Prompt Payment Code policy changes are having unforeseen consequences

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For small suppliers, being paid on time can mean the difference between survival or closure, particularly in times of trouble.

According to the Federation of Small Businesses, about 50,000 businesses close every year due to late payments – and the pressures of the pandemic have only added the problem.

It’s why the government decided to strengthen the Prompt Payment Code earlier this year, with signatories told in January that they would need to pay 95% of invoices from companies with fewer than 50 employees within 30 days if they were to remain on the programme, down from 60 days.

This change was welcomed by the FSB. “A late payment crisis was massively stifling the UK economy before covid hit,” said national chairman Mike Cherry. “The pandemic has deepened it.”

But it has already had some unforeseen consequences – with Tesco resigning from the voluntary code ahead of the new regime coming into force in July. Not because it objects to paying small suppliers within 30 days (something it claims it is already doing), but because the new classification of a ‘small business’ – measured by number of employees – is problematic.

“We have not changed our payment terms and no suppliers have been affected by our decision on the Prompt Payment Code (PPC),” says a Tesco spokesman.

“Like most retailers, we measure the size of suppliers by reference to their sales. The changes to the PPC define business size by number of employees – data that is not readily available to us and does not necessarily reflect the size of a business.

“We’re committed to supporting our smallest suppliers, which is why we’ve recently made permanent the improved payment terms we introduced to help them through the pandemic. This means that invoices are paid immediately, instead of the previous 14 days – significantly faster than the 30-day terms required by the Prompt Payment Code.”

Tesco isn’t the first signatory to object to changes in the criteria of the PPC. Unilever – which The Times reports is facing expulsion from the code alongside Diageo, amid a crackdown by small business commissioner Liz Barclay – has also raised concerns.

Unilever was among the first to sign up to the PPC in 2012, but it was suspended in 2019 due to “changes made to the criteria” and has not since been reinstated. The fmcg giant takes up to 90 days to pay its biggest suppliers, thus breaching the requirement to pay 95% of all invoices within 60 days.

Ironically, that’s because it prioritises payment to smaller suppliers – something the PPC used to recognise as an “exceptional circumstance” to the 95% of invoices in 60 days rule.

“The Prompt Payment Code has always required companies to achieve payment of at least 90% of invoices within 60 days,” says a Unilever spokeswoman. “Previously, for companies like Unilever, who have mutually agreed terms with suppliers that fall outside this, the PPC took into consideration that we prioritise smaller suppliers, SMEs and charities with payment terms of 30 days.

“We believe we are still fully honouring the spirit of the Prompt Payment Code as we continue to pay SMEs within 30 days, our average time to pay all invoices is less than 60 days and since 2019, Unilever UK has paid more than 96% of invoices on time.”

It seems, then, that those falling foul of the PPC (or deciding to quit it altogether) are not necessarily those taking the longest to pay small suppliers.

You could argue it’s unfair that Unilever faces the same fate as Diageo, which also notes larger suppliers are often on “multi-year contracts involving mutually agreed payment terms”, but hasn’t yet offered 30-day payment terms to its smaller suppliers.

“All SMEs working for us in the UK are on 60-day payment terms and 97.7% are currently paid to terms,” says a Diageo spokeswoman, adding it has agreed “a clear action plan with the PPC and [is] working to this, while also reviewing recent reforms.”

Unilever says it plans to discuss the matter further with the Prompt Payment Code administrator. But there are no signs the Office of the Small Business Commissioner, which administers the code on behalf of BEIS, plans to make any changes to the rules, even in the light of Tesco’s exit.

“Firms often tell the OSBC they can’t sign up to the PPC because they can’t identify small firms amongst their suppliers,” reid a tweet from the PPC account earlier this month. “The 3,000-plus firms that are signatories have worked out which suppliers have fewer than 50 employees so it can be done.”

And there lies the rub. If other major retailers and suppliers can meet the increasingly strict critera of the PPC, those who don’t will inevitably continue to face criticism – whether justified or not.