New Fair Payment Code
Despite decades of complaints from victims – and some reasonably successful legislation over the last 26 years – late payment continues to be an issue.
Now a New Fair Payment Code has been announced by the government. Businesses would need to prove they’ve met good payment standards before being awarded official code status. There would be gold, silver and bronze tiers.
Proposals also include stepping up enforcement. Will this carrot-and-stick approach work? The enforcement side of it probably won’t, for reasons we’ll discuss later in this blog post. Meanwhile, let’s first have a look at the existing laws regarding late payment…
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Late Payment of Commercial Debts (Interest) Act 1998
This Act was introduced to encourage prompt payment of debts between businesses and to penalise late payers. Here’s what it means:
Interest on Late Payments. If a payment is late, the creditor is entitled to claim statutory interest. This is set at 8% above the Bank of England base rate. It can significantly increase the amount owed.
Fixed Compensation. For each overdue invoice, the creditor can claim a fixed sum to cover debt recovery costs. This fixed sum ranges from £40 to £100, depending on the size of the debt.
Additional Costs. If the creditor incurs reasonable debt recovery costs while recovering the debt (such as legal fees), they may also be able to recover these.
For late payers, this means that delaying payment can be costly. Not only will they owe the original debt, but they will also incur interest and additional recovery charges.
For the creditors, this law gives them the right to claim compensation and interest, making it financially disadvantageous for the debtor to delay payment. This law also helps to maintain better cash flow, something that’s important for every business – especially small firms that rely on timely payments.
Late Payment of Commercial Debts Regulations 2013
These regulations supplement the 1998 Act and further strengthen creditors’ rights. They aligned UK law with EU directives on late payments – and added additional protection.
Payment Terms. The law sets a maximum payment term of 60 days for business-to-business transactions unless both parties explicitly agree otherwise and the terms are not grossly unfair. Public authorities must pay within 30 days.
Challenging Unfair Contract Terms. Creditors can challenge payment terms that are considered unfair or excessively long, ensuring that they are not forced into unreasonable contracts that delay payments.
Automatic Interest. Under this regulation, statutory interest starts accruing automatically the day after the payment is due – without the creditor needing to send a reminder.
For late payers, these regulations tighten the rules on how long they can take to pay before penalties apply. They must be aware of the automatic interest that begins accruing once a payment is overdue.
For victims, this Act provides more robust tools to ensure that debts are paid promptly. It also makes it easier to challenge unfair payment terms – ensuring that creditors are not left in a vulnerable position due to delayed payments.
Duty To Report On Payment Practices And Performance Regulations 2017
This duty applies to large companies and limited liability partnerships in the UK. Under these regulations, large businesses must publicly report their payment practices, policies, and performance regarding supplier payments.
For the purposes of the regulations, ‘large’ businesses are those that meet two or more of the following criteria:
- turnover of £36 million or more
- a balance sheet total of £18 million
- 250 or more employees.
The report must include information such as:
- the average time taken to pay invoices
- the proportion of invoices paid within specific periods
- whether the business offers e-invoicing or supply chain finance.
Criminal penalties can apply if a company or its directors fail to comply with the duty to report – or if they provide false or misleading information. These penalties include unlimited fines for the company and its directors.
Criminal records may result if directors are found guilty of non-compliance or deliberately withholding accurate information.
In proposing new rules, the government plans to strengthen enforcement of this reporting. But we don’t think that will work particularly well. Here’s why…
Late Payment Legislation Enforcement Issues
Let’s start on a positive note: the Late Payment of Commercial Debts (Interest) Act 1998 hasn’t failed. Quite the contrary, it has actually been quite a useful tool. And we’re not damning it with faint praise – it genuinely has been a practical piece of legislation that can benefit victims of late payment.
But the broader issue is that government policies past and present have made life very difficult for HM Courts & Tribunals Service. The courts are essential for successful enforcement – and they are struggling to cope with demand.
This is causing more claimants (including landlords) to incur more costs when they’re trying to recover what is owed to them.
Sadly, the whole process is no longer fit for purpose. It is very slow, cumbersome and under-resourced. Often, the staff have been poorly trained. More and more work is being moved towards call centres with people reading from scripts. This is far from ideal: ‘toothless’ is the word that springs to mind.
If the government is serious about enforcement, it needs to beef up the enforcers. Quantity is not enough – better quality is needed. But can you see that happening quickly – if at all – under the present financial constraints? Neither can we.
So all the hopeless Whitehall hand-wringing will continue. In the meantime, companies will need expert legal help to make the best of this country’s badly under-resourced justice system…
Get Expert Help To Stop Late Payment
Don’t tolerate late payment – take action. Contact Coles Miller’s highly experienced Debt Recovery Manager Eric Holt. His specialisms include:
- payment requests, enforcement, issuing court proceedings
- managing credit control, retention of title claims, statutory demands, insolvency/bankruptcy proceedings, recovery of rent arrears and rental properties.
Eric is based at our Poole office.
