The Prompt Payment Code (PPC) was introduced to the UK in December 2008 as a voluntary code of practice, administered by the Office of the Small Business Commissioner (OSBC), on behalf of Department for Business and Trade (DBT).
As Pat Bermingham, CEO, Adflex explains it set standards for good payment practices between UK-based organisations and their suppliers. It was introduced in response to calls from UK businesses for a change in payment culture: at the time, one in four businesses were going insolvent due to invoices being paid late, and the problem was felt more acutely by smaller businesses with less cash in the bank.
The code initially received a positive response from the market and despite remaining a voluntary initiative, over 4,000 UK businesses from a variety of industries are signed up today. Does that mean it has solved the problem of late payments? Many feel it has failed to meet its initial objective.
Research from the Federation of Small Businesses (FSB) has found that 50,000 businesses are closing each year in the UK due to suppliers not being paid on time. So where has it gone wrong and what can be done to correct the path toward prompt payment paradise?
How the Prompt Payment Code evolved
The initial code outlined three core principles:
- Buyers should pay suppliers on time, within agreed terms.
- Buyers should give clear guidance to suppliers on terms, dispute resolution and prompt notification of late payment.
- Buyers should support good practice throughout their supply chain by encouraging adoption of the Prompt Payment Code.
Despite its introduction, over the ensuing 13 years, poor payment practices continued to plague UK businesses. When the pandemic hit in 2021, company insolvencies rose and late payments became a critical priority in order to keep the UK economy moving. The UK government announced an overhaul of the PPC, cracking down on delayed invoices and a number of changes designed specifically to help small businesses.
Reforms to the Prompt Payment Code in 2021 introduced a new set of payment standards, the most important of which was “the 95% rule”. This required that:
- 95% of invoices must be paid within agreed terms.
- 95% of invoices must be paid within 60 days.
- 95% of invoices must be paid within 30 days for small businesses with less than 50 employees.
Some have found these terms unclear, as views differ on what the starting point is during the 30/60-day payment cycle. Suppliers typically view the initial sharing of the invoice as the start of the cycle, but manual processes on the buyer side can result in human error, with invoices being lost due to incorrect contact details or landing in spam folders. This leads to disagreement between buyers and suppliers on when the payment cycle began, and the resulting confusion can cause delays and harm important business relationships.
Also in 2021, the government published the Procurement Policy Note 08/21. This specifically addressed payment practices for government contracts worth £5 million or more. The note effectively makes it more difficult for companies to bid for government contracts without a proven track record of paying promptly. The hope was that these new standards would help address the shortcomings of the original code, and as a result, late payments would decrease.
Counting the cost of late payments
Despite the overhaul of the PPC and the Procurement Policy, late payments in the UK remained prevalent. According to research by PwC, in 2022 the length of time taken for invoices to be paid to SMEs reached a five-year high. In addition, a 2022 survey showed that on average, 25% of UK small businesses had reported an increase in late payments in the three months prior. Not only was the overhauled PPC failing to reduce late payments, but they were actually becoming more common.
When Carillion collapsed under billions of pounds worth of debt in 2018, it impacted 75,000 people working in its supply chain, highlighting the risk that suppliers run when buyers do not pay promptly.
Despite such high profile cases, and industry efforts to tackle the problem, the proportion of late invoices significantly in construction increased to 52.9% in 2022, a rise of 13 per cent compared with 2021. In a 2022 survey, 55% of the British public stated they would support more controls to prevent late payments. It is clear that current legislation and initiatives, while commendable, are failing to improve the situation.
So, why has the Prompt Payment Code not been more effective? Many feel that the voluntary nature of the code undermines any attempt to address poor payment practices. By comparison, some states in the US, such as Texas, require that payments are made on time by law – for both public and private contracts. The payment deadlines are also shorter in the US. Where in the UK 30-60 days is the ambitious target, in the US, 21-35 days is the standard.
The UK’s poor international standing was highlighted by Tina McKenzie, the Financial Stability Board Policy Chair, in March 2023: “The UK is almost unique in being a place where it is acceptable to pay small businesses late, and that will remain the case without further action.”
B2B payments are going digital
The problem of late payments is a collective one. Therefore, the solution requires collective action. Buyers and suppliers must work together to communicate and deliver the benefits of faster reconciliation to their organisations. After all, everyone benefits from prompt payments: businesses have a clearer picture of cashflow; some suppliers offer incentives for early payments; and others accepting commercial card payments are willing to waive merchant service charge costs, all to encourage speedy settlement.
In the last fifteen years, technology has also advanced dramatically. Consumer payments can be made quickly and easily from mobile devices, for example. B2B payments are more complex to manage but have also seen great innovation that is transforming payments in and out. Straight-through processing (STP) is one example that flips the traditional payment process on its head. STP allows the buyer to automatically ‘push’ commercial card payments to the supplier, instead of the supplier needing to initiate the payment via a payment gateway, such as a Virtual Terminal.
This reduces the cost of acceptance and can be used to automate transactions, removing additional friction and human error from the payment process, thus speeding up settlement. Meanwhile, suppliers that can offer buyers choice in preferred payment methods removes further friction from the payment process and strengthens relationships crucial to repeat business.
Does digital transformation remove the excuses?
Despite many challenges, the Prompt Payment Code signalled a turning point in UK business payment practices. Over 4,000 businesses signed up and abiding by the code indicates the success it has already enjoyed, but if the UK is to become a thriving hub for business growth over the next fifteen years, it’s clear that more needs to be done.
Now that B2B payment technology is catching up with its B2C counterpart, businesses have access to a multitude of tools that can do the heaving lifting for them and enable them to focus on building and maintaining relationships that remain critical to growth. Responsibility ultimately lies with buyers and suppliers both large and small, and the financial partners with which they work.
In a world where digital payments are becoming the norm, there really is no excuse today for failing to pay promptly. In the end, those that do so will reap the benefits of closer relationships throughout the supply chain, and those that fail to do so may find themselves “promptly” removed from preferred buyer lists.