Amid concerns around payment culture towards small and medium-sized enterprises (SMEs), the UK’s Department for Business and Trade (the DBT) announced plans to reduce the late payment of business invoices on 2 October. Sector analysis shows that SMEs in the luxury goods sector regularly contend with high numbers of late payees compared to data from other sectors.

The DBT’s measures 

In 2022, SMEs were owed on average £22,000 in late payments. SMEs are organisations that maintain assets, revenues or a number of employees below a certain threshold. Each country has its own definition of what constitutes an SME. The UK government definition of SMEs mirrors that defined in the EU recommendation 2003/61. It encompasses micro businesses with less than 10 employees and an annual turnover under €2m, small businesses with less than 50 employees and an annual turnover under €10m, and medium-sized businesses with less than 250 employees and an annual turnover under €50m.

Late payments and long payment terms are frequently identified as significant barriers to business growth, especially within the luxury goods sector. The government hopes that improving payment culture towards SMEs, many of which lack the resources to accommodate late or long payments, could boost the economy by £2.5bn annually. 

The DBT intends to introduce new, tougher measures on late payments in the upcoming Prompt Payment and Cash Flow Review and aims to improve delivery and enforcement of policies, making it possible for more SMEs to receive timely payments. As it stands, owners of small businesses in the luxury goods sector are forced to invest an excessive amount of time chasing overdue payments, resulting in cash flow issues. This is particularly critical against the backdrop of current ongoing economic challenges. 

New measures include:

• The extension of the Reporting on Payment Practices and Performance Regulations 2017 (SI 2018/395). The regulations, which are currently due to expire on 6 April 2024, mandate that in-scope businesses disclose details about their payment procedures. The objective is to eliminate bad practices by promoting greater transparency. 
• The inclusion of new metrics within the regulations. These will involve new requirements to report on the value of invoices, including invoices paid late, a disputed invoice metric and reporting on retention payments for businesses in the construction sector.
• The broadening of the powers of the Small Business Commissioner. The government intends to introduce primary legislation to enable the commissioner to undertake investigations and public reports where necessary based on anonymous information and intelligence. 
• The strengthening of the Prompt Payment Code whereby businesses must reaffirm their commitment every two years to remain on it. This voluntary code gives companies and public entities the chance to demonstrate their commitment to paying their suppliers or partners promptly and within the agreed payment terms. 
• The implementation of an effective compliance regime to help ensure that businesses required by law to report their payment data, do so. 

More generally, the provision of greater advice to small businesses on negotiating payment terms and using digital technology to help them get paid quicker and manage their cash flow. This will include extending existing initiatives, such as Help to Grow and Growth Hubs, which offer training designed to help SMEs reach their full potential.

The hope is that these measures will prove advantageous for UK businesses by cultivating a stronger payment culture and affording them a more predictable and reliable cash flow. 

Secretary of State for Business and Trade Kemi Badenoch said: “SMEs make up 99% of the firms in the UK and are the lifeblood of our economy. I know that late payments are a massive barrier to growth, and I am determined to fix that.”

Small Business Minister Kevin Hollinrake later added: “SMEs that are paid on time can do more business, scale up and make more profits, delivering growth for the economy.”

Following in the European Commission’s footsteps

The DBT’s measures follows the European Commission’s announcement, on 12 September, to introduce a new regulation to tackle late payments in commercial transactions. The proposed regulation will revise the existing Late Payment Directive (2011/7/EU) and aims to bring fairness into commercial transactions, increase the resilience of SMEs and encourage a greater use of digitalisation. A regulation, contrary to a directive, is directly applicable and lays down the same provision across the EU, thus particularly benefitting businesses that rely on cross-border trade in the EU.

In the EU, on average, one out of two invoices in commercial transactions are paid late, or not at all. The new rules would introduce a maximum payment term of 30 days and make the right to late payment interest automatic and compulsory. Member states would need to establish enforcement authorities to monitor and ensure the application of the rules. These authorities then become responsible for receiving complaints, initiating investigations and imposing penalties on those who delay payments. 

If the rules are adopted by the European Parliament and the Council, they become applicable one year after the entry into force of the regulation. As outlined above, the regulation will signify a notable departure from the current directive and will have repercussions on UK businesses within the luxury goods sector contracting with EU entities.  

The changes will affect all businesses in the luxury goods sector

These changes, whether in the UK or in the EU, are relevant to and will affect businesses of all sizes in the luxury goods sector whether receiving payments or making them. Businesses should keep a watchful eye on when these rules will enter into force and adjust their internal payment procedures accordingly to prevent falling foul of the changes. 

Victoria Hobbs is a partner in Bird & Bird’s International Dispute Resolution Group in London where she specialises primarily in resolving disputes arising out of franchise, licence, distribution and agency agreements. She can be reached at victoria.hobbs@twobirds.com. 

Trainee Solicitor Evie Scott also contributed to this article.