My Lords, at the outset I acknowledge the work of the previous Conservative Government in establishing the Office of the Small Business Commissioner under the Enterprise Act 2016, and in introducing the Reporting on Payment Practices and Performance Regulations, which require large businesses and LLPs to publish payment data twice yearly. Those reforms were important and necessary steps forward.
As most noble Lords know, I am a former business owner, so I know that many businesses across the United Kingdom have benefited from those measures without having to endure lengthy and costly litigation simply to recover money that was already owed to them. But despite those reforms, the culture of persistent late payment remains deeply entrenched in too many parts of our economy. Late payment is not merely an inconvenience; it is a scourge on British business. It costs the UK economy an estimated £11 billion every year. Small business owners spend more than 86 hours each year chasing overdue invoices. Every day, approximately 38 businesses in the United Kingdom close because they run out of cash while waiting to be paid.
Behind every one of those statistics is a founder who took a risk, mortgaged a home, invested savings, employed staff, and worked tirelessly to build a business—only to discover that despite fulfilling their side of the contract, they could not survive because payment did not arrive on time. That is neither fair nor sustainable, and this Government are determined to act.
My Lords, I declare my interests as set out in the register, in particular as a partner and practising solicitor at DAC Beachcroft. It is a pleasure to follow the Minister, who not only read from a brief but spoke from his heart. He has a record that anyone should be proud of in building businesses in the past.
The Minister was also very generous in the praise that he extended to the previous Conservative Government. We on these Benches have consistently championed the rights of small businesses. In government, we created a specific duty for contracting authorities to consider small-sized and medium-sized enterprises in competing for contracts. During the pandemic, we directed an additional £69 billion towards support for businesses.
That belief in small business has followed us into Opposition, often in defiance of the Government’s broader approach to industrial policy, so it is welcome to see Ministers taking a step in our direction. For that reason, I say from the outset that we do not oppose the Bill. Tackling poor payment practices will be beneficial not only to small businesses but to the wider economy as a whole.
As the Minister pointed out, an estimated 38 businesses close every day as a result of late payments, costing the country some £11 billion annually. We therefore recognise the need for reforms such as mandatory payment terms and statutory interest payments, both of which should improve cash flow and provide smaller firms with greater certainty.
I too welcome the powerful, lucid and passionate way in which the noble Lord the Minister introduced, based on his own experience, the need for this Bill and the principal purposes behind it. It is also a great pleasure to follow the noble Lord, Lord Hunt, and his exposition of some of the problems that he has encountered from his long experience as a senior and distinguished lawyer, because at the heart of so many legal disputes is the desire to delay payment.
I want to raise a point that has not been raised, which comes from much more recent experience, primarily in this House. The notes to the King’s Speech say:
“The measures apply only to UK-to-UK business transactions and do not affect global supply chains or international trade”.
The Late Payment of Commercial Debts (Interest) Act 1998, which this Act seeks to amend, applied to all business-to-business contracts governed by English law—or, I should hastily add, laws of other parts of the United Kingdom, provided that there was a connection in the contract with the United Kingdom. My understanding is that it is intended that effect will be given to what is said in the King’s Speech under regulations made under new Section 2E, which is to be inserted by Clause 3 of this Bill, and that it is intended thereby to exclude all non-UK business-to-business contracts and thus achieve the result of excluding international trade from the scope of the Bill.
My Lords, I begin with my register of interests. I chair the Joint Industry Board of the electrotechnical sector, which brings together employers and unions operating in the electrotechnical, engineering services and built environment sectors. Our employer members are a critical part of the construction supply chain, and many have felt the burden of late payments and retentions. I therefore begin by congratulating the Government on the Bill.
Noble Lords will be familiar with Ronald Reagan’s lampooning remark:
“I’m from the government and I’m here to help”,
and will know that new regulation often engenders business scepticism. However, when it comes to tackling late payments, there is broad consensus that it is past time to update the well-intentioned but, in practice, ineffective legislation put in place at the end of the last century by the previous Labour Government. SMEs have been calling for further government action for more than a decade. This Bill will now deal with outdated and ineffective legislation.
To echo my noble friend the Minister, a shocking quarter of all firms are impacted by late payments. The Bill will bring relief to 1.5 million small businesses every year. Shockingly, late payments currently lead to more than 14,000 businesses closing each year, and the total cost of late payments is estimated to be a whopping £11 billion each year. The Bill, as the noble Lord, Lord Hunt, graciously acknowledged from the Benches opposite, is a valuable economic pro-growth measure.
My Lords, I am pleased to follow the noble Baroness, Lady Alexander of Cleveden, who made some important points about enforceability and escaping avoidance of the provisions. I will come on in a few moments to talk about some of the other issues raised by the proposed ban on retention payments.
I am also pleased to follow my noble and learned friend—for these purposes—Lord Thomas of Cwmgiedd, with whom I served on that Special Public Bill Committee on the Electronic Trade Documents Act. From what I heard, I entirely agree with him on the importance of us trying to see the progress that we are making, under English law, in securing the electronic dispatch of documents being reinforced through the mechanisms that we are bringing into force in relation to payment terms.
I draw attention to my entry in the register of interests. I am a director of a small business and chair of the Cambridgeshire Development Forum, although I should again emphasise that I do not speak on behalf of any of the members of that forum. My views are entirely my own.
