Chasing late payments costs freelancers 20 days of work a year, equivalent to more than £16.5 billion in the UK economy. Now, businesses could be fined for not paying freelancers and small businesses on time.
It’s no surprise that many welcomed the news that large businesses could be fined and their directors even prosecuted for not paying freelancers and small businesses on time. Not being paid on time has more than just financial consequences: it is also an administrative burden and it is about time things changed.
Research shows that on average, freelancers lose approximately 20 days a year chasing late payment (worth more than £16.5 billion to the UK economy). This can be the difference between a freelancer staying afloat or going under.
What has the government done about this poor payment culture?
Four years ago, the Small Business, Enterprise and Employment Act 2015 was passed and it included the Duty to Report on Payment Practices and Performance. Duty to report, as it is commonly referred to, essentially requires large companies to publish their payment practices through a portal on gov.uk.
In theory, this was meant to increase transparency and give freelancers and small businesses the necessary information to choose which clients to work with. The fear of being named and shamed was supposed to force these large companies to improve their payment practices.
But the reality is that nothing much has happened. Margot James, small business minister at the time, said she wanted it to “empower small businesses and drive a real change in payment culture”. That drive clearly stalled.
Two years on and there is still very little understanding of the legislation, it appears. Duty to report has loopholes that many companies have exploited and manipulated. As Rachel Reeves, chair of the Commons’ Business, Energy and Industrial Strategy Committee, rightly said, it “undermines efforts” to tackle late payment and protect small businesses.
It’s not all bad, however. It seems the government is making attempts to really clamp down on this. Last month, the Department of Business, Energy and Industrial Strategy (BEIS), spearheaded by small business minister Kelly Tolhurst, used a consultation report to announce a raft of new measures.
One thing is for sure: on the surface, these measures suggest better transparency and tougher punishment for companies who fail to pay freelancers on time. One of the proposals is to prosecute company directors under existing legislation for failing to report payment practices.
New powers to small business commissioner
BEIS has also suggested giving new powers to Paul Uppal, the small business commissioner, which would include compelling the disclosure of payment terms and practices, imposing financial penalties and binding payment plans on large businesses found to have unfair payment practices.
Part of this proposal includes moving the voluntary code of best practice – the Prompt Payment Code – to the small business commissioner. According to BEIS, this will put all the tools needed to tackle late payment under one organisation, and hopefully this reform will go some way to changing payment culture and pulling duty to report into effect.
At the launch of the consultation report, Tolhust said: “The vast majority of businesses pay their bills on time, with the amount owed in late payments halved over the last five years. I know the huge impact a late payment can have on the ability of a small business to plan, invest and grow.”
She later told Modern Work: “I ran a small business, so I am not completely ignorant about what small businesses have to put up with.
“I learnt very early on in the world of work that credit control and how you got paid was key – I saw the risks of not getting paid. So, we want to be tough with these particular announcements.”
Tolhurst went on to say: “Small businesses are the backbone of our economy and through our modern industrial strategy, we want to ensure the UK is the best place to start and grow a business. These measures will make sure small businesses are given the support they need and ensure that they get paid quickly – ending the unacceptable culture of late payment.”
Most organisations welcomed this as progress. The Confederation of British Industry’s Josh Hardie said: “Getting this right is absolutely a board-level issue.” IPSE’s deputy director of policy, Andy Chamberlain described it as “a positive step”, but was clear afterwards that ministers must follow through, deliver, then go further.
The smallest businesses take the biggest hit
While this is a step in the right direction, let’s not get too ahead of ourselves. The new rules only cover businesses that are classified as ‘large’. This means they meet two of the following: £36 million in annual turnover, £18 million balance sheet total, or 250 employees.
In the grand scheme of things, this covers less than five per cent of businesses, including the larger ‘small’ businesses, which are anecdotally some of the worst offenders. Freelancers, the smallest of all businesses, are therefore sometimes treated so poorly and this can have a serious effect on their wellbeing as well as their business.
So yes, this is a positive step from the government, but it is not going to stamp out late payment and certainly not right away. For freelancers, the best advice is to always state your payment terms up front, put it in your contract and don’t be afraid to remind your clients when payday is approaching.