In early December 2024, the Government launched a new voluntary payment code, The Fair Payment Code (the Code), replacing the previous Prompt Payment Code. It aims to tackle the late payment of businesses, support SME’s cash flow and incentivise good practice. The Code is open to not just businesses of any size, but also to Community Interest Companies, Business Representative Organisations, Charities, Co-operatives and Universities.
The most interesting change is the shift to ‘tiered’ awards regarding payment standards, it is now possible to win (and level up over time) the following:
- Gold Award – for those firms paying at least 95% of all invoices within 30 days;
- Silver Award – for those paying at least 95% of all invoices within 60 days, including at least 95% of invoices to small businesses within 30 days; and
- Bronze Award – for those paying at least 95% of all invoices within 60 days.
Each Award is for two years, after which they then must be reapplied for.
Other key changes include:
- The highest standards are intended for payment to all suppliers, whereas previously the 30 day standard only applied to payments to SMEs.
- You do not get credit merely for paying invoices within your payment terms.
- You must adhere to a ‘clear, fair and collaborative’ code of practice and ensure that your payment terms generally are fair to suppliers.
How to apply?
Importantly, previous signatories to the Prompt Payment Code will not automatically receive an Award.
As such, a new individual application must be submitted to receive one of the tiered Awards under the new Code. If you wish to apply, an expression of interest form must be submitted to the Office of the Small Business Commissioner (the OSBC). The OSBC will then send you an application form and supporting guidance which sets out the necessary evidence that should accompany your application. Briefly, this evidence includes:
- proof of UK registered address;
- your standard contract terms;
- two references from suppliers; and
- evidence of payment performance.
Any level of Award can be applied for, provided the accompanying evidence meets the criteria. If an application does not meet the requirements for one tier, the applicant will then automatically be considered for a lower one.
Complaints
The Fair Payment Code also includes a complaints procedure with the OSBC to report those businesses which are failing to meet the standards required under their Award or that are not following the Code’s principles of being Clear, Fair and Collaborative. This complaints procedure is the main form of redress under the Code and could see businesses move down the tiers or have their award removed from them.
Intention and Impact of the Code
Although the Code is not mandatory, the clear intention is to drive down payment periods for businesses. Those that stand to benefit from this obviously include payees, and particularly smaller businesses, as reduced payment periods will significantly improve their cash flow position.
Indeed, the Government has cited that late payments often hold back the expansion of SMEs and that unlocking this will be highly beneficial for the UK economy, thereby linking the Code to their current growth agenda.
Another advantage for businesses holding awards includes the reputational benefit. Potential suppliers and business partners will be encouraged by the presence of Awards. It is a signal they will be treated reasonably and paid within clear timeframes.
Intersection with the Procurement Act 2023
Another observation regarding the Code is its intersection with the Procurement Act 2023 (the Act) which is coming into force 24th February 2025. One of the most important changes under the Act is that any sum due to be paid under a public contract by a public sector payer (a ‘contracting authority’) must be paid within 30 days of receipt. Under the Act, this payment term should ‘flow down’ to the sub-contractors of the suppliers in public contracts, meaning the sub-contractors must also be paid within 30 days as well. It is clear that the Government are attempting to lead by example in relation to public sector supply chains, aligning their expectations for contracting authorities to a Gold Award under the Code.
Further, an Award under the Code may be a helpful boost in the tender process for public sector contracts, and demonstration of prompt payment compliance will be a mandatory requirement for certain tenders, including those with a value of over £5m issued by central government authorities.
Accordingly, for procurement purposes an Award is indicative of prompt payment compliance and it puts a supplier in strong position to submit a competitive bid and gain an increasing share of the £300 billion spent by the Government each year on public procurement.
Next Steps
It is clear that poor payment practices are in the Government’s crosshairs, but also that the introduction of the Code represents an opportunity for businesses. For the reasons stated above, many businesses will benefit from applying for an Award, and, regardless, all businesses should be moving towards an environment of paying undisputed invoices within 30 days. This may require detailed review of their standard terms and conditions, communication with others in their supply chain, training staff and upgrading systems, including for electronic invoicing.
If you have any questions about the Code, this article or on any other issues it has raised, please do contact its authors for further advice and support.