As my noble friend on the Front Bench may have done, we have worked on this issue from time to time over quite a long period, not just in the parliamentary sense. I was once upon a time the deputy director general of the British Chambers of Commerce and remember, back in the late 1980s, talking at length to David Trippier, who was then the Small Firms Minister, about the introduction of the code of practice on payment of bills on time. It is fair to say that where we are now, all those years later, has demonstrated that while it has always been desirable for us not to proceed by way of legislation and making payment terms mandatory and interfering in contractual terms between businesses, in practice we were never effectively able to overcome the obstacle that many small businesses would not challenge the payment terms of large companies to which they were suppliers. We have to be prepared to step in.
My Lords, I am very pleased to welcome the Commercial Payments Bill and to take part in this Second Reading. I congratulate my noble friend the Minister on his absolutely outstanding introduction to it. I intend to make two points about why the Bill is so important to our business community, particularly those seeking to establish and grow enterprises of all kinds: small businesses and social enterprises.
But first, I want to say that I support this legislation for personal reasons. At a very early age, I was aware of the importance of invoices being paid in good time. My dad, Peter Thornton, was a master plumber who set up a plumbing and building business in Bradford when I was a child. It was a successful business that grew to employ a few dozen employees and provide apprenticeships for plumbers, electricians and brickies. He remained proud of that for the whole of his life. Even at 10 years old, I was aware that there were moments in the early days when customers delaying payment caused anxiety and belt-tightening times at home. Sad to say, some of this was the local authority dragging its bureaucratic feet and not paying bills in a timely fashion.
Many years later, having worked on a freelance basis and self-employed, I set up my own small business with a business partner. We were a micro-business— I think we employed 10 people at the most—and a very happy company. But again, my business partner and I had moments of anxiety caused by clients delaying payment of invoices and dragging their feet, particularly large companies that did not recognise the effect that an extra 30 or 60 days, or delays that were arbitrarily imposed, had on our company and its cash flow.
My Lords, I too thank the Minister for the passion and eloquence with which he introduced this Bill. It is a pleasure to follow my noble friend Lady Thornton and other noble Lords.
When I began my career in banking, I had to work out cash flows and balance sheet ratios for businesses manually. To anyone under the age of 40, that is pretty neanderthal—and it seemed it at the time. But I remember being told early in my training that debt never killed a company; it was always a lack of cash. You might say that a banker would say that, and there is of course a relationship between debt and cash, but it was a simple lesson because it is true. So I welcome the thrust of this Bill and the provisions within it.
The latest British Chambers of Commerce survey shows that three-quarters of all businesses report late payments and one-quarter of all businesses report that late payments are having a direct impact on their operations or ability to grow. So the proposal in this Bill to set a cap on payments at 60 days can only be welcomed. It will of course be important for business to clarify the scope of any exemptions, as the Minister has said, and we will have to be mindful of how enforcement might impact on commercial relationships, especially between small suppliers and much larger customers. I also welcome the provisions in the Bill to strengthen the role of the Small Business Commissioner beyond guidance to more effective enforcement of prompt payment practices. Increased transparency backed by enforcement powers can only be welcomed.
My Lords, I welcome the Bill and refer your Lordships to my business interests, which are largely in the SME sector, as set out in the register.
I thank the noble Lord, Lord Leong, for his very gracious remarks about the contribution the Conservatives have made to the Bill—the continuing line. I ought to fess up: I am not sure that the Conservatives have always led the way in this. I remember going to a speech that my noble friend Lord Heseltine, not in his place, gave. It was literally 30 years ago, but it was such a powerful speech that I can remember it. It was at the Institute of Directors, largely with small businesses there, and he was describing his business career. He explained that when he started off, he had a ledger in which he listed all the bills payable. The first column was “Bills 30 days” and the second column was “Bills over 60 days”. The third column was “Bills 120 days”. The fourth column was “Bills where solicitor’s letter has been received” and the fifth column was “Winding-up order has been received”. He said to the Institute of Directors, “Gentlemen and ladies, my advice to you, to be a success in business, is only pay the bills in the fifth column”. Not a great precedent, but a true story.
This is an important Bill and I believe it will be supported on a cross-party basis. It is something close to my heart, not least, as with the noble Baroness, Lady Thornton, because of my family history. Like many people in this House, I come from an entrepreneurial family. Both my grandfathers were originally in the furniture business, which led to my mother, after a successful career as an actress, deciding also to go into the furniture business. She discovered that in the East End of London in the 1970s and 1980s, there were a large number of craftsmen who made reproduction furniture. They worked under the railway bridges, some of them manufacturing reproduction furniture with wood, some doing the brass, some doing the lining and some doing the glass, but they were not combined, any of these businesses. She started taking furniture from one craftsman to another, and then took it all the way from the East End to the West End to sell it. None of those manufacturers could imagine “going up west” to sell their products, so she took the furniture there and sold it to the large department stores.
My Lords, what a pleasure to follow my noble friend Lord Leigh of Hurley and to hear some of his family history. I always suspected that he was a big fan of sofa government.
I declare my interests as set out in the register as adviser variously to the Crown Estate, Endava plc and Simmons & Simmons LLP. I give more than warm congratulations to the Minister for the way in which he not only clearly and precisely set out the provisions of this Bill but did it with such experience and expertise. In all my dealings on previous Bills, I have always found the Minister passionate, constructive, practical and a pleasure to deal with. That will certainly be the case for the negotiations that we have coming up on this Bill.
