The Government has unveiled a series of reforms to late payments described as “the toughest crackdown on late payments in 25 years”, intended to help small businesses improve cashflow. This comes as government data suggests late payments cause 38 business closures daily, costing the UK economy a staggering £11 billion a year.
Small and medium-sized enterprises (SMEs), and in particular microbusinesses – from independent salons, freelance therapists and makeup artists, to brands and specialist manufacturers – are the backbone of the beauty industry, comprising 95% of its businesses. At present, late payment practices leave small businesses strapped for cash, waiting months to receive money they’ve already earnt and wasting time chasing unpaid invoices. The Council, therefore, welcomes government action to tackle this.
How the new rules could impact beauty businesses:
1. Stopping larger businesses from taking advantage of small suppliers
Many salon owners and freelance therapists find themselves acting as an unintended source of interest-free credit for larger corporate clients (such as hotels, spas or department stores).
A new 60-day legal cap on payment terms for large firms will now mean larger companies can no longer push small beauty businesses into 90 or 120-day terms. The government also intends to consult on reducing this further to 45 days in the future.
2. High-pressure invoice disputes
A common tactic used to delay payment is to raise a dispute months after the service was provided, effectively resetting the clock on the invoice.
The government intends to introduce a 30-day statutory limit for raising disputes. If a client doesn’t flag an issue with an invoice or service within 30 days, they lose the right to delay payment and must pay the full amount or face penalties.
3. Financial deterrents
In the past, small businesses were often too intimidated to charge interest on late payments for fear of losing future contracts.
A statutory interest set at 8% above the Bank of England base rate is becoming mandatory and will be a legal requirement in all commercial contracts. At the current Bank rate of 3.75%, this would mean a late payment interest of 11.75%.
4. Enforcement
The Small Business Commissioner has historically lacked any real powers to take firm action against late payers.
They will now be granted sweeping new powers to:
- Investigate companies suspected of poor payment practices.
- Fine persistent offenders
- Publicly name and shame businesses that fail to explain poor payment performance.
5. The Fair Payment Code
Replacing the old Prompt Payment Code, this new tiered system (Gold, Silver, Bronze) allows businesses to easily identify which corporate partners are reliable.
For example, ‘Gold Status’ requires a company to pay 95% of all invoices within 30 days. This acts as a green flag for small and microbusinesses looking to partner with larger brands or venues.
What Comes Next
Speaking directly to businesses on the planned crackdown, Business and Trade Minister, Blair McDougall MP, wrote:
“Across the UK, businesses currently spend a staggering 133 million hours per year chasing late payments – hurting their cash flow, preventing their growth, and endangering their survival. We are going to fix this problem. Working in partnership with business, we will end the scourge of late payments. Together, we can ensure you and your suppliers are paid on time, every time.”
However, these reforms do not yet have a set date for implementation. Victoria Brownlie MBE, Chief of Policy, comments:
“The late payments crackdown could be a really positive move to help industry at a time when the sector’s growth is in jeopardy and employment figures are falling due to the sheer cost of doing business. It’s important to note, however, that we are still in the early stages of this reform, with the proposed changes needing both primary and secondary legislation to be enacted. The Council will be working closely with the Government as this process gets underway.”
For full details of the Government’s response to the late payments consultation and its future plans, click here.
