Last reviewed 30 January 2013

Paul Clarke reports on the latest EU Late Payment Directive, which is due to come into force in March 2013.

The cheque's in the post: combating late payment

Late payment is an issue that worries the European Commission for one very good reason: firms go bust waiting for their money. In 2009, a Commission report found that there were £1.6 trillion worth of late payments in the European economy, €1.1 trillion of which was owed to small and medium-sized companies. The problem was exacerbated by the fact that, in many Member States, public authorities had longer payment terms than commercial organisations. The first EU Late Payment Directive appeared in 2000, setting out penalty payments, which could be charged if invoices went unpaid beyond the agreed settlement date. This legislation was updated and replaced in February 2011 by Directive 2011/7/EU, which is due to come into force in the Member States in March 2013.

What the 2011 directive requires

  • Public authorities will be expected to pay suppliers within 30 calendar days of receipt of an undisputed invoice.

  • For business-to-business payments, the period for payment fixed in the contract should not exceed 60 days, unless otherwise expressly agreed and provided such terms are not grossly unfair.

  • There should be a default payment period of 30 days, where terms have not been otherwise agreed.

  • There will be a minimum €40 (around £31) of compensation, although suppliers will not be prevented from seeking to claim additional recovery costs.

UK leads the way

This is certainly one area where some EU "red tape" might be positively welcomed by small firms in the UK, given that the Federation of Small Businesses (FSB) pointed out last year that 73% of small businesses had been paid late in the previous 12 months. According to the Government, around 2.2% of businesses that are paid late spend time chasing payments, and the estimated cost of doing so, in each case, is £5000. This is also an area, however, where the UK can safely claim to be ahead of the rest of Europe as its first legislation on late payment was introduced in 1998, well ahead of the first Late Payment Directive.

Member States have until 16 March 2013 to implement the new directive in national law, and the Department for Business, Innovation and Skills (BIS) has held a consultation into the way the UK will comply. Small firms expecting some major changes in payment terms will, however, be disappointed as the new directive mainly draws on existing UK practice given that, according to BIS, this country is seen as "an exemplar" in this field across the Union. As Business and Enterprise Minister Michael Fallon put it, “The UK already has some of the strongest late payment laws in Europe which are now being copied across Europe."

For example, the directive requires public authorities to pay suppliers within 30 calendar days of receipt of an undisputed invoice, which is already standard practice in the UK's public sector. The UK will however need to replace its current three-tiered compensation structure, depending on the value of the debt, with a flat rate of compensation to comply with the directive.

Savings

The Government has suggested that, if the revised directive results in all public sector authorities meeting the 30-day payment period in commercial transactions, a benefit to creditor businesses of £11.8 million would be generated from reducing the administrative cost of chasing late payment. Accepting that this level of compliance is most unlikely, it is working on the basis of companies saving about half that amount (around £6 million) once the directive is in place. It also anticipates that the revised directive will reduce the value of written-off debt, the administrative costs of chasing late payment from other businesses, and the number of insolvencies.