Late payments: government launches crackdown to help small businesses

The government has launched a range of measures to help reduce the problem of late payments for small businesses, including a new Fair Payment Code.. 

Under new laws, larger companies will be held to account and the Small Business Commissioner will be given greater enforcement powers.

Simply Business research found that small businesses were owed an estimated £32 billion in late payments last year. And findings from the Federation of Small Businesses suggest they lead to 50,000 business closures each year.

Read on to find out how the government plans to crack down on late payments, plus when new laws could be introduced.

Plans to reduce late payment to small businesses revealed  

Prime minister Sir Keir Starmer said that ‘stamping out late payments’ is ‘at the heart’ of the government’s plans to ‘unlock barriers to growth’ for small businesses.

The government estimates that the new measures will help 5.5 million small businesses to benefit from improved cash flow. They’ll also be able to spend more time growing their business, rather than chasing late payments.

Responsible directors at companies who don’t report their payment practices could face criminal prosecutions, including criminal records and unlimited fines.

What is the Fair Payment Code? 

The Fair Payment Code will replace the Conservative government’s Prompt Payment Code, which has 5,000 signatures from large businesses. 

Companies that sign up will need to prove that they’ve met good payment standards before being awarded official code status.

“Late payments are simply unacceptable”

When launching the new measures, Business Secretary Jonathan Reynolds said: “Late payments are simply unacceptable and this government is determined to level the playing field for small business.

“When the cash flow runs dry, small firms go under, which is why we need to hold larger businesses to account with their payment practices and foster an environment that supports growth and jobs.”

Small Business Minister Gareth Thomas added: “Small businesses deserve to be paid on time, it’s as simple as that. 

“I’m optimistic that [these measures] will help pave the way for real change that supports SMEs to thrive and help to grow our economy.”

When could the new laws be introduced?

The legislation, which will require all large businesses to include payment reporting in their annual reports, is expected in the ‘coming weeks’.

Meanwhile, there’ll be a consultation on plans to increase enforcement of existing late payment regulations before any new laws are introduced.

The new code will eventually replace the existing Prompt Payment Code. The government suggests that eligible businesses will be able to sign up to the new code from this autumn.

Will small businesses benefit from the Fair Payment Code?

As well as helping to improve the cash flow of small businesses, the new measures could increase transparency. This will help small businesses to make decisions about who they do business with.

However, the government’s plans focus on larger businesses so there could still be late payment problems between small businesses that work with each other, as well as with consumers. 

Small businesses can reduce the issue of late payments by reviewing their payment terms, and using late payment letters. They can also report late payments to the Small Business Commissioner and encourage larger businesses they work with to sign up for the Fair Payment Code. 

Do you think the government’s plans will help to reduce the issue of late payments for small businesses? Let us know in the comments.

More guides for small businesses

• Bookkeeping guide for small businesses
• How to budget: a budget calculator and guide
• Best small business bank account – your options explained
• Best self-employed accounting software

Photograph: Friends Stock/stock.adobe.com