MPs have said that the government should introduce a tougher regime to prevent bad payment practices by large companies.
A report published by the Business, Energy and Industrial Strategy Committee has said that large companies are treating SMEs ‘disgracefully’ and long payment terms are preventing SMEs from growing, and in many cases resulting in their failure. As part of its recommendations, the report urges the government to introduce a statutory requirement for companies to cut payment times to 30 days.
Rachel Reeves, chair of the committee, said: “Many SMEs are placed in a stranglehold by larger companies deliberately paying late and ruthlessly taking advantage of their suppliers, causing these firms financial instability. Unless the government levels the playing field and acts to bring in a tougher regime for poor payment practices then we choke-off the opportunity for SMEs to invest and grow in the future.”
As well as highlighting the importance of fair and timely payment for SMEs, the report said that previous government initiatives to address poor payment times such as the Prompt Payment Code have been largely “ineffective”. The committee also found evidence that some SMEs were also subject to unfavourable terms such as being required to give discounts for prompt payment or being charged fees to remain on supplier lists.
High street stores such as WH Smiths, Boots UK and Holland & Barrett have all been criticised for long payment terms to their suppliers and several companies examined by the report took on average 60 days to pay suppliers. Alongside a cut to payment times, the report recommends moving as soon as possible to require all medium and large companies to sign the Prompt Payment Code and to give the small business commissioner power to fine companies that pay their suppliers late.
The government had previously laid out targets to award 33% of central government contracts to SMEs by 2022, which the committee believes will not be met. MPs have urged the government to urgently set out a plan for meeting its target and protect SMEs by requiring companies and their supply chains to pay within 30 days or be prevented from bidding.
Reeves said: “Small and medium-sized businesses have an important role to play in rebalancing the UK economy and spread prosperity more widely and to all parts of the country. The government must play its part and, at the very least, ensure that more SMEs are awarded government contracts, which are paid fairly and on time.”
Seperately, the government has issued new guidance on procurement for major government contracts, which it says reflects its commitment to prompt payment. The procurement policy note explains how government departments should assess their suppliers and when it may be appropriate to exclude suppliers which cannot demonstrate a "fair, effective and responsible approach to supply chain payment".
The policy note applies to government contracts for goods or services valued above £5m and must be applied to all procurements advertised on and after 1 September 2019.