New 'conciliation service' will help small UK suppliers enforce prompt payment, says government

The Conservative Party pledged to establish the SBCS in its pre-election manifesto, and the measure will be included in a new Enterprise Bill which will feature in the Queen's Speech next week, said Sajid Javid in a speech in Bristol. The bill will contain a number of business-friendly measures, including a further commitment to tackling regulatory 'red tape' and extensions to the 'primary authority' scheme, he said.

"The purpose is to avoid expensive legal costs and maintain business relationships by reaching mutually satisfactory agreements," said Javid. "This model has worked in Australia and we will explore it, and other models, and find what works best in the UK."

"In 2008, late payment alone cost British businesses £19 billion. This year, that's set to exceed £40 billion. The average amount owed to a small business is more than £30,000. You know as well as I what figures like that can do to the cash flow of small businesses - it's enough to force a company into insolvency," he said.

Commercial law expert Ben Gardner of Pinsent Masons, the law firm behind Out-Law.com, said that the announcement "underlines the government's commitment to tackling the issue of late payment and the detrimental affect it has on SMEs".

"However, the success of the SBCS is likely to be dependent on SMEs referring late payment issues and disputes to it in the first place," he said. "As is the case with existing legislation, this is something SMEs may be unwilling to do for fear of jeopardising their business relationships."

"Importantly, the creation of the SBCS appears to be in addition to the existing suite of measures that are available under the Small Business, Enterprise and Employment Act to tackle poor payment practices. One of these measures requires large businesses to publicly report on their payment practices. As discussed previously, should the government push ahead with this measure, the reputational repercussions of how a large business treats its supply chain may well prove to be more of an incentive to treat suppliers fairly and pay them on time," he said.

From next April, large businesses will be required to publish information about their payment practices twice a year. The final reporting requirements will be established through new regulations, which are due to be published shortly. However, it is expected that large businesses will be required to report on their standard payment terms; on the average time taken to pay; on the proportion of invoices paid in 30 days or less, 60 days or less and beyond 60 days; and any financial incentives required of suppliers before they can join or remain on supplier lists.

Along with the new reporting requirements, the previous government introduced a number of measures to beef up the industry-backed Prompt Payment Code and enforce the removal of those found to have breached its standards. The Prompt Payment Code now promotes a 30 day payment term as the norm, with a maximum permitted payment term of 60 days, while the government has been "leading by example" by requiring all public sector contracts to pay out within 30 days, according to Javid.

"Large businesses should therefore keep a close eye on developments in this area in order to better understand what they will be required to report on," said Gardner. "At the same time they should also be assessing whether their current practices are likely to be deemed unjustifiable when benchmarked against the requirements of the Prompt Payment Code, market practice and the business' financial performance."

The new Enterprise Bill will include measures to reduce the cost to businesses of complying with regulations by a further £10 billion over the next five years, and to help create two million more jobs, Javid said. The independent regulators, including the likes of energy market regulator Ofgem and the Financial Conduct Authority (FCA), will be expected to contribute to this target, meaning that it will go further than the previous government's deregulation drive which only applied to central government departments.

The bill will also extend and simplify the primary authority scheme, which allows businesses to get advice on regulation from a single local council which must then be respected by all other local councils, so that more businesses can access the scheme and to cover more aspects of the regulatory regime. It will also include any changes to the business rates regime that emerge from the Treasury's ongoing review, and remove the requirement for employers to pay national insurance contributions for apprentices aged under 25.