Prompt payment policy update - How it impacts your small business | Chaser

The Prompt Payment Code protects organisations and their suppliers by establishing regulatory standards for payment. The Code was established in 2008 and has undergone several revisions since then, including the most recently updated standards in April 2024.

Under the new regulations, firms bidding for government contracts over £5M will need to demonstrate they pay their invoices within an average timeframe of 55 days. This amount of time will be shortened to 45 days in 2025 and, eventually 30 days in the coming years.

Firms bidding for government contracts over £5M will need to demonstrate they pay their invoices within an average timeframe of 55 days.

Additionally, suppliers must now demonstrate they pay 95% of their invoices within 60 days. The new updates to the Prompt Payment Policy further protect businesses, investors, and their supply chains. Adhering to the code’s original purpose, these newly revised standards uphold the mission to ensure fast payment, offer clear guidance to suppliers on terms, promote swift dispute resolution, and support good practice throughout supply chains. 

Suppliers must now demonstrate they pay 95% of their invoices within 60 days.

How the April 2024 Prompt Payment Policy update will impact businesses

Organisations that work with large government contracts will be affected by the changes. Reporting payment history will be a strict requirement to ensure compliance with the Code. Under the Reporting on Payment Practices and Performance Regulations 2017, large businesses are already required to publish their payment performance. These records can be submitted along with a bid to illustrate that your business meets the Code’s minimum standards. 

Penalties for non-compliance

If a business or supplier does not comply with the Prompt Payment Code, they will no longer be eligible to bid for government contracts. Suppliers must fill both criteria within one of the last two six-month reporting periods to be compliant. 

There is some leeway for suppliers who have fallen slightly short of the 95% payment requirement. Those who have paid at least 90% of their invoices within 60 days must submit a detailed action plan that outlines how they intend to meet the criteria in the future. Suppliers who pay their invoices within 55 days in one of the previous two six-month reporting periods will be considered compliant. 

Companies that do not comply with the terms could face investigation and removal from the Code.

How the Prompt Payment Policy impacts the public sector 

Instituting new prompt payment policies can help small businesses by increasing cash flow through the supply chain. Even companies that do not work with the government can benefit from adopting the Prompt Payment Policy terms with their suppliers. Faster payments mean smaller firms will receive more stable income and wait less time to receive payment for their goods and services. Improved cash flows have far-reaching benefits for businesses, including the ability to hire more staff, expand offerings, and contribute more to the economy. 

The government estimates that the new standards could generate an additional £2.5 billion for the economy. The ripple effect of prompt payments throughout supply chains can benefit the public sector by creating more job opportunities and improving access to goods and services. As businesses generate more revenue, they are able to scale sustainably, which allows them to give more back to the economy.

Actions for public sector companies to take

Companies can protect themselves by closely adhering to the terms laid out in the Code. This includes:

• Paying all suppliers within the allotted time frame.
• Providing clear guidance on payment terms, dispute resolution, and prompt notification of late payment. 
• Encouraging the adoption of the Prompt Payment Code at all levels of the supply chain.
  
  

Implementing the Procurement Act

From October 2024, the Procurement Act will mandate that all public procurement contracts include a 30-day payment term. The terms are implied into contracts even when not explicitly written in the terms. The new Procurement Act will also apply to any subcontracts wholly or substantially meant to contribute to the performance of a public contract. 

The October 2024 Procurement Act applies to the entire supply chain. Invoices will have to be paid within 30 days of the receipt, not when they are validated. These terms will be enforced through "Payments Compliance Notices" published every six months by the contracting authorities, according to gov.uk. These notices will detail the authority’s compliance with paying invoices within 30 days of receipt, which will align public and private sector payment reporting. 

Conclusion 

The Prompt Payment Policy updates in April 2024 will continue to refine the way businesses and suppliers operate within the public and private sector. By mandating stricter payment requirements, the Code will promote greater transparency and good business conduct. Although voluntary, the Code serves as a beneficial tool for businesses seeking to support good practices and improve cash flows with their suppliers. 

For businesses to navigate these changes whilst ensuring compliance with the Prompt Payment Code and upcoming Procurement Act, it is essential to leverage tools that streamline your payment process.