This is what the Prompt Payment Code is intended to prevent. It was introduced in December 2008 as part of a package of measures to create a responsible payment culture within the UK – across all business sectors, not just construction.
Earlier this year, the government unveiled a number of reforms to the Code following a consultation exercise in 2019. On these pages we outline how the Code operates and how the recent changes affect signatories.
What is the prompt payment code?
The Prompt Payment Code is a voluntary code of practice for businesses, administered by the Office of the Small Business Commissioner (SBC) on behalf of the Department of Business, Energy & Industrial Strategy (BEIS).
It sets standards for payment practices between organisations and their suppliers and specifically aims to improve cashflow through the supply chain by tackling the issue of late payment.
The issue of outstanding invoices particularly affects small businesses and can have a negative impact on investment and job creation. In the worst cases it can lead to business closures.
There have now been over 3,300 signatories to the Code from all sectors including large retailers, local authorities, central government departments and small/medium-sized enterprises (SMEs).
The basic requirements
All signatories to the Code must pay:
• 95% of all invoices within the agreed payment terms and without attempting to change terms retrospectively,
• 95% of all invoices within 60 days, and
• 95% of invoices from businesses with fewer than 50 employees within 30 days.
If there is any reason why an invoice will not be paid in accordance with its terms, Code signatories must immediately advise the relevant supplier.
As well as agreeing to pay their suppliers in a timely manner, signatories to the Code agree to provide their suppliers with clear and easily accessible guidance on payment procedures, invoicing requirements and complaints policies.
In addition, by signing up to the Code, a signatory undertakes to encourage good practice more widely, for example by asking its own lead suppliers to encourage adoption of the Code throughout their supply chains.
The SBC encourages regular engagement with all suppliers and expects Code signatories to take steps to identify their small suppliers (i.e. those with fewer than 50 employees) who should be paid within 30 days of an invoice.
The SBC also suggests that small suppliers proactively inform their counterparties that they qualify for 30-day terms.
How do you sign up to the code?
Signing up to the Code costs nothing and is a relatively easy process – an authorised employee simply has to fill in the online form, providing:
• details of the organisation including the name of the director responsible for payment matters,
• number of days for standard payment terms (which must be no more than 60),
• links to the organisation’s procurement policy and payment guide, if any, and
• if the organisation does not have its own payment guide, further details about the invoicing and payment process so that a personalised payment guide can be generated.
Following submission of the form, a prospective signatory will be contacted by the SBC office to check that it meets the requirements. Assuming that there are no issues the SBC will add the entity’s name to the list of signatories on the website and authorise the use of the Code’s logo.
Policing the code
Compliance with the Code is monitored by a compliance board whose members are drawn from large and small business representative groups, financial services providers and the government.
The board monitors compliance with the Code in two ways:
• by considering and responding to complaints from suppliers or information from third parties and
• by reviewing data from the signatories themselves.
In the case of large companies, the compliance board reviews the data submitted to the payment practices reporting portal twice a year (in accordance with the Reporting on Payment Practices and Performance Regulations 2017). The data for smaller businesses is obtained from an annual declaration on their payment practices.
What if a signatory fails to pay in accordance with the code’s requirements?
If the compliance board considers that a signatory has not complied with the Code (from reviewing either complaints or payment data) it may suspend the signatory from the Code.
The signatory is given the opportunity to submit an action plan to correct the non-compliance. Provided that compliance is achieved within 12 months, it will be reinstated.
If the signatory fails to engage or submit an acceptable action plan, it will be permanently removed.
Between the start of enforcement action for non-compliance in late 2018 and October 2020, 61 signatories had been suspended for failing to pay their suppliers on time. Of those, 41 have been reinstated after engaging with the SBC to improve their payment practices.
A list of the signatories currently suspended is available on the Code website (see further information).
How do I complain about a signatory’s payment practices?
Complaints can be made using the online form on the SBC website (see further information). The SBC will investigate the complaint and encourage dialogue between the parties. If the complaint is upheld the signatory may be suspended from the Code.
Have the requirements of the code changed since it was established?
Various steps have been taken over the years to strengthen the Code as part of the government’s push to improve payment culture generally within the UK and specifically for small businesses.
A sharper focus on small businesses was reflected by the SBC joining the Code’s compliance board in 2019 and subsequently taking overall responsibility for the Code in 2020.
In January 2021, BEIS announced various reforms to the Code following a consultation exercise in 2019 on how to create a responsible payment culture for small businesses.
The changes, which are now all in force, include:
• A company’s CEO or finance director, or the business owner where it is a small business, is required to sign the Code personally to ensure that responsibility for payment practices is taken at the highest level of an organisation.
• A shorter payment period for invoices from small businesses (those with less than 50 employees). Code signatories are now required to pay 95% of invoices from small businesses within 30 days, rather than the 60 days previously applied to invoices for all suppliers.
• The SBC can now investigate breaches based on third-party information.
• Small and medium-sized signatories are required to report annually on their payment performance, on a ‘comply or explain’ basis.
• Signatories must recognise the right of suppliers to charge late payment interest and charges if an invoice is paid late without justification.
The Code remains entirely voluntary and there are no proposals to turn it into a regulatory requirement.
Other changes in the pipeline
BEIS is also currently considering the responses to its October 2020 consultation on proposals to strengthen the SBC’s ability to help small businesses get redress in respect of late payments. The proposed additional powers for the commissioner include the ability to:
• consider complaints from small businesses about other small businesses,
• take enforcement action against businesses that do not comply with information requests, and
• take enforcement action against businesses that are found to have poor or unfair payment practices towards small businesses.
The consultation closed on 24th December, 2020, and the government will publish consultation responses and take forward proposed reforms in due course.
The Code: https://www.smallbusinesscommissioner.gov.uk/ppc/
To sign up to the Code: https://www.smallbusinesscommissioner.gov.uk/ppc/signatory-details/
About the Author
Julie Farley is a professional support lawyer in the London corporate division of Herbert Smith Freehills.