It is a good Bill and I welcome it. To mash up my biblical references, it is full of good intentions but we all know what good intentions have the potential to pave and, as has already been noted, the devil is in the detail. I will go to some of that detail in the first instance. Why is it that if you are a small or micro entity you have a maximum payment term of 60 days, whereas if you are a public authority you have 30 days? I am a big supporter of public authorities. The roles and responsibilities they have are extraordinary, and the difference they make to people’s lives on a daily basis is to be absolutely applauded. My old man worked for a local authority; it is in the blood. But they are in a very different circumstance from micro entities when it comes to late payments. These are not ideal, but they are less likely to break a public authority in the same way as we see in those 14,000 businesses year on year. These are 14,000 tragic stories for all those individuals involved and in how that ripples out through their families and communities.
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In July 2025, the Government launched a public consultation to gather views from businesses, trade bodies, representative organisations and stakeholders across the country on how best to tackle poor payment practices and improve payment times. The response was overwhelming. Businesses large and small, across all sectors and regions, made it clear that reform was urgently needed. The measures before your Lordships’ House today are the result of that engagement.
The Bill builds on the foundations laid by previous reforms and delivers on this Government’s manifesto commitment to tackle persistent late payments once and for all. Its purpose is straightforward: to ensure that when goods are supplied or services are delivered, businesses, particularly small and medium-sized enterprises, can be confident they will be paid fairly and on time.
SMEs are not peripheral to our economy; they are the very backbone of it. There are approximately 5.5 million SMEs operating across the United Kingdom. They employ around 60% of the private sector workforce and account for around half of all private sector turnover. Yet too often, they operate in a commercial environment where delayed payment has become normalised and smaller suppliers effectively act as involuntary lenders to larger organisations with greater bargaining power. The Bill seeks to restore balance, fairness and accountability to those commercial relationships.
Part 1 of the Bill introduces a maximum payment term of 60 days in commercial contracts, subject to limited exemptions, and renders contractual terms in breach of those rules void. We have listened carefully to businesses and stakeholders to ensure that these measures are proportionate and workable. Therefore, the Bill includes provisions enabling exemptions for large-to-large business contracts and for circumstances where the purchaser is the smaller party. We also intend to consult on secondary legislation that would exempt contracts relating to imports and exports from maximum payment terms.
This is not an attack on legitimate commercial freedom; it is a measured and proportionate intervention to address situations where freedom of contract exists more in theory than in practice because of unequal bargaining powers. Businesses cannot pay wages, suppliers, VAT, rent or national insurance with invoices that remain unpaid for 90, 120 or even 180 days. Prompt payment should be the norm in a modern economy, not the exception. The Bill also strengthens the existing statutory right to interest on late payment of commercial debts.
At present, many suppliers are reluctant to enforce those rights because they fear damaging valuable commercial relationships. Consequently, the law often exists only on paper. The Bill will remove the ability for contracts to substitute weaker remedies in place of a statutory interest at 8% above the Bank of England base rate. That will create a stronger deterrent against late payments and reinforce the principle that delaying payments should carry consequences. The Bill further allows suppliers to recover a fixed sum where disputes are raised late or without sufficient information in an attempt to delay payment. Too many businesses have encountered situations where objections are raised at the eleventh hour, not because there is a genuine dispute but because delaying payment benefits the purchaser’s cash flow. That practice is unfair, damaging and totally unacceptable.
Legislation is meaningful only if it can be enforced effectively. That is why the Bill will significantly strengthen the powers of the Small Business Commissioner. The commissioner will be empowered to resolve contractual payment disputes through a confidential adjudication scheme operating outside the court process, enabling small businesses to recover money owed to them quickly and efficiently. The commissioner will also gain powers to investigate persistent poor payment practices by larger businesses, to compel participation in investigations, to issue recommendations, to give publication and enforcement directions, and, in the most serious cases, to impose financial penalties. The Bill will allow regulations to be made to empower the commissioner to enforce compliance with payment reporting obligations when businesses fail to publish accurate payment data. Taken together, these reforms will transform the Small Business Commissioner from a passive observer into an active champion of fair payment practices across the United Kingdom economy.
The Bill also addresses one of the most controversial and damaging practices in the construction sector: cash retentions. Retention payments represent labour and materials already delivered and installed on site. Yet subcontractors and smaller firms frequently wait months, sometimes years, for money that is rightfully theirs. In some cases, they never recover it because of insolvency higher up the supply chain. The Construction Leadership Council estimates that approximately £223 million in retention payments is lost annually due to insolvency, while around £4 billion to £6 billion in retentions is held across the industry at any given time. That is an extraordinary amount of capital being withheld from productive businesses. Therefore, the Bill bans retention clauses in construction contracts and introduces a fixed sum payable for any unauthorised deduction from a retention payment.
A two-year transition period will apply before the ban comes fully into force, allowing industry and clients time to adapt and enabling alternative surety products to develop in the market. This is an important reform that will improve cash flow, strengthen resilience and reduce insolvency risks throughout the construction supply chain.
There is a broader economic case for this legislation. Growth does not come solely from major infrastructure projects or multinational investment; growth also comes from healthy cash flow in ordinary businesses across every town, city and region of our country. When small businesses are paid on time, they invest with greater confidence, recruit more staff, train apprentices, innovate and grow. Improving payment culture is therefore not simply a contractual issue; it is a growth strategy, a productivity strategy and, fundamentally, a fairness strategy. The Bill strikes the right balance between respecting commercial freedom and intervening where persistent unfairness harms businesses, jobs and economic growth. It is pro-enterprise, pro-growth and pro-fairness.
Poor payment practices destroy businesses, jobs and livelihoods. Too many business owners work day and night, often without paying themselves—as I, for one, know—reinvesting every penny into their businesses, only to find that they run out of cash because larger organisations fail to pay them on time. The Government are on the side of those businesses. We will not accept a business culture where smaller firms bear disproportionate financial risk simply because they lack bargaining power.
