Friday, 28 September 2012 11:21

30 Days Later. Late Payments Directive brings life to zombie businesses...

Recast Late Payment Directive Consultation

Businesses that have been surviving at the edge of affordability - commonly called 'zombie businesses' for their inability to survive any further change in the health of their cashflow - could be particularly keen to see the Late Payments Directive introduced as planned.

The Department for Business, Innovation & Skills is running a consultation until October 19th on the Late Payments Directive (or European Directive 2011/7/EU, to use its proper name), which should help many small businesses to receive full payment of their invoices within 30 days - and to charge interest on top of any debts that go unpaid for longer.

 

So what are the proposals? Well, they include:

  • a default 30-day payment period where other terms have not been agreed;
  • a 30-day limit on public-sector payments (excluding certain sectors like healthcare);
  • a longer, 60-day limit on business-to-business payments unless otherwise agreed;
  • fixed compensation of €40 and the ability to reclaim additional recovery costs.

Implementing the Late Payments Directive

The Late Payments Directive is due to come into effect no later than March 16th 2013, and may be introduced in the UK earlier than that if there is enough support from businesses.

According to BIS estimates, once the new rules are in place, EU businesses could effectively see an extra £150 billion in regular cashflow - testament to the economic impact of keeping money moving.

But the fundamentals of getting paid for the work you've done remain the same, and BIS adds:

"Evidence suggests that the best way of securing timely payment is to agree terms in advance of the transaction and to invoice timely and accurately - effort therefore needs to be focused upon managing customer relationships and managing cashflow."

Under the new Directive, the idea is not to change these fundamentals, but simply to make timely payments "the norm" and to make late payments - currently used by many businesses to keep their own cashflow looking a little healthier - unacceptable in the vast majority of circumstances.

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Consultation Questions

The current consultation asks several questions about how the Directive should be implemented, which can be summarised as follows:

  1. Should healthcare, industrial and commercial contracts be subject to a standard 60-day payment period, instead of the 30-day period applied in other industries?
  2. Should the existing Late Payment of Commercial Debts (Interest) Act 1998 be repealed and replaced, or simply amended?
  3. Should the existing three-tiered approach to compensation for recovery costs be retained, or changed to the proposed €40 single minimum fee?
  4. Should contracts concluded before the introduction of the new Directive be excluded from its scope?
  5. Question 5 is an Impact Assessment that calls for evidence of late payments, written-off debts and similar issues.
  6. We're not too sure what happened to question 6, but it seems to be missing in the BIS consultation document...
  7. Any other comments?

'Government Best Practice'

One paragraph we couldn't help but notice was this one:

"The Directive proposes that Member States shall ensure that in commercial transactions where the debtor is a public authority the payment period does not exceed 30 calendar days following receipt by the debtor of the invoice, with limited exceptions where the period can be extended. This matches Government's current best practice for the public sector."

BIS added the emphasis to the bold bit, not us, but it's pretty handy in highlighting that 'best practice' in the public sector is apparently to pay within 30 days.

That's odd, because we could have sworn local authorities were told to pay within 10 days, not 30 days, as a 'best-practice' approach to invoicing.

As we reported earlier this month, only around half of local-authority payments are made within this target, and the average wait for payment stands at 17.5 days.

In some parts of the country though, delays can be much longer - up to 65 days in Worcestershire - so a firm commitment to 30-day payment terms could still be welcome news for zombie businesses trying to survive under such circumstances.

You can read more about the Directive and the consultation on the BIS website here.  

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Image "Zombie!" by flickr user Daniel Hollister is licensed under CC BY 2.0

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