I don't know how I missed this consultancy, but they had said they are happy for me to send in comments.
Proposed changes to Late Payment of Commercial Debts (Interest) Act 1998
Thank you for providing contact details - I somehow missed the consultation on this, though I have been very much an advocate of this legislation since it was created, and have a web site dedicated to it paylate.co.uk
The press release led me to more concerns, but I have now read the consultation response in more detail, so these are comments on that.
Who are we?
We are an internet provider and equipment manufacturer. We turn over around £xm, have around x staff, and have thousands of customers. We sell items from as little as a £1/month, to equipment costing tens of thousands. We have commercial customers ranging from sole traders to very large corporation and even government bodies. We have been charging late payment penalties since the legislation was introduced and have experience of pursuing charges via county court as well.
Summary
We actually find the existing legislation to be very effective, and feel that the main issue is that so many small companies are still unaware that they can charge these penalties and interest. I don’t think these proposals address that. There is also a feeling that doing so risks losing important customers (something our experience says is not the case). As such we are surprised that these proposals are happening.
However, I can see some of the logic. Some proposals seem reasonable sensible, but I do have some specific comments.
Our experience
I think our experience is relevant as I am not aware of other smaller businesses fully automating late payment penalties, which we did from the start of this legislation (do look at paylate.co.uk for more).
This meant that the day a payment was late we would send an invoice for the penalty (interest was invoiced once paid). We chose to send an invoice as our experience is that any sort of payment demand or note, or polite email, would be ignored. One has to be careful to ensure no VAT nor late payment charges apply to such an invoice, but a real invoice is generally effective at getting a response.
The impact of this varied - some customers horrified (especially in the early days of the legislation). Some annoyed. We adopted a simple policy of crediting the first invoice. But it got the message across, and created some good will with the credit, and ensured we retained the customer, but that they know they would have to pay on time, and this generally works. Our accounts staff would even blame the computer - it is an automated process. But we did not lose customers over this.
Some customers had old school accounts departments that paid late as a matter of course. The actual customers, specifically the individuals we deal with, are happy with our service and exasperated with their accounts departments. The result is that we would charge, and collect, tens of thousands of pounds a year in late payment penalties - often from people persisting in paying only a few days late each month. We later started taking Direct Debit and this meant these charges dried up, a lot. Direct Debit collection is a massive benefit for getting paid on time. But we do have the occasional customer paying late and being charged every month, even now.
We also had a handful of cases of, typically smaller companies, insisting they would not pay penalties, and we took some to court and won with no problem whatsoever. That generally does not happen now as people are more aware.
It is also worth noting that one huge corporation was somewhat intractable, and we took the pragmatic decision (because of the value of the business) not to charge penalties. We left the system adding a note on each statement indicating how much they had accumulated to date (they ignored this). After many years they moved to a new supplier for unrelated reasons (which we expected would happen eventually), but they had paid every invoice a few days late. We send a final invoice for all of the late payment penalties. Many thousands of pounds, and they had no choice but to pay, which they did.
One interesting comment we have had, in light of comments on your proposal about small businesses asking for the interest - we have had customer say it is not good business practice to ask for the interest! We have replied that it is not good business practice to pay late. Others may feel intimidated.
Specifics of your proposals
New powers and reporting
These seem good in principle, and I guess making it part of large company audits makes sense. New reporting burdens are never nice, if it is simply reporting what the auditors have found, it should not be too bad.
Penalties
As for powers for imposing additional penalties: As the legislation makes this part of the terms, paying late and then paying the interest and penalties as required, is complying with the terms, ultimately? And has already imposed penalties. I can understand penalties for not paying the late payment penalties and interest, but also, is that not what county court is for? It just sounds legally a little odd (I am not a lawyer). The terms are in effect pay by this date or else if you choose to pay later then pay this extra money, in effect a choice, and compliance with either is compliance with the contract terms as such. Indeed a customer might explicitly word a contract exactly in those terms and be compliant with the Act.
In practice, if somehow it could be that everyone who is paid late actually charged the penalties and interest, that would be an administrative and financial burden on those that pay late and change their ways. At present this does not happen. I am not sure these proposals change that. I do not see customers negotiating contracts with no penalties, I see suppliers unaware or too scared to charge what is already the legally required penalties and interest.
One thought on penalties, if a business identifies through audits that it has paid suppliers late, can it not be forced to calculate and send the due penalties and interest to those suppliers that have not already demanded it - that would also be a notable disincentive and effective penalty but also benefit those that have been paid late rather than a fine paid to the government.
Personally I have always said that a company that knows it is paying late should be accounting for the accumulated debt they legally owe (even if not requested by suppliers) on its accounts, and that failing to do so is already fraudulent accounts.
