on the cause, problems and consequences of late payments for individuals, employers and the economy and there has been for some time. However, agreement on an effective solution remains elusive.
The Prompt Payment Code
The voluntary Prompt Payment Code was introduced in 2012 and hailed as a potential solution by many, including the construction sector. This voluntary code requires large companies to pay their suppliers within a maximum of 60 days – hardly a challenge for most businesses in the 21st Century, not least given statistics from the Department for Business, Energy & Industrial Strategy (BEIS) show that most companies (53%) pay their suppliers within 30 days.
Despite the less than challenging nature of the Code, only 2,500 companies have signed it. There is little enforcement and no financial penalties are imposed for a failure to comply. It took 7 years before the first company was removed from the Code for persistently failing to pay within 60 days.
Given the weak performance of the Code, rather than beef it up as seems the most obvious and straightforward option, in 2017 Government instead decided to require companies to report on their payment practices on a half-yearly basis. This may provide some useful data for policymakers or the most diligent of small businesses that check who they are dealing with, but it has no discernible value in terms of changing behaviour. There is a legal obligation to report the data but no legal action if that data is terrible. Companies freely admit to having very lengthy payment terms but don’t have to do anything about them. For example, according to the public register, Hitachi Construction Machinery UK has standard payment terms of 135 days, Topps Tiles 120 days, Tata Steel 180 days and Brinton Carpets 180 days.
Small Business Commissioner
Following on from this, as 2017 ended, the “Small Business Commissioner” post was created. This was supposed to be based on the Australian Small Business Commissioner model i.e. a Commissioner with teeth to impose fines. Instead, our Commissioner has no powers to impose fines and is widely regarded as toothless. With no real powers and a very limited budget, the Commissioner has done a good job in recovering a few million pounds in late payments for small business. However, when you consider the multi-billion-pound scale of the problem, it’s less than a drop in the ocean.
AAT campaigns for change
The past decade has been characterised by a series of initiatives, legislative tweaks, voluntarism and reliance on big employers to do the right thing, all of which have failed to address the problem of late payments either in the construction industry or the wider economy.
That’s why the Association of Accounting Technicians (AAT) has been campaigning for change. AAT has a strong interest in improving matters because 60% of its 140,000 members either work for or run their own SME and its 4,250 licensed accountants provide tax and accountancy services to more than 400,000 British SMEs. It’s a big issue for AAT members and an even bigger issue for their clients.
In 2018 AAT made three key recommendations to BEIS that should resolve the problem. These are:
- That the Prompt Payment Code should be made compulsory for companies with more than 250 staff
- That payment terms under the Code should be halved from a maximum of 60 days to a maximum of 30 days for 95% of invoices
- That a clear, simple financial penalty regime for persistent late payers should be introduced and enforced by the Small Business Commissioner.
The campaign to deliver these changes gained substantial support from the SME community as well as the construction, fashion, finance and recruitment sectors.
Political support has been similarly impressive. The Green Party, Liberal Democrats and Scottish National Party have all publicly backed AAT’s campaign together with almost three quarters (73%) of Labour and Conservative MPs according to a YouGov poll published last year.
Despite this coalition of backers, in the summer of 2019, Government said there was little consensus for reform and published a new package of measures to tackle the problem. These included setting up a £1m technology fund and proposing to hold company boards to account for supply chain practices. These measures were badly received by the construction industry, by AAT and the SME community, although welcomed by the Federation of Small Business.
At the time, Nick Sangwin, chair of the National Federation of Builders (NFB), said: “Today’s announcement does not help small construction businesses who are about to go under because they are owed money. Nothing has changed for SMEs.”
Six months later and hopes have been raised again. In January 2020, Labour Peer Lord Mendelsohn introduced a “Late Payments” Private Members Bill to the House of Lords.
This legislation is based largely on AAT’s recommendations for reform. It promises to introduce a statutory 30-day limit for payment of all invoices, backed up by giving the Small Business Commissioner powers to impose large fines on the worst, persistent offenders.
Lord Mendelsohn’s Bill also rightly seeks to ban the most predatory payment practices like prompt payment discounts, where purchasers demand discounts for prompt payment of invoices; charges for onboarding and staying on supplier lists.
Lord Mendelsohn said: “Late payment is crippling small businesses while the UK economy is crying out for investment. By failing to tackle late payment we are starving our small businesses of the capacity to act. The recent huge escalation in outstanding payments shows that decades of promoting ‘culture change’ has only made things worse.
“This Bill will tackle the issue once and for all with a package of measures that is operable, impactful and measurable.”
AAT is backing Lord Mendelsohn’s Bill and urges politicians from all parties to do the same.
Although the Bill is not likely to be passed, owing to a lack of Parliamentary time, it further raises political awareness of the problem and that Government action to date has not been sufficient.
Head of Public Affairs & Public Policy