I am grateful for the constructive engagement and support received from noble Lords across the House through the all-Peers briefing sessions and discussions with Front Benches. I look forward to working collaboratively with noble Lords during the passage of the Bill. I particularly look forward to hearing the wisdom, expertise and practical experience that your Lordships’ House will bring to this important debate.
The Bill will help to ensure that the United Kingdom remains one of the best places in the world to start, build and grow a business. It will strengthen confidence, improve cash flow, protect jobs and create a fairer commercial environment for millions of businesses across our country. Businesses that do the work deserve to be paid on time. That is the simple and fair principle at the heart of the Bill. I beg to move.
However, I recognise that there is a small risk that some businesses may be negatively affected by the changes to the late payment rules. Although that is undoubtedly not the Government’s intention, the decision to exempt transactions between large businesses risks creating an incentive for bigger firms to bypass smaller suppliers altogether. I would therefore be grateful if, when the Minister comes to sum up the debate—like him, I look forward to noble Lords’ contributions to this debate from all sides of the House—he could address whether the Government have considered this possibility and what safeguards could be created to guard against such an outcome.
Similarly, in a number of countries where mandatory late payment terms have been introduced, they have in practice tended to become accepted payment dates rather than genuine deadlines. Instead of encouraging prompt settlement, they have occasionally encouraged businesses to delay payment until the final permissible day. I hope that the Minister will address this concern in his reply; I look forward, as he does, to engaging constructively on these matters in Committee.
I also ask the Minister for some clarity on the 60-day payment term. There is often a discrepancy between when a business does a payment run and when the bank actually makes the payment. There are instances where unforeseen delays cause the payment to overrun the 60-day window, after which statutory interest is automatically applied. Can the Minister confirm whether the 60-day deadline ends when the payment is made or when it is received by the supplier? Does the legislation account for delays due to payment runs or payment system delays? Perhaps these points need more clarity in the Bill’s drafting.
We similarly support the abolition of retention sums in construction contracts. We recognise that retention payments are often far smaller than the actual cost of defects, and that they have increasingly become less a form of genuine insurance and more a mechanism for unilaterally transferring risk on to smaller contractors while preserving working capital for larger firms. That does little to improve either quality or productivity in the construction sector.
Despite this, we recognise that, on occasion, retention payments have served as a legitimate, if limited, form of protection against defective work. In the construction industry, where the cost of errors tends to range between 5% and 25% of project value, the importance of ensuring that adequate protection against shortfalls is available is self-evident. Given that the retention option is being removed from construction contracts, can the Minister please explain how the Government intend to ensure that defects in construction projects will still be rectified by those responsible?
I turn for a moment to the changes proposed to the Office of the Small Business Commissioner. Bringing upwards claims into its remit is welcome, as are the new powers to enforce compliance and to distribute fines for non-compliance. The success of these reforms will depend ultimately on resources. Greater powers and greater responsibilities must be accompanied by adequate funding. The former without the latter risks creating backlogs and inefficiency, and ultimately discrediting the important work that the commissioner’s office exists to carry out. I therefore hope that the Minister can assure the House that sufficient resources will accompany these expanded duties.
I also wish to address some broader points concerning the Government’s overall business policy. This Bill is undoubtedly a step in the right direction, but I would describe it as a small step only, because it must be seen in the broader direction of the Government’s overall legislative programme. This is a Bill that rightly seeks to support small businesses in competing fairly with larger firms. It seeks to improve cash flow and to engineer greater and fairer symmetry within the market. These are worthwhile and sensible objectives. It is a great pity that those very principles should be in such obvious contrast with almost every other area of government policy.
Small businesses will welcome this Bill, but it will do little to relieve the broader pressures under which they must currently operate. Industrial electricity costs in the UK remain among the highest in the OECD, driven by a combination of high green levies and continued reliance on intermittent energy generation. The consequence is that large sections of our manufacturing and construction sectors are becoming increasingly uncompetitive and, in some cases, simply unprofitable. At the same time, the minimum wage has continued to rise significantly beyond the rate of inflation, discouraging investment in youth employment and training opportunities. For sectors such as construction, which already endures one of the highest turnover rates in the United Kingdom, this is particularly damaging. Businesses cannot continually absorb rising labour costs while simultaneously facing higher energy prices, increased taxation and ever-growing administrative and regulatory burdens.
I must return to the Employment Rights Act. The Government’s own figures suggest that it will impose over £1 billion in additional administrative costs on businesses. Many of us suspect that this figure may prove to be a significant underestimate. Those costs will inevitably fall most disproportionately on small and micro businesses, which lack the legal resources that are available to larger corporations. When the qualifying period for unfair dismissal is reduced to six months, many small businesses simply will not possess the capacity to manage, or even adequately assess, the additional risks involved in hiring.
Six months was a late and welcome compromise, but it will still make employers think twice and twice again before hiring people. At a time when economic growth remains weak and business confidence fragile, that is deeply concerning. Given the stated intent of this Bill—to help smaller businesses survive—I hope that, over the coming weeks, the Minister will be receptive to measures exempting some of the most vulnerable businesses from further measures within the Employment Rights Act that stand to be triggered by secondary legislation.
While we welcome this attempt to improve market practices and enhance protections for small businesses, without cheaper energy, affordable labour and proportionate employment regulation the effect of these reforms will inevitably be limited. We therefore hope that this Bill marks not merely an isolated intervention but the beginning of a broader change in the Government’s outlook towards the wealth creators in our society, without whom no progress is possible. This legislation is founded on sound principles. I only hope that the same principles will come to guide future policy more generally across the full field of industrial and economic strategy.
