Do voluntary schemes like the UK’s Prompt Payment Code help SMEs get paid on time?

The United Kingdom (UK) government believes that £2.5 billion could be added to the economy annually if small businesses were paid on time.

To change the payment culture among the businesses, it introduced the Prompt Payment Code (PPC) in 2008. The PPC sets certain rules, such as paying suppliers on time, giving clear guidance to suppliers and encouraging good practices.

It hasn’t been a resounding success. “Despite almost 3,000 companies signing the Code, poor payment practices are still rife, with many payments delayed well beyond the current 60-day target required for 95% of invoices. Currently, £23.4 billion worth of late invoices are owed to firms across Britain, impacting on businesses’ cash flow and ultimate survival,” stated a government press release in January that announced changes to the PPC aimed at improving the situation.

Reforms include a shorter payment term for companies that have signed up to be part of the PPC — they now have to pay 95% invoices from small businesses (with less than 50 employees) within 30 days, instead of the previous 60 days. CEOs and Finance Officers are now directly responsible for any breaches. Signatories also have to accept late payment interest and charges levied by their suppliers.

The changes were appreciated by the UK’s Federation of Small Businesses (FSB), but they didn’t go down well with some large corporations as these reforms required too many internal changes.

As a result, UK retail giant Tesco resigned from the PPC before the changes came into effect in July 2021, stating that it was not against paying small suppliers within 30 days. Rather, it took issue with the PPC’s new classification of a small business as measured by the number of employees. Tesco measures the size of a supplier by its sales figures.

Meanwhile, reports in August point to Unilever and Diageo as companies in danger of being disqualified from the code as they both were still taking 60 days to pay their suppliers.

If that does happen, the expulsion does not have to be permanent. GlaxoSmithKline (GSK) met the same fate years ago when it paid only 12% of its suppliers within 60 days for its overall UK business. It returned to the PPC this year after showing improvements in the timeliness of their payments.

So, do such voluntary government-led schemes to encourage prompt payment for SMEs work? While they do not have the force of actual legislation, such guidelines do help to set new norms in favour of small suppliers. The bad press that greets signatories that fail to comply may serve as deterrents for bad behaviour, to a degree.

The public act of making a promise is also no small thing. That’s why RIABU launched Pledge2Pay.sg— a showcase for companies that commit to paying invoices issued by their SME suppliers within 30 days, to help them survive the Covid-19 slowdown.

Responding to the PPC’s changes, the UK’s FSB National Chairman Mike Cherry also cited overcoming the pandemic’s impact on small businesses as a critical reason for working towards a norm of timely payments: “Ending our pernicious poor payment culture for good over the coming months will be fundamental to turning our hopes of economic recovery into reality.”