Large companies could be fined for paying suppliers late

Large companies that persistently fail to pay their suppliers on time could face fines under government plans to help smaller businesses.

Draft proposals unveiled on Thursday would also limit invoice terms to a maximum of two months, dropping to 45 days in five years’ time.

Business Secretary Jonathan Reynolds unveiled the plans alongside research blaming late payments for the failure of thousands of businesses a year.

Opposition parties welcomed the move, but said firms were suffering under Labour due to National Insurance rises at the Budget.

The government claims the change would mark the biggest shake-up in payment rules since firms gained powers to charge interest on late invoices in the 1990s.

Government research estimates around 1.5m businesses have been affected by late payments, with £26bn owed at any given time.

The issue poses a particular problem for small firms, which usually have smaller cash reserves and are more affected by time wasted chasing late bills.

Unveiling the plans, Reynolds said late payments were the “number one issue” raised by small businesses.

Under the new proposals, which will be subject to a 12-week consultation, the small business commissioner – a post introduced under the Conservatives in 2017 – would gain powers to fine late-paying companies.

The new powers would apply to companies with more than 250 employees, which are already obliged to report their average payment times twice a year.

A government policy paper suggested companies would be liable for a fine if they failed to pay a quarter of invoices on time within this six-month reporting window.

Fines would be double the amount companies owe their suppliers in late-payment interest, currently set at 8% plus the Bank of England base rate.

The government has not set a timetable for the legislation required to deliver the change, adding it would be introduced as soon as parliamentary time allowed.

The government has also outlined plans to cut the maximum time businesses have to pay their suppliers.

Currently commercial invoices are generally supposed to be paid within 60 days, although companies can ask for a longer settlement period if the supplier agrees and it is not not considered “grossly unfair”.

The business department said this exemption had allowed some larger firms to effectively impose long payment terms on smaller suppliers, which felt compelled to agree in order to secure contracts.

It added that removing the ability to agree payment terms longer than 60 days would address the “negotiating imbalance between small and large businesses”.

This blanket 60-day limit could be reduced to 45 days in five years’ time, it added, in a bid to “further improve business cashflow”.

Conservative shadow business secretary Andrew Griffith said the crackdown on late payments was welcome, but businesses were suffering from a “full-on strangulation of employment red tape” under Labour.

He also criticised the decision at the Budget to raise employers’ National Insurance (NI), a payroll tax, branding it a “£25bn jobs tax”.

The Liberal Democrats also criticised the NI rise, adding that smaller firms had been “badly hit” by the hike.

Business spokesperson Sarah Olney also said the government needed to deliver a “proper plan” for companies, including “fixing business rates and cutting sky-high energy bills”.