The Prompt Payment Code still lacks teeth – it needs bite to protect SMEs

The Prompt Payment Code was established in 2008 to improve SMEs’ financial stability by helping them to recover billions of pounds of late payments owed to them more quickly. However six years on, research shows that the Code has not lived up to expectations. The problem is that these government guidelines are lacklustre and have no bite. Being a voluntary code it has no consequences and in many minds therefore, has no real value in its current format.

The fact that recent figures released by BACS show that the problem is only growing and the actual Code to date only has around 1700 signatories out of a possible 4.9 million businesses is a genuine worry.  The government has made promises for change and draft legislation has now surfaced that will eventually force companies to publish more information about their payment terms, in the hope this will embarrass the businesses with their own less than favourable terms being more transparent.

Why is the EU’s late payments directive overlooked? What can be done?

The Code needs teeth and that means statutory status with actual penalties for failure to adhere to it. This would be a big step forward in addressing the government’s constant pledges of support to the small business sector. Figures released from the Asset Based Financial Association (ABFA) recently show that small businesses are paid 23 days later by customers than bigger businesses. This is backed up by research this summer from Bacs Payment Schemes, which found that small and medium-sized companies are owed nearly £40bn as a result of late payments which is ultimately threatening their solvency and their future.

In addition to setting penalties of real consequence, the Code must also give rulings not guidance of what is deemed fair as payment terms. Again this will not be easy as every sector will have their own issues and worries but with the support of the Institute of Credit management (ICM) spearheading this, there is real hope that round table discussions can begin.

The ICM has been both hosting and administering the code. As a supporter of it, they are determined to be seen to be pushing the Department for Business, Innovation and Skills (BIS) to get this right. The ICM have launched a, well regarded, Construction Supply Chain Payment Charter which has gained considerable momentum. Philip King CEO of the ICM has recently spoken out about the need to tighten the Code and indicated in a BBC Radio 4 interview that he would be disappointed if no change took place in the next three months.

Businesses should be able to challenge unfair contract terms without risking individual supplier contracts or relationships under new directive. This could be enforced by clause (article 7.5) in the EU Directive on late payments which has for some reason been omitted from the Code.

It is not fair that only large businesses prosper as the economy returns to growth - small firms need a robust framework in which they can confidently charge interest and complain about late payments without the fear of losing future work which will harm their underlying business.

Despite having failed in many ways, as the economy now recovers, the government now has a second chance to sharpen those teeth to give them real bite.

Top tips to help businesses protect themselves against late payment

  • Adopt proactive credit management policies – reduce the risk of payment delays by knowing what bills are due when and following up as appropriate

  • Know your customer – good relationships with clients won’t necessarily avoid problems, but they should help you to plan for and resolve them

  • Contact debtors immediately following due date – if you’re not on top of things, delays could worsen

  • Engage with other professionals (solicitors/debt collectors/IPs) – know your rights and the remedies available to you


Brendan Clarkson
National creditor services team

Related links

National creditor services
Restructuring and insolvency