Ministers intend to crack down on large companies that take too long to pay suppliers to relieve pressure on thousands of smaller businesses facing severe cash flow problems.
The UK government will on Tuesday say that the prompt-payment code, which is voluntary but widely adhered to, will be strengthened so that from July 1 95 per cent of invoices for small suppliers must be paid within 30 days.
This has been reduced from 60 days, which will remain the target to pay larger business suppliers with more than 50 employees.
Company directors, chief executives and finance directors will also be required to personally sign the code to ensure responsibility for payment practices is taken at the highest level of an organisation.
Small businesses have struggled with cash flow more than larger counterparts in the pandemic lockdown, as many lack the financial resources and access to finance to help them survive economic restrictions.
But late payments is a long-running problem that the government has sought to crack down on through the use of the voluntary code.
Almost 3,000 companies have signed the code but many small suppliers still complain of payment delays beyond even the 60-day target. Officials estimate that about £23bn of late invoices are owed to businesses across Britain.
Paul Scully, small business minister, said: “We are relieving some of the pressure on small business owners by introducing significant reforms to the UK payments regime — pushing big businesses to pay their suppliers on time.”
The code is overseen by the Office of the Small Business Commissioner on behalf of the business department.
The government has also brought in an acknowledgment that, as a condition of signing the code, suppliers can charge interest on late payments, and has enabled breaches to be investigated based on third-party information.
The voluntary code was first established in December 2008 to set standards for payment practices between organisations of any size and their suppliers.
Mike Cherry, head of the Federation of Small Businesses (FSB), said: “A late payment crisis was massively stifling the UK economy before Covid hit. The pandemic has deepened it. Ending our pernicious poor payment culture for good over the coming months will be fundamental to turning our hopes of economic recovery into reality.”
Companies are publicly named and shamed if they breach the code, with retailer Holland & Barrett the first big company to be named for late payment of suppliers in 2019. Businesses in the construction sector such as Balfour Beatty, Costain, Engie, Interserve and Laing O’Rourke were also flagged for failing to pay 95 per cent of invoices within 60 days that year.
The FSB also on Monday agreed to a streamlined application process for companies with up to 50 employees to apply for Good Business Charter accreditation.
This is hoped to allow more small businesses the chance to have their commitment to ethical practice recognised despite financial constraints. The charter includes a commitment over prompt payment.