Late-payment legislation has been a magnet for controversy since it was introduced seven months ago.
Revelations last week that retail giant House of Fraser intends to impose 75-day payment terms on its suppliers – more than double the 30 days specified in the Act – have been seized on by critics as evidence that the law is toothless.
‘The House of Fraser’s payment terms are outrageous,’ says Peter Clark, group finance director of Conrad Advertising. ‘I can’t imagine a small company which has the working capital to cope with 75 days.’
The term is also longer than the 60-day terms imposed on suppliers of Rentokil Initial as the law came into force last year – provoking a scandal that led to calls for Sir Clive Thompson, Rentokil’s chief executive, to resign as president of the Confederation of British Industry.
Nick Goulding, head of policy at the Forum of Private Business, has mixed feelings on the effectiveness of the government’s crusade against late payment. ‘We do a quarterly survey of members on different business issues. Since the Late Payment Act, the proportion of businesses which perceive late payment as a problem has come down,’ he says.
Goulding argues that high-profile late-payment rows, such as the Rentokil and House of Fraser controversies, are slowly raising the profile of late payment. He admits , however, that few small suppliers are prepared to stick their necks out and take a large contractor to court. Apart from the cost of embarking on legal action, few can afford to lose a major customer. It is here that the late payment legislation seems to fly in the face of reality.
Under UK law, only an individual company can take another company to court over payment terms – actions by groups or trade associations are not permitted. One way round this problem would be for business groups to advise a small company which wants to take a large company to court. The Forum of Private Business is keen to act as a champion for the little guys and might be joined by other like-minded organisations such as the Federation of Smaller Businesses.
But away from the glare of publicity the legislation is starting to bite, according to Keith Lewin, head of litigation at law firm Dibb Lupton Alsop. Lewin says his firm has successfully acted for small suppliers under the new legislation. ‘We don’t make a song and dance of it and it’s very low key,’ he says. He also argues it is too early to judge if the late-payment legislation has been a success or not.
Unfavourable publicity and the new law has done little to help suppliers of Rentokil.
Despite being signed up to the government-sponsored Better Payment Practice Group, Rentokil’s only concession to this has been to pay its suppliers a higher interest rate to compensate for late unpaid bills.
But things could change. In November 2000, phase two of the late-payment laws come into force. Small companies, with 50 employees or fewer, will be allowed to slap 8% interest on overdue bills owed by other small companies. At present, they can only use the law where larger organisations owe them money. Phase three, from November 2002, will allow all businesses to use the powers.
The future campaign against late payment could also receive a boost from across the channel. A European Union directive, agreed last month, aims to harmonise late-payment protection across Europe by allowing small and medium-sized companies to charge interest at 6% above Bank of England and European Central Bank rates. The higher rate will kick in after 30 days, unless prior agreement has been reached. Something to think about, perhaps, for companies like House of Fraser.
LATE PAYMENT: THE STORY SO FAR
November 1998 Late Payment Act comes into force. Accountancy Age exposes Rentokil Initial’s 60-day payment terms for suppliers, offering 1% interest for late bills. Angry supplier accuses Rentokil of using bullying tactics. Rentokil chief executive, Sir Clive Thompson, faces calls to resign as CBI president.
December 1998 McLean Homes, one the UK’s leading construction companies, falls foul of Late Payment Act by offering revised payment terms for 1999 starting at 60 days and reaching 90 days if supplier’s invoice arrived in last week of month.
January 1999 McLean Homes says it will review the 90-day policy.
March 1999 Rentokil offers to pay small suppliers up to 8% interest above base rates on unpaid bills, but keeps 60-day terms.
May 1999 House of Fraser caught in new pay row after it attempts to extend its payment terms to 75 days.
Late Payment Act: the rules Small businesses – defined as having fewer than 50 employees – can charge larger companies/public-sector bodies 8% interest on unpaid bills after 30 days, if payment terms have not been agreed. If a bill is overdue on an existing contract small companies can also charge 8% interest. The supplier can take the contractor to court if it ignores the demand for interest.
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