The point I wish to raise is to question whether that is a sensible and desirable policy, given the changes in technology, recent legislation, and the current emphasis on the need to strengthen the participation of SMEs in exporting and importing. I hope that His Majesty’s Government would wish to take a position to promote a modern policy in tune with their ambition to be leaders in the digital age: I would hope we would not be seen as laggards. I therefore suggest that we might need to look at and should consider an amendment to the Bill to remove the exclusion from the regulatory powers of the Bill of international trade—imports and exports—or at least to provide a sunset for that provision.
Now, can I explain the experience that has led me to this view and declare my interest through it? My experience is derived from my chairmanship of the Special Public Bill Committee on the Bill that became the Electronic Trade Documents Act. Since that time, I have taken an interest in trying to encourage the head start that the Act gave the United Kingdom in revolutionising documentation and payments in international trade, in particular financing trade and the speed of payment, that being particularly important. One of the avenues through which I have tried to do this is by assisting in the implementation of the Act as chairman of the advisory volunteer board of the International Centre for Digital Trade and Innovation.
The Electronic Trades Document Act was a Law Commission Bill, the purpose of which was to legislate in the United Kingdom to bring about a legal regime absolutely consistent with the UNCITRAL Model Law on Electronic Transferable Records 2017, but in a way that retained the historic flexibility of English law and was consistent with the law of Scotland. It is a very short Act: it is seven clauses over three operative pages. It is a pleasure to see that two members of that committee will follow me in speaking in this debate: the noble Lords, Lord Lansley and Lord Holmes of Richmond.
The regime under the model law replaces the centuries-old traditional way in which we traded. Paper bills of lading, paper bills of exchange and paper certificates have been used for trade since the 13th century. It is a long tradition, and it takes a long time for people to get used to losing long traditions, but we must get used to this, and the Bill is an important opportunity to see how we can bring about a new system.
The new system replaces the old one with electronic documents, making the process entirely electronic. It provides better and easier access to finance. It ensures vastly speedier payment. It provides greater security than traditional paper-based documents and reduces the cost. If one wants to see a snapshot of the way in which the system works and the advantage that it brings, it is set out in a short and easily digestible recent report of the Teesside University Digital Trade Testbed on a project undertaken with the Centre for Digital Trade and Innovation, the ICC, and His Britannic Majesty’s embassy and other stakeholders in Japan.
The regime to which the Act made the UK a party is already in force in many leading countries with which we trade—the United States, Japan, France, Germany, Singapore and much of the Gulf. Its implementation is before legislatures in many other countries, including India, Australia, Canada, Mexico, Spain, China and Turkey.
As the UK was one of the first to get going, we have an undoubted leadership. It was indeed a pleasure, as I am sure members of the committee will recall, when the French came over to see how we would be implementing the Bill. Huge work is being done by the Centre for Digital Trade and Innovation and others to promote the use of digital documentation, but the UK needs more support in this. It was being done by the then Department for Digital, Culture, Media and Sport, but it now needs support from the new department.
It is important to realise that dealing with this matter in the Bill would bring huge advantages. First, it would encourage SMEs to engage more in import and export, as payment terms would be the same as for domestic trade. One does not want to see a differentiation. Secondly, it would encourage the move to electronic trade documents in the UK, with the great advantage that it brings. Thirdly, it would promote the leadership that we already have in electronic trade documents. Fourthly, it would bring His Majesty’s Government visibly behind the move to electronic trade documents. Fifthly, it would tie in with the move to e-invoicing that HM Treasury is insisting on. This is to be compulsory under the VAT regime. Sixthly, it would help achieve part of the Government’s trade strategy where it is stated, in reference to the use of digital documentation:
“The London School of Economics estimates that global adoption of digital trading systems could boost the UK’s GDP by up to 0.9%—and that even partial adoption could significantly impact the UK economy”.
I am extremely grateful to the Minister for his engagement on this point. I look forward to further discussions, before and in Committee, on how we can bring trade into the Bill, or at least prevent it excluding trade. That is so important not only to the way that we should be encouraging import and export business but to our leadership in the electronic age. I therefore look forward to hearing the views of other noble Lords on this subject and to engaging further in bringing the modern age into the Bill, in comparison to the scourges that the two preceding speeches addressed.
When the Bill reaches the statute book, it will advance the Government’s ambition for Britain to be one of the best places to start a new business, and Britain will then have the most effective late-payments regime in the G7. Knowing that payments will be made on time means that British businesses can rely on, or indeed bank on—for that is the right word—better cash flow, thereby releasing income for investment in capital and people. By delivering enforceable penalties, the Bill can change our payments culture.
I mentioned that 1.5 million small businesses are impacted each year by late payments. Some 900,000 of them are in the construction industry, so, as the Minister has made clear, the Bill will also tackle retentions in the construction industry. Retentions are justified, as the noble Lord, Lord Hunt, made clear, as security against defects, and high-quality, on-time performance matters, but retentions, as the noble Lord recognised, are not a neutral accounting mechanism. In practice, they starve supply-chain small businesses of cash. They remove cash from companies that are often working on very thin margins. The practical impact of retentions is to remove liquidity from businesses that need that cash to pay staff, apprentices, suppliers, and tax and financing costs. Retentions expose small businesses to insolvency risk and impose a costly recovery burden that is often disproportionate to the sums at stake.
