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Compliance with UK Prompt Payment Code to be 'rigorously enforced', says minister

Large companies that have signed up to the industry's Prompt Payment Code but that do not pay their suppliers within a reasonable time period will have their names removed, UK business minister Matthew Hancock has confirmed.02 Mar 2015

A new Code Compliance Board made up of people from business representative bodies will be appointed to investigate challenges made against code signatories by their suppliers, and "rigorously enforce" the removal of signatories found to have breached the standards set out in it. However, the code will remain a voluntary commitment by businesses to fair practices when dealing with their suppliers.

The code will also begin promoting 30-day payment terms as standard, with 60 days allowed as an absolute maximum, Hancock said. Signatories will be actively encouraged to start complying with the strengthened code in the coming weeks, although the changes will not formally come into force until next year, he said.

"Making small businesses wait an unreasonable time for payment is entirely unacceptable," he said. "I know first-hand the great burden that late payment can place on firms – and how it can strain family finances – which is why I am committed to stopping it."

"Big companies should lead by example and pay small suppliers within 30 days. I have already written to the FTSE 350 urging them to sign up to the Prompt Payment Code. Fairer payment practices will help small businesses grow and create jobs," he said.

The Prompt Payment Code was set up in 2008 by the Chartered Institute of Credit Management (CICM) as a voluntary agreement promoting good payment practices. Code signatories, including a number of FTSE100 businesses, are obliged to pay suppliers within an agreed time and to make sure that they have proper processes in place for any issues that may arise. More than 1,700 businesses and public authorities have committed to the code to date.

Appointment of the new Code Compliance Board and moves to formalise the payment terms of signatories are among the recommendations of the 'advisory board' on prompt payment, established at the end of last year to take the lead on strengthening the code and its enforcement. The advisory board will also require all code signatories to report on their payment practices or explain why they do not, in line with the new legal requirement for large and listed businesses to do so contained in the Small Business, Enterprise and Employment Bill, which is currently before parliament.

Changes to public procurement laws introduced last week set a maximum 30-day payment term for every business in the public sector supply chain, including suppliers and sub-contractors.

Commercial law expert Ben Gardner of Pinsent Masons, the law firm behind Out-Law.com, said that the changes would enable code signatories to "distinguish themselves from their competitors" by demonstrating their commitment to the small businesses in their supply chains.

"It has long been accepted that small suppliers are not willing to use the legal remedies that are available to them under the Late Payment Regulations for fearing of losing a customer relationship," he said. "As a result, it appears that the government is now trying to use other tools to incentivise businesses to settle their invoices within a reasonable period of time."

"Since its formation, the Prompt Payment Code has lacked the 'teeth' it needs to achieve what it set out to do. Its voluntary nature, together with the lack of any real incentive to become a signatory, means that many businesses will continue to negotiate long and unfair payment terms in the future. However, the rising prominence of the code should be noted by larger businesses that currently have what may be deemed 'unfair' payment practices because, as the UK economy continues to go from strength to strength, such practices are going to be increasingly viewed as unjustifiable," he said.