Maximum payment terms
I feel the press release is somewhat misleading on this…
Re-reading the latest version of the existing Act, I see 30 day (public authority) and 60 day (other) limits already in place. I suppose the 5D(b) and 7A does allow for longer terms if not grossly unfair and I can only assume this proposal is simply to remove that option. The consultation and press release do not make it clear that it is just the removal of not grossly unfair longer terms. I hope it is not extending the 30 day limit on public authorities to 60 days. But the wording does suggest exceptions may still exist, so this is really not a significant change at all.
Personally I would be happy with something that makes 30 days much more of a default, and up to 60 days some sort of exception needing some specific justification or perhaps common established industry practice. I can see that some large customers might even now point to the Act and say that 60 days is clearly reasonable as it is allowed by the Act - however as it is already in the Act, and has not changed what we see from customers, maybe that is not such a concern.
Construction contracts
I have no experience of such.
Deadline for disputing invoices.
This does concern me. It was not that clear until I read the more detailed response what the purpose was. I do see the basic logic.
Even when a dispute is raised promptly, it needs to be clear that the undisputed amount must still be paid within terms and penalties and interest apply to that.
Also, once a dispute is raised the process for ensuring a supplier refunds a customer for the correctly disputed amount is probably important as well. This would not count for late payment penalties the other way around, and perhaps it should.
Also, what is to stop a customer simply generally disputing every invoice, so as to stop the clock? Or a supplier deliberately making it hard to understand an invoice so is can’t easily be disputed in time. Slip in some errors that won’t be spotted until too late?
A general limit on raising disputes is a concern, e.g. disputes on invoices already paid. This whole process needs to relate only to the application of late payment penalties, and not disputes in general.
For example, we deal with BT as a supplier, and the invoices each month have tens of thousands of line items. We have staff that spend time checking for errors, and there are usually some. We obviously pay the undisputed amount within terms - we pay all suppliers within terms. But the process of identifying an error can be time consuming. We also have the fact that an error might not be apparent until one of our retail/consumer customers queries something with us, and that may relate to previous invoices or even go back years. We recently found a case of a circuit for which BT have been charging for around 5 years even though they ceased it, and, being within the 6 years of the Limitations Act, we have, of course disputed the (paid) invoices, and now got a refund. Limiting our ability to dispute genuine errors is not good, in my view. I really hope that is not what is being proposed.
Mandatory interest
Again, I feel the press release is misleading on this… For a start, it only mentions interest and not the fixed penalty part, which I hope is retained.
Interest (and penalties) are in effect mandatory already. The exception is where a substantial contract remedy is agreed. I can only assume you are simply removing that option. The press release made it sound like interest was a new thing. Our experience is we have not seen any customer try and negotiate an alternative substantial remedy.
However, as a customer of BT, it happens that BT have a long standing clauses (which may even pre-date the Act) for late payment interest (not fixed penalty) which is lower than the current +8% in the Act. This change would actually make us, as a small business worse off (though, as I say, we do not pay anyone late) by making it the statutory amount.
So in our experience this is a pointless change. But I can see the logic. Maybe where the supplier is a large company and they propose in their standard terms a lower late payment penalties, that would make sense as an exception.
The consultation comments on this make little sense to me - small businesses would still have to ask for the penalties and interest (I hope the penalty aspect is retained), obviously, just like now. If the customer does not think they paid late, they are not going to work out the interest and send it! I say that the customer may not realise they paid late - and this relates not only to things like old BACS taking two days, bank holidays, wilful ignorance, etc, but companies that genuinely think that they are not getting their 30 days credit if they send payment before it is overdue, so they wait 30 days and then send, indeed feeling it is unreasonable to expect them to “do a BACS run every day”. So it is sent on the next BACS run after the payment is overdue. In that case we agreed 40 day terms to allow them time, and as predicted they started sending on the BACS run after 40 days!
No big change?
Overall this is not a big change - in effect (from our experience) the interest and penalties are a mandatory part of every commercial contract, and 60 days is a hard limit (30 for public authority). The changes remove some existing exceptions which already have wording to make them difficult (substantial remedy, grossly unfair), and we see no examples of these being used. Perhaps other industries do see them used.
Yes the auditing and reporting is new, but does that actually get small businesses actually charging the penalties and interest due? Surely many will still be either unaware, or scared to apply these charges to big customers, as now. Nothing much has changed there.
The dispute timeframe changes are a slight concern if not worded very carefully.
Suggestion
A big change would be customers that pay late having to allow for the debt due on their accounts (they probably already should), as well as include it in auditing, and report it. Then the possibility that they can be ordered to calculate and pay suppliers (that have not demanded it) what is due. A few high profile cases of that and it would scare large late payers in to action, and also make the smaller suppliers aware of what they should have already been charging.
I hope that is useful feedback.
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