A late payment crack down, the Chancellor’s speech has an optimistic tone, and closing the tax gap with HMRC’s digital reform
How to protect your business from late payments, feedback from the Chancellor’s latest speech and how HMRC’s digital reform could help to close the tax gap. All in today’s blog post!
Government cracks down on late payments: what you need to know and how to protect your business now
Late payments are a huge headache for small businesses across the UK, costing SMEs around £22,000 per year on average. In fact, it’s estimated that they’re responsible for about 50,000 business closures each year!
The government has just announced new measures to tackle the problem, but these won’t come into play overnight, so what can you do in the meantime to protect your business?
What’s changing?
The government has rolled out some new proposals to address late payment problems, particularly trying to tackle larger businesses taking advantage of smaller ones. Here’s what’s on the table:
- New Fair Payment Code: The old Prompt Payment Code will be replaced with a new Fair Payment Code this autumn, setting clearer standards for businesses to meet. Businesses that show they pay their suppliers promptly can earn gold, silver, or bronze status, encouraging faster payments across the board.
- More transparency about big company practices: New legislation will soon require large businesses to report their payment practices in their annual reports. This will shine a light on companies that drag their feet on paying small suppliers, holding them accountable to boards and investors.
- Consultation on tougher laws: Consultation will be held on stronger laws to force big companies to pay small businesses on time. Enforcement of existing laws is also being ramped up, meaning companies that don’t comply with reporting regulations could face criminal penalties, including unlimited fines.
This matters to small businesses
According to the Federation of Small Businesses (FSB), more than half of UK SMEs are affected by late payments every quarter, with many forced to take out expensive loans or dip into personal savings to cover cash flow gaps. This new government focus on the issue aims to level the playing field and remove a major barrier to SME growth.
Of course, it’s hard to say exactly how effective the new measures will be, and it will take time for them to be fully implemented. So, what can you do to tackle late payments in your business today?
Practical steps to handle late payments right now
While the government’s efforts to fix the late payment culture are welcome, here are a few practical steps you can take immediately to protect your business:
- Be proactive with your payment terms: Make sure your payment terms are crystal clear right from the start. Include these in your contracts and invoices, and consider tightening your payment deadlines if you’ve been giving clients too much leeway. For example, moving from 60 to 30-day terms can help speed things up.
- Chase payments early and regularly: Don’t wait until an invoice is overdue to follow up. Send polite reminders a week before the due date, and chase them promptly if payment is late. Many businesses find that consistent, friendly follow-ups can make a big difference in getting paid faster.
- Offer incentives for early payment: Consider offering a small discount for clients who pay early. While this might reduce your profit slightly, it’s often worth it to avoid the costs and stress of late payments.
- Use electronic invoicing and payment systems: Research shows that electronic invoicing can reduce late payments by up to 20%. Switching to digital invoicing and payment systems can streamline the process, making it easier for your clients to pay on time and for you to track payments more efficiently.
- Consider factoring or invoice financing: If late payments are seriously hurting your cash flow, you could look into invoice financing or factoring services. These allow you to borrow against your unpaid invoices, giving you the cash you need upfront. Just be aware that these services come at a cost, so weigh the pros and cons carefully.
- Build strong relationships with clients: It’s easy to overlook, but maintaining a strong relationship with your clients can sometimes help avoid late payments. Regular check-ins and open communication about the status of payments can prevent issues before they arise.
Looking ahead
Hopefully the new Fair Payment Code and the related legislation around reporting will put more pressure on big businesses to pay smaller ones on time. However, even if effective, these changes will take time to filter through.
In the meantime, taking a proactive approach to invoicing, payments, and customer relationships now will continue to help protect your business and reduce the impact of late payments.
If late payments are causing you major issues or you’re unsure how to handle overdue invoices, get in touch with us for advice tailored to your business. We’re here to help you stay on top of your finances and keep your business growing.
Chancellor’s speech takes optimistic tone on economy
The Chancellor, Rachel Reeves, gave an important speech at the Labour Party conference last week, in which she appeared to shift tone to speak more positively about the economy.
Recently she spoke about the upcoming Budget being a “painful” one. As a result, there has been speculation on where spending will be cut and tax raised, which may have affected consumer confidence.
However, the Chancellor’s speech at the party conference concentrated on the positive results she expects to bring to the economy. She plans to grow public spending in real terms as she believes that investment by the government will help the economy to grow. There may be changes upcoming to the rules on government borrowing so that more investment is allowed.
Whether this means that the Budget will not be as painful as we might have been expecting is hard to know. As always, we will keep you posted on the Budget developments.
See: https://www.bbc.co.uk/news/articles/c5y50z5l1r2o
Chancellor pushes for e-invoicing: What you need to know
The Chancellor unveiled a series of announcements last week that could have implications for UK businesses. One of the most relevant for business owners was the government’s push for electronic invoicing (e-invoicing).
HM Revenue and Customs (HMRC) will soon launch a consultation on encouraging the wider use of e-invoicing, with the goal of simplifying business transactions and reducing administrative burdens but perhaps especially, reducing errors in tax returns so that HMRC can ‘close the tax gap’.
While there are clearly advantages for HMRC in businesses using e-invoices, it’s also fair to say that they can benefit businesses too.
Benefits of e-invoicing for businesses:
- Improved cash flow: E-invoicing accelerates payment times by automating the invoice approval process, making it easier for businesses to receive payments quickly.
- Reduced errors: Automated processes can help minimise the risks of manual entry errors in invoices, which can lead to payment delays or disputes.
- Increased productivity: With fewer administrative tasks, businesses can save time and focus on other essential areas, such as growth and customer service.
- Tax compliance: E-invoicing can help businesses keep accurate tax records, making it easier to complete tax returns and avoid discrepancies that may lead to penalties.
How could you take advantage of e-invoicing?
While the consultation is yet to launch, there’s no reason you couldn’t give some thought to moving over to an e-invoicing system now.
To do this, you could explore the options available. Many software providers offer affordable solutions tailored to SMEs that work with your existing accounting software. You may find that the software you already use can do e-invoicing for you.
If you need any help with e-invoicing or setting up your accounting software, please just give us a call and we would be happy to help you out.
HMRC reform: digital transformation and closing the tax gap
In line with the e-invoicing initiative we reported on elsewhere, the Chancellor also outlined broader reforms to modernise HMRC through a Digital Transformation Roadmap, which is expected in Spring 2025.
This roadmap will aim to create a “digital-first” tax system, although it will include measures to ensure support for those unable to go fully digital.
In addition, James Murray, who is Exchequer Secretary to the Treasury and is responsible for the UK’s tax system, has been appointed as the Chair of the HMRC Board. This in part is to help him oversee how HMRC can ‘close the tax gap’ – in other words, collect tax that the government currently believes is being underpaid.
HMRC has a target of recruiting an additional 5,000 compliance staff to help it in these aims.
How businesses might be impacted:
With HMRC focusing on closing the tax gap, businesses should ensure that their tax affairs are in order. You might consider seeking advice to review your tax compliance processes and make sure you avoid potential penalties.
For most businesses, operating digitally is now a day-to-day norm. However, with HMRC moving to a “digital-first” approach, if you’ve been relying on paper-based or old computer systems, it may be time to think about upgrading to online solutions.
If you’re unsure how these changes might affect your business or need support with your tax compliance or digital strategy, please get in touch. We’re here to help you navigate the upcoming reforms and ensure your business is well-positioned for growth.