These retentions are not a marginal issue. In the impact statement and in evidence to the other place, retentions were estimated at up to £8 billion a year. Some 50% of construction supply chain contractors experience partial or full non-repayment of retentions, and the construction industry experiences the highest number of insolvencies of any sector in the UK economy. This Bill, as the Minister acknowledged, goes to the heart of building a resilient construction supply chain. It will stop dominant players using market power through contractual complexity, payments delay and retention practices to fund their own working capital at the expense of smaller firms.
The Bill, if properly implemented, can tackle these issues once and for all. No longer will money earned by small companies become free working capital for larger firms. The Bill can deliver not simply legal change but a significant productivity boost. However, as noble Lords have noted in all the opening speeches so far, the devil is in the detail. So, in my remaining time, I shall ask the Minister about issues to which I hope we can return during the subsequent stages: my queries relate to enforceability, avoidance and remedies.
First, on enforceability, as the Minister is aware, while the Small Business Commissioner has been an excellent advance, construction disputes are outwith the commissioner’s powers due to the separate existing statutory construction adjudication arrangements. However, this existing construction adjudication regime is largely inaccessible for lower-value claims, so I invite the Government to consider measures to ensure that the enforcement ban that they are proposing will also be available to small construction supply chain companies. Is this the moment to consider whether the Small Business Commissioner should also have some jurisdiction in construction, or could the commissioner have a supporting role in construction payments behaviour even if the formal adjudication regime remains under the construction Act?
I turn to the second issue, which is avoidance. If the Bill is to fulfil its promise, it must prevent disguised or backdoor retentions. So does the Minister agree that the definition of “retention” in the Bill should be widely interpreted by the courts to ensure that contractors do not try to reimpose retentions by another name? In that service, will the Government commit to monitoring avoidance behaviours, including where main contractors seek alternative forms of security, which could be more expensive, more complex or simply unavailable to small companies? I encourage the Government’s commitment to use the secondary legislation powers in the Bill expeditiously when new backdoor retention practices emerge.
Thirdly, and finally, I come to remedies. The construction industry’s payment regime is already highly complex. It involves five dates and two notices. As the Minister has acknowledged, the Bill proposes to layer on top of that a further two-year transition arrangement. I encourage the Government to consider simplifying these transitional arrangements to ensure that small businesses can follow the changes without having to pay for specialist lawyers.
The Bill is a significant development in the Government’s plans for supporting growth. It will improve Britain’s payment culture and support all small and medium-sized enterprises. It will improve supply chain resilience, reduce insolvency pressures and support a more productive economy. I commend it to the Chamber.
That is indeed, as other noble Lords have said, where the Small Business Commissioner is a very important addition to our armament. The work of the Small Business Commissioner and her team is really central to ensuring that small and medium enterprises can be protected, because they are not themselves having to raise complaints against their larger customers. I hope that we thoroughly support greater powers for the Small Business Commissioner.
Is there a means by which the interventions that the Small Business Commissioner can undertake might be prompted and supported occasionally by working with the large audit firms? We know that payment terms tend to be longer in larger businesses and, when the audit firms are examining larger businesses, it would be possible for them to sample their payment terms and report to the Small Business Commissioner so that the commissioner’s team could, where necessary, investigate particular large firms without necessarily having to do so off the back of a complaint by a particular supplier.
I have one other principal point about payment terms. The Government have chosen the 60-day approach, not the option to move over time—after, say, five years or so—to the 45-day approach. I have been trying to work this out in my head and thinking about it simply in practical terms. If one is, as a company, in receipt of an invoice in the first part of the month, it should be paid at the end of the month. Quite often companies have end-of-the-month payment runs and often rest on that as an excuse for delay. But if it is in the first part of the month, it should be paid by the end of the month and if it were to move to the following month, it would exceed 45 days. If, however, one receives an invoice in the latter part of the month and it passes over the end of the month in the payment run, it would go to the end of the following month and therefore would probably just about fall within 45 days. Thinking about it in practical terms, it always seemed to me that 45 days ought to be the logical maximum payment term, and I am not quite sure I understand where 60 days comes from in relation to the practicalities of when one receives an invoice. I hope we might think carefully about whether moving to 45 days might be better in the long run.
I have one point—an important one from my point of view—on retention payments. I have never been persuaded and am still trying to be persuaded. I think I would be more persuaded if I felt confident, as my noble friend on the Front Bench was saying, that we had other mechanisms for dealing with snags and defects.
In that context, if not today then in further discussion, we might look at whether the Government are now in a position to activate fully the new homes ombudsman scheme, under the auspices of the new homes quality board. I am very much persuaded of the value of this. Many major contractors are signed up to that scheme, and we are pretty close to the point where it could essentially be made nationwide and mandatory. That might well give people the assurance they are looking for about desnagging for residential dwellings, which is an abiding problem that many buying new homes have to put up with.
As far as retentions are concerned, I have received a brief from the National Housing Federation. We were talking about social housing last week and I noted, with some concern, that it shared the concern that I have. Let me quote the National Housing Federation, which of course represents housing associations and registered providers, generally speaking, of social housing. It said that retention clauses are one of the strongest practical mechanisms housing associations have that enable them to hold developers to account on good quality standards, strong aftercare services and agreed delivery timelines for Section 106 homes. Noble Lords will recall that the Section 106 obligation on developers is the single largest mechanism by which we provide affordable and social housing.
The National Housing Federation went on to say that a ban on retention clauses will increase the risk for housing associations buying Section 106 homes. We know that housing associations buying Section 106 contracts is a particular problem; they have lacked the cash resources to do this because they are so busy trying to remedy aspects of their housing stock and meeting building safety requirements.
