There has been gathering support of late from business organisations and advisers, calling for a change in VAT rules to penalise companies who continually pay their suppliers late.
A 20% VAT “fine” is being proposed for the worst offenders, with the hope they will be shocked into cleaning up their act. The campaign is being canvassed by Beatrice Bartlay, managing director of 2B Interface, who has said that the problem is “killing” small businesses. She is proposing a 60 day trigger point, whereby any payment after this time would trigger the VAT penalty. Every company would pay VAT on all invoices that are unpaid for more than 60 days, with the extra VAT not being recoverable after invoices have been paid. Thus, the 20% “fine” would be implemented, making the goods more expensive than similar goods paid for within the 60 day cut off.
This could be a way to combat the issue, but what exactly is the problem, and what can you as a small business owner do to combat it? A scourge of late payments sees (often large businesses but not always the case) businesses paying later than the specified term, with no negotiation, explanation or discussion. Another situation is that payment terms are changed from 30 days to 90 days, mid way through the contract, or businesses whose practice has been to pay a bill within 30 days, but which have terms of 90 days, are changing their deadlines to 90 days and requesting a settlement discount for earlier payments, which they were originally making anyway. While none of these actions are illegal, they do have a terrible effect on SMEs, who often have extremely tight cash flow, and rely on bills being paid on time and without discounts.
Large companies will of course use their commercial clout to get the best deal they can from SMEs but with late payments having such a detrimental effect, changes need to be made. Serious implications can result from late payments, and with the current economic climate as it is, livelihoods are at risk.
So what can you do to try and safeguard against this action? The Government has expressed sympathy with the problem, but don’t want to interfere in commercial arrangements between companies. Small companies don’t want to start upsetting large customers, and many have said it will be counterproductive for the larger companies to be seen as being under attack from others. One of the few organisations taking an initiative against the payment problem is The Forum of Private Business, who has created a ‘name and shame’ list of large companies who have attempted to change the terms of trade. The list can be viewed here, but sadly reputational damage is limited, with many small companies deciding the risk is far too great to ever challenge customers over late payments. They take the view that being paid late is better than not being paid at all – and in this tough economic climate, it is easy to see why.
There is also The Late Payment of Commercial Debts Regulations 2013 which came into force on 16 March 2013. The Regulations effectively impose payment periods for commercial contracts for goods or services, by providing that interest on outstanding payments starts to run after certain time periods. This means that you, by law, can charge interest on late payments and take your claim to court if the customer does not pay. Some other tips for you to consider, to combat late payers, are:
- Relying less on large customers who are prone to late payments – could you split your supply up to numerous smaller companies who will pay you on time and see you still making the same profit?
- Increase the price you charge for goods provided – this way you can offer a settlement discount and still make the same profit while hopefully receiving the payment earlier than usual.
- Finally you can insist on payment on time, and refuse to deal with the customer in question again if the payment is late.
Have you ever had a problem with late paying customers? How did you deal with the issue? Please leave your comments below.
Image sourced from kenteegardin.