1. Late payment is a serious issue for businesses, especially small businesses. Evidence shows that small and medium businesses are owed a total of £39.4 billion, and small businesses are waiting for an average of £38,200 in overdue payments1. This has a damaging knock-on effect on small businesses’ ability to manage their finances and plan for growth. In addition, late payment by one company pushes the problem down the supply chain, potentially affecting many more firms.
2. The Late Payment of Commercial Debts (Interest) Act 1998 and subsequent regulations created a statutory framework in the UK for tackling late payment. The legislation’s key provisions are:
• Businesses are entitled to charge interest of 8% above the Bank of England Base Rate for any late payment;
• Administration costs for chasing late payment can be claimed by business, on a sliding scale depending on the size of the debt;
• Payment contracts must not infringe on a business’s right to claim interest and administration costs for late payment;
• Mandatory 30 day payment terms for transactions with public authorities;
• Maximum 60 day payment terms between businesses, unless they agree longer terms and this is not grossly unfair to the supplier.
3. The 2000 EU Late Payment Directive recognised that “heavy administrative and financial burdens are placed on businesses, particularly small and medium-sized ones, as a result of excessive payment periods and late payments. These problems are a major cause of insolvencies threatening the survival of businesses and result in numerous job losses“.2 It therefore introduced a right to claim interest in the event of late payments and to reasonable compensation, as well as a maximum payment term (subject to exceptions).
4. The Directive also gave representative bodies the power to challenge certain contract terms and practices deemed “grossly unfair” on behalf of small businesses. This power was transposed into UK law with the 2002 Regulations to the Late Payment Act in relation to terms that seek to “oust or vary the right to statutory interest” following a late payment.
5. In 2011, the recast EU Directive extended these powers to allow representative bodies to challenge all contractual terms or practices with regards to late payment considered “grossly unfair” on behalf of any business. We are seeking views on how to clarify our transposition of this broader power.
6. In particular, we are seeking views on:
• Who might be covered by a representative claim (individual businesses, or groups of businesses);
• Which organisations can bring a claim;
• Options for dispute resolution; and
• The resources available to bring a case.
7. We are also consulting on whether to further refine the definition of “grossly unfair” payment practices. Building on precedent in other jurisdictions, we could legislate to provide indicative criteria that the Courts could take into account when assessing whether a practice is unfair. This could include consideration of when there is a disparity in bargaining power between the parties involved.
8. Subject to the views expressed, the Government may subsequently decide to make consequential changes to the UK’s statutory framework.
9. The Late Payment of Commercial Debts (Interest) Act 1998 applies to the whole of the UK. However, responsibility for amending the Act in order to implement the Late Payment Directives has been split between England, Wales and Northern Ireland on one hand and Scotland on the other. Following publication of this paper the Scottish Government will work with stakeholders to identify how this can be taken forward in Scotland. The proposals would cover the law applying in the other parts of the UK.
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