I ask the Minister to reflect carefully on whether we can deal with the problems raised by the National Housing Federation. It looks for an exemption for registered providers, which is not a small exemption. It would be a substantial one, but I want to be sure that we do not do something that would inadvertently further inhibit us in providing social housing. As we all know, at the same time as we are supporting the business community, we absolutely need to increase the supply of social housing. With those reservations for the moment, and with questions about the ban on retention payments, I say how much, generally speaking, I welcome the Bill that the Government have brought forward. I hope that the House will give it its fulsome support.
My second reason for supporting this Bill is that I am the founding chair of Social Enterprise UK, of which I am now patron. I am currently vice-chair of the Social, Cooperative and Community Economy All-Party Group, and a senior associate of E3M, an organisation that supports social enterprises contracting to deliver public services. Social businesses are businesses. Many are small and face the same challenges as all SMEs. They seek to make surpluses, like any business. The thing that distinguishes them, of course, is what they use those surpluses for: to fulfil their social purpose. Equally, they depend on the timely payment of invoices and suffer in the same way that many noble Lords, including my noble friend the Minister, have spoken of from delayed payments and non-payment. There is an unfairness in that, sometimes with disastrous consequences.
A recent consultation by Social Enterprise UK about procurement, asked: to what extent do you agree or disagree that requiring contracting authorities to exclude suppliers from bidding on major contracts if they cannot demonstrate prompt payment of invoices to their supply chains within an average of 60 days would help improve payment by suppliers to the public sector? Of course, there was agreement about this. One of the comments—I am glad I am following the noble Lord, Lord Lansley, saying this—was:
“A 60-day requirement should be the minimum, but we would like to see it set to at least 30 days. This reflects what the Fair Payment Code recommends for SMEs, and would also reduce barriers for social enterprises, where healthy cash flow is crucial and late payments are often a barrier to entry. We would also suggest altering the wording of this recommendation to a ‘maximum of 30 days’ rather than an ‘average of 60 days’, to reflect the importance of prompt payment of invoices”.
This is why I am pleased to follow the noble Lord, Lord Lansley, who at least suggested 45 days, and I think thousands of SMEs would agree with that quotation.
I seek assurance from my noble friend the Minister that this legislation will apply as much to social enterprises, co-operatives and community businesses as all other businesses. On that note, I welcome this Bill and I wish it speedy progress through the House.
It was the provision in the Bill to abolish retention payments in construction contracts that I found especially interesting. Here, I must declare my interests. I am a director of Hellens Residential—a for-profit registered social landlord that is part of a larger property group—and I am a shareholder in a small regional housebuilder based in the north-east of England.
The construction business model is not an enviable one. As my noble friend Lady Alexander said, it is a low-margin business. Last year, margins in the largest 100 construction firms were just 2.4%, up from 1.9% the previous year. You are paid in arrears, have a negative cash flow, and therefore have to have ready access to working capital. Your clients are sometimes debt-funded and illiquid in nature themselves. When building anything from scratch, you can take on all the risk of what is under the ground, which is the riskiest part of construction. Construction inflation over the last five years has been almost 40%, with inflation in key materials such as steel, timber and concrete hitting 60% over the same period. In short, it is not an easy sector of the economy in which to make money.
I am reminded of Warren Buffett’s remark that when a chief executive with a great reputation joins a company in a sector with a poor reputation, it is the sector’s reputation that will prevail. Construction in the UK represents about 4% of the economy and employs just under 1.5 million people. It is one of the diminishing number of areas of the economy where school leavers can learn a trade that can provide them with an adequate standard of living and, if they wish, career progression. Yet, as has been mentioned, despite accounting for just 4% of GDP, construction accounts for nearly 17% of all insolvencies in England, and current levels of insolvency are around 20% higher than pre-pandemic levels. Any changes to the business model must be considered carefully, but anything that improves cash flow in construction companies, as a number of noble Lords have said, should be welcomed in principle.
Retention payments—money held back by the customer until work is completed—are typically around 3% of large contracts and up to 5% for smaller contracts, so the sum held back is usually larger than the profit margin in the business. Half the sum, however, is paid when practical completion has been certified by an architect or a QS. That means the job is finished, so half the retention is paid over at that point. However, the other half of the retention payment is held by the customer until the defect period ends. That is the period during which the contractor has to return and fix any faults; it is typically 12 to 24 months. Often defects can take time to emerge—for example, with building work completed in spring, it might not become apparent until winter that there is a problem—but, in essence, around 2.5% of the contract sum is retained during the defect period.
If a window falls out, a heating system fails or an elevator malfunctions, the contractor is called back to rectify the fault at their own cost. This means that they have to pull people off another contract, which delays that contract, and get them to site, which could be miles away. Frankly, it is very inconvenient for them, and it can be quite expensive. They will turn up, sometimes reluctantly, and for smaller developments it is often the fact that the customer retains half of the retention payment that incentivises them to show up at all. If you have ever tried to get a plumber back to your house three months after you thought they fixed your boiler, you will get the picture. Although the industry is known for its disputes and resorting to contract arbitration, in practice companies usually try to take a commercial view on disputes. The fact that some money is retained incentivises a pragmatic approach to resolving disputes.
