Contractors who are consistently paid late by their clients are unlikely to benefit from recent changes to the late payment legislation.
The Late Payment of Commercial Debts Regulations 2013 came into force on 16th March 2013. According to the business support website Payontime.co.uk, the changes are the result of legislation changes at a European Union level.
However, despite the new regulations tightening-up some of the existing late payment provisions, they fall short of what is seen, for example, in France, where prompt payment is a legal requirement. That’s according to a Pinsent Masons commercial law expert, Ben Gardner.
“If [government] really wants to protect small and medium sized enterprises (SMEs) from the effects of late payment, it should change the law to create an absolute duty to pay invoices within a fixed time limit,” Gardner told Out-Law.com.
He highlights that the legislation still enables businesses to extend payment terms beyond the 60-day limit as long as both parties agree and the practice is not “grossly unfair”.
“What this does not recognise is the imbalance in contractual negotiations over payment terms,” continues Gardner. “’Grossly unfair’ is an untried concept in English law and so not one that [small and medium enterprises] will rush to court to act on.”
Contractors don’t have to accept payment terms extended beyond 60 days, and can insist on prompt payment from their clients, but Gardner’s fear is contractors and other small firms will lose work as a result.
Payontime.co.uk reports that the key changes are as follows:
- The default payment period is 30 days, if no terms are agreed, and they must not exceed 60 days “unless both parties agree and the extension is not grossly unfair”
- Public sector clients must pay contractors within 30 days of invoice
- Compensation for recovery remains at previous levels, but contractors can now also claim ‘reasonable’ additional costs, such as the costs of using a debt recovery agency
- ‘Verification periods’, or the time it takes for the client to approve the contractor’s work, must not exceed 30 days unless agreed, and should not be grossly unfair to the contractor.
UK legislators have known for years of Britain’s late payment culture, but despite regular campaigns from business organisations representing small and medium enterprises, nothing has been done that makes a measurable difference. The current Coalition government has talked of ‘naming and shaming’ late-paying firms, but there has been no evidence of that happening.
Labour’s shadow business secretary, Chuka Umunna, said at the party’s Spring Conference in March 2013 that a future Labour government might ban late-paying firms from public contracts. He is quoted in The Guardian as saying: "Too many small businesses are effectively bankrolling bigger businesses that refuse to pay them on time.”
Whilst such acknowledgements are welcomed by small business representatives, they do nothing to help contractors now. As Gardner concludes: “What is clear is that SMEs remain close to powerless when it comes to late payments.”