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Gathering interest

11th September 1997
Page 47
Page 47, 11th September 1997 — Gathering interest
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Which of the following most accurately describes the problem?

Despite a lukewarm reception from business, the Government is pushing ahead with its proposals, announced in the Queen's Speech, to bring in legislation to deal with late payment of bills. No doubt this is driven as much by Brussels as by domestic pressure.

It is likely that the EU Commission will shortly introduce a directive requiring member states to provide a statutory right to claim interest on overdue commercial debts.

The bones of the proposals have been fleshed out in the recent Department of Trade and Industry consultation paper Improving the Payment Culture. The Government hopes to introduce legislation before the end of this year and, keen to get it right, has invited comment.

As proposed, the legislation will: • Apply across the UK and to all contracts written under the laws of England and Wales, Scotland or Northern Ireland; • Apply to all commercial debts that are incurred for the provision of goods or services where the debtor and the creditor operate as businesses, regardless of the amount; • Apply to all debts which remain unpaid after the contractually agreed credit period. Where credit terms have not been agreed, this will be taken as 30 days from the date of the invoice or delivery of the goods.

It will give creditors the statutory right to charge interest at 4% above base rate and the ability to voluntarily exercise a statutory right to interest. It will not compel the charging of statutory interest. Creditors will have the right to claim statutory interest at any time up to six years after the debt was due, even when the principal debt has been paid in full, albeit late.

The Government recognises that small businesses are currently prime victims in the late payment culture and is keen to ensure they benefit under the new regime. To allow them time to develop appropriate credit management systems, the right to interest will be introduced gradually.

Other businesses will not be able to claim statutory interest from small businesses for the first four years of the new legislation. But small businesses will be able to exercise the right to statutory interest against all large enterprises and public sector organisations as soon as the law is enacted.

After two years, the right will be extended to allow small businesses to claim against all enterprises. Only after four years will the right be universally available for all businesses to use against each other, regardless of their relative size.

So what constitutes a small business? Subsidiaries of larger businesses will certainly not be treated as small, but otherwise two of the following three criteria must be satisfied: a turnover of not more than £2.8m; a balance sheet total of not more than £1.4m; or not more than 50 employes.

But there are problems with the proposals, hence the consultation invitation. Is the interest rate sufficient to encourage prompt payment? Will the establishment of a voluntary right to claim statutory interest really give small businesses more muscle? What impact will the phased introduction have?

The Government acknowledges that legislation alone is not a cure. It proposes to "name and shame" poor payers by producing league tables of average payment times. It also intends to bolster credit management training initiatives.

This last measure should not be viewed as peripheral to changing the late payment culture. In fact it underscores the need for businesses to redouble their own efforts to keep the cash flowing, rather than relying on the law.

Of Course the proposed legislation will never compensate for poor credit control and inadequate or non-existent terms and conditions. So don't get left behind, put your foot down now.

• Copies of the consultation paper are available from: The Small and Medium Enterprise Policy Directorate, Department of Trade and Industry, 4.A.411 Victoria Street, London SWIH OET. Comments on the proposals should be sent to Nicholas Williams at the same address by 3 October 1997 by Jonathan Sinclair and Kathryn Taylor Jonathan Sinclair is a partner and Kathryn Taylor is a solicitor in the Leeds office of Eversheds.


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