Credit, Collections & Insolvency News
At the Autumn Budget last year, the Chancellor tightened the rules surrounding poor payment practices by introducing deterrents for late taxpayers and encouraging large businesses to improve payment culture. Late payments are responsible for stifling growth, eliminating investment opportunities, and creating serious cash flow shortfalls for SMEs, which subsequently raises the risk of insolvency, hinders financial performance, and triggers a cycle of financial problems.
The late payment epidemic
According to a survey conducted by the Federation of Small Businesses for GoCardless, 60% of respondents said late payments held back business growth, with over 30% feeling they had little to no control over late payments, particularly when dealing with large customers. Large businesses are repeat offenders in the late payment space, which initially prompted the development of the Prompt Payment Code, now the Fair Payment Code.
New Fair Payment Code
The Fair Payment Code which replaced the Prompt Payment Code in Autumn 2024 is more ambitious, aspirational, and robust. There are tiered award categories, Gold, Silver and Bronze that underpin different fair payment principles businesses can aspire to achieve. This is key to incentivising businesses to improve payment practices at a faster pace, progress through the ranks, and reach a higher award status.
The key changes as part of the reform include:
– 95% of invoices must be paid within 60 days
– 95% of invoices to SME suppliers must be paid within 30 days
While these conditions are firm, the code is a voluntary scheme with no legally binding consequences. The Fair Payment Code encourages transparency around late payments by instructing large companies to report on their payment practices and comply with the set conditions.
Late payments at the heart of SME insolvencies
The late payment epidemic is a growing concern for UK SMEs, costing money, resources, and time. Around 63% of businesses reported that spending time chasing overdue payments is costing an estimated £5,200 per year in lost time and resources. This equates to between one and four hours per week spent managing late payments for around 34% of survey respondents.
SMEs are pursuing a range of methods to fast-track payments, such as issuing payment reminders, tightening payment terms, and blacklisting non-payers, however, the problem continues to plague the small business community. HMRC is following suit by increasing interest on late tax to encourage prompt payments.
The cost of late business tax
HMRC announced that it will increase the interest levied on tax debts by 1.5% which is expected to raise £6.5 million for HMRC. From April 2025, interest on tax debts changed from the Bank of England (BoE) base rate plus 2.5 percentage points to the BoE base rate plus 2.5 percentage points.
HMRC increased the tax rate to encourage taxpayers to prioritise their tax payments and to ensure fairness for those who pay their taxes on time. While the crackdown on late business tax is intended to prompt businesses to prioritise their tax debts, businesses under financial strain will only see their health worsen, unless tax debts are negotiated with HMRC through a Time to Pay arrangement.
