The Government should introduce a tougher regime to tackle larger companies who treat small businesses ‘disgracefully’ by enforcing long payment terms or paying their suppliers late, according to a new report
The Small businesses and productivity report published by the Business, Energy and Industrial Strategy Committee says that for a small and medium-sized enterprise (SME) to succeed it is crucial they are paid fairly and on time.
However, the report finds that bad payment practices have led to the failure of many SMEs and prevented others from growing and improving their productivity. Initiatives to address poor payment practices, including the Government’s Prompt Payment Code, have been ineffective, say MPs.
The report urges the Government to introduce a statutory requirement for companies to pay within 30 days, move as soon as possible to require all medium and large companies to sign the Prompt Payment Code, and equip the Small Business Commissioner with powers to fine those companies who pay late.
The Committee found evidence that payment terms are getting longer. Several companies looked at by the Committee took on average more than 60 days to pay an invoice.
SMEs also face other unfavourable terms – described as “supply chain bullying” by the Federation of Small Businesses – such as being required to give discounts for prompt payment or being charged fees to remain on a suppliers list.
Rachel Reeves MP, Chair of the Business, Energy and Industrial Strategy Committee said: “Small and medium-sized businesses are vital to the health of our economy, providing jobs and prosperity to communities up and down the country.
“But many SMEs are placed in a stranglehold by larger companies deliberately paying late and ruthlessly taking advantage of their suppliers, causing these firms financial instability.
“Unless the Government levels the playing field and acts to bring in a tougher regime for poor payment practices then we choke-off the opportunity for SMEs to invest and grow in the future.
“UK productivity is falling behind its competitors and it’s important the Government’s Industrial Strategy supports the ‘long tail’ of less productive SMEs to benefit from new technologies and skills. Small and medium-sized businesses have an important role to play in rebalancing the UK economy and spread prosperity more widely and to all parts of the country.
“The Government must play its part and, at the very least, ensure that more SMEs are awarded government contracts, which are paid fairly and on time.”
Access to public sector procurement can bring important benefits to SMEs but the Government is on course to miss its target of awarding 33% of all central government contracts to SMEs by 2022. The Committee calls on the Government to urgently set out how it will meet its target and, to protect SMEs from late payments, recommends that companies and their supply chains that bid for public sector contracts should pay within 30 days or be prevented from bidding.
The Committee’s report identifies the construction industry as a sector where poor payment practices are widespread. The Committee calls for the Government to extend the Small Business Commissioner’s remit to cover the construction industry.
The report also recommends changes to tackle the abuse of retention payments within the construction industry, proposing that independently managed project accounts are introduced, and money withheld only when there is a good reason to do so.