The Complete Guide on Prompt Payment Code and Late Payments in UK

Late payments are a persistent issue in the United Kingdom (UK). According to Xero, small businesses are losing £684 million a year thanks to late payments.

However, there are ways small businesses can adapt to avoid the issue of late payments altogether, or to mitigate the impact of late payments.

By the way, if you need help with sorting out your company’s paperwork, we can help you with that. Stay on top of your invoices and build a strong and healthy cash flow with the help of our steady and experienced accountants in the UK.

The Late Payments Problem

Late payments are one of the most difficult problems small and medium-sized enterprises (SMEs) encounter, especially during economic downturns. Having to wait 60, 90, or 120 days to be remunerated for completed work makes balancing the books difficult, and affects everything from daily operations to your business growth plans and paying wages.

Thankfully, the UK Prompt Payment Code (PPC) was introduced by the government in December 2008, to hold large corporations accountable for paying their suppliers on time and move towards a culture of providing “payment certainty”.

How Can I Avoid the Cash Flow Bottleneck?

The issue of late payments can be avoided if you plan ahead. Do your research and introduce robust processes, so you can avoid the cash flow bottleneck.

1. Establish payments systems and processes

Have standard operating procedures for your invoicing processes, so things can function like clockwork every month. Timely payment should be of utmost importance, and here are the steps you can take:

Invoice regularly

Don't be late on your invoice delivery, and make sure that your invoices are well organised and easy to understand. To facilitate payment, remember to clearly state the following:

• Company name
• Contact information
• Invoice date
• Invoice number
• Outline of provided services or goods
• Payment terms
• Discounts
• Value-Added Tax (VAT)
• Amount due and due date

Put in place a system to record outstanding invoices

Setting up a cash management system allows you to stay on top of the outstanding invoices, so you can be easily reminded of the payment due date and send invoices or reminders when necessary. If you need extra help, just lean on your dedicated expert at Osome. With smart software to automate your menial tasks from collecting documents to invoicing, you can always keep track of your finances.

Rethink your payment terms

Certain circumstances should prompt you to rethink your payment terms. For instance, if a job or customer poses higher risk for your business, you could request for upfront payments, staggered payments, or to be paid on a retainer basis. In this way,  you don't have to wait a month after the work is delivered to be remunerated for your efforts.

Consider offering incentives in your T&Cs

To encourage your business partner to make payment in a timely manner, it might be worth thinking about offering some incentives in your terms and conditions (i.e. small discounts for early payment. Alternatively, you can also include a clause charging interest on late payments.

2. Do your homework before taking on new clients

Avoid late payment or non-payment at all costs. In fact, this issue could very well be avoided by performing a background check on your new client to ensure they are a legitimate business and do not have any bad payment track record or complaints against them.

This is what you can do:

• Check if they are registered on Companies House and assess their financial well-being
• Ask them for referees they have previously worked with, and cross reference with referees if they got paid on time
• If your new client is an individual, consider purchasing a credit report or searching their name in the Gazette to check if they have had insolvency issues
• If your new client is a large business, check its payment practices on the Government’s payment practices website. If it’s a small business, check if it’s signed up to the Prompt Payment Code

How Should I Chase Payment When Invoices Fall Due?

If your invoice still goes unpaid despite your efforts, you can consider taking these steps:

1. Immediately contact your client

Don't burn bridges just yet – it could simply be a case of oversight on your client's part. In any case, reach out to your client first, to understand what could have resulted in the delay. If possible, follow up on your conversations through writing (i.e. emails) so as to leave a digital paper trail for you to fall back on.

2. Find out whether you can charge interest

If it is stated in your contract, you can charge interest on late payments. Also, if you client is in another business, you can charge statutory interest. Make it a point to let your client know that you will be charging them interest if they do not pay up, and you can inform them out of courtesy through emails.

3. Consider escalating your debt recovery action

If you are actively following up but not getting a response, don’t give up. Escalate it by making a phone call or an in-person office visit. Alternatively, bring this issue to the top of the food chain and kee[ the executive leadership in the loop. Your emails and calls to chase payments can act as documentation, and you could use these to pursue legal matters in the worst case scenario.

From instructing a debt collector, selling the debt, serving a statutory demand in the form of a formal written demand for payment, to going to court, there are multiple options of debt recovery.

Of course, the value of the debt, available resources, as well as the consequences of taking formal action against your client are some factors that you have to consider when escalating your debt recovery action.

4. Know your bottom line

Make sure that you have a bottom line – this means how flexible you can be with late payments without jeopardising your business, or when you should forgo a debt instead of spending resources and time trying to recover it.

Where the Prompt Payment Code (PPC) Comes In

The PPC was introduced to encourage large businesses to pay their debts promptly. When businesses sign up for this voluntary code of practice, they promise to do the following:

• Pay suppliers on time, within agreed terms;
• Give clear guidance to suppliers on terms, dispute resolution, as well as prompt notification of late payments;
• Support good practice throughout their supply chain by promoting adoption of the PPC.

Changes to the Prompt Payment Code (PPC)

As of 19 January 2021, the Government has strengthened the Code by introducing reforms including:

• Signatories are required to pay 95% invoices within 60 days
• Signatories are required to pay 95% invoices from small businesses (those that employ fewer than 50 people) within 30 days
• Small and medium-sized businesses are required to provide an annual report on their payment performance
• Signatories must recognise that suppliers have the right to impose late payment interest/additional charges if an invoice is paid late without any reasonable justification.
• Suppliers should always be have a point of contact regarding all payment queries
• Applications to join the code must be signed by the Chief Executive or Finance Director in a large business, or the company owner in the case of a small business
• Large businesses that pay less than 90% of their invoices within 60 days will be suspended from the PPC until they achieve at least that percentage

Why Have These Changes Come Into Effect?

Late payments are very common, and are in fact expected to increase significantly with the rise of interest rates and inflation. According to Barclays, three in five (58%) UK businesses face late payments, resulting in cash flow issues and stress. To small businesses, late payments are a significant barrier to growth.

Through the PPC, small businesses can claim compensation and late payment interest from signatories if they miss a payment deadline. However, although two thirds of surveyed  businesses are aware that they can take action, the reality is that less than a quarter have pursued things in fear of not procuring another job with the client.

A Useful Barometer — But More Can Still Be Done

Late payments are a serious issue, and you can even be forced to close your business because of unpaid invoices.

Thankfully, the UK Government has taken a step in the right direction with the introduction of the PPC and strengthening the code, in a bid to hold businesses accountable and encourage better payment practices. Nonetheless, there are still drawbacks of the Code, as it is not legally binding. While PPC is a good starting point, there is certainly more room for improvement.