I have one question for the Minister, and it relates to behaviours. The noble Lords, Lord Hunt and Lord Lansley, touched on this. How, in the absence of retention payments, will a contractor be incentivised to return to a site and correct defects at their own expense, short of a customer resorting to legal or other contract enforcement action? I think the Minister said that the transition period will give time for alternative mechanisms to be given. I very much look forward to hearing more from the Minister, if not today, in the Bill’s later stages. That notwithstanding, I very much support the principles of these changes. I am pleased to note that both the British Chambers of Commerce and the Federation of Small Businesses broadly welcome the Bill. The provisions in the Bill are practical and sensible and show a real commitment from this Government to support UK business, and I welcome them.
Now, it was a big learning curve for her: she had a great eye for business and a certain business acumen, but she did not have much business experience and she was busy juggling a family life. It turned out that the first meeting with the buyer in this upmarket West End department store was during the school holidays, and she was obliged to take my younger brother. The meeting went well and an order was about to be placed, when the experienced buyer said to my mother, “Now, Mrs Leigh, what are your terms?”, and she had no idea what that meant. Fortunately, my younger brother, aged 12, was in the room and he piped up, “2.5%, 30 days; 5%, seven days”. “Fair enough”, said the buyer, and the order was placed.
In those days, it was absolutely normal for a discount to be given for payments made in anything like a reasonable time. Needless to say, the buyer took the 50% discount and paid 60 days later. Sadly, there was not much that could be done about it. In fact, most businesses, as has been said, did not have the resources to cope with that sort of thing, particularly in the days of very high interest rates, so late payments is in my family folklore. Clearly, businesses need to have this situation remedied, but I cannot help feeling, as perhaps others do, that it is a shame that a common-sense issue such as this needs some 60 pages of legislation to be regularised, with some quite turgid and difficult clauses, and the heavy hand of government has to come in, for reasons everyone does understand, but it is regrettable that this is necessary.
There is a huge amount to discuss in this Bill. Later I will come on to some matters that are not in it but might be. I will focus on one area: the role of the aforementioned Small Business Commissioner, which comes from the Enterprise Act 2016—I see one or two familiar veterans on the other side of the House who worked on it. I note that the Government are using the definition of SMEs from the Procurement Act 2023. There are quite a lot of other definitions around; there is one in the Companies Act and we have the term “less complex entities” used by standard setters elsewhere. Perhaps the Government could start off by trying to find one definition for SME companies.
As my noble friend Lord Lansley pointed out, the concern is that most small businesses will frankly not have the time or energy to use an adjudication system in the way the Government anticipate. They will not want to enter it because they will not want to get into conflict with their customer. In a perfect market, the customer can choose which supplier they prefer, and no supplier wants to be deemed to be part of the “awkward squad”. I do not understand how this will work in practice and will be interested to hear the Minister’s thoughts. It seems to me that, by the time anyone has brought a specific complaint about late payments to the Small Business Commissioner, it will have been settled long since. All we are talking about here is timing, not whether the debt is actually due. Will the SBC have a 24-hour service seven days a week? I am keen to know more.
Some of this might be covered in the regulations, not yet published, which Clause 18 anticipates. Once again, the Government are tantalising us with what might come at a later date. I very much hope we will see drafts of these regulations as the Bill progresses through your Lordships’ House, because in this instance, as ever, the devil is in the detail. It is entirely possible that the proposal for adjudication may be redundant unless a quick and effective mechanism is put in place.
Particularly interesting to me is Chapter 2 of Part 2, which will allow investigation into payment practices—not specific instances but whole practices. It is not quite clear from the Bill exactly what would trigger an investigation and who can do so. The Bill says that a large business can be investigated where it
“‘persistently’ engages in poor payment practices”,
but we need to know what “persistently” means. The wording in the Bill and the Explanatory Notes, which I have read, is not clear. Worryingly, it will allow the Small Business Commissioner not to progress matters if it does not feel that it has the necessary resources. That cannot be satisfactory, because it is less likely to have the necessary resources in respect of a very large business. Why should it get off simply because the SBC feels it does not have the necessary resources? I look forward to debating this and other areas as the Bill progresses.
As I mentioned, I want to raise something that is not in the Bill but might be, which is particularly relevant to the relationship between SMEs and their large customers. There is a growing and worrying trend of large companies forcing their suppliers to comply with certain conditions which they feel are obligatory but on which small suppliers might take a different perspective. This applies already in areas such as modern slavery requirements, but it is now being applied by those who have signed up to the UN sustainable development goals. We are half way to the 2030 deadline for hitting these goals but on track to meet only 12% of the targets, so panic might be setting in.
The 17 UN goals are a worldwide initiative of generally apple-pie good things such as ending poverty, protecting the planet and, to use their words, ensuring that all people enjoy “peace and prosperity”—I am not quite sure that every SME can achieve that, but those are the aims of the UN Global Compact. The problem is that CEOs of large companies have clearly been persuaded to sign up—maybe over a long lunch at Davos or by their PR agents—and are now forcing their SME suppliers not just to comply with these goals but to evidence that they are doing so. They are forcing them to attend webinars, go to seminars and set out specific goals that they then have to explain to their customers that they have achieved.
I have talked to SME businesses that regard this as wholly inappropriate and are struggling to be able to do business with larger companies that force them to undertake this sort of work. They just do not have the resources, but they are frightened to speak up because they do not want to lose the business. They are responsible people who carry out their business in their own way and take care to undertake business responsibly, so why should they have to go through all these hurdles just to supply a product or service to a larger company? Artificial barriers are thus eventually being created and are detrimental to SME businesses.
I am sure the Minister is aware that large companies are forcing their suppliers to comply with these UN Global Compact requirements; people are being forced into training and taking on other costs that are unnecessary. Will he consider requiring such companies to disclose where they are forcing their suppliers to enter into these compacts? I accept that we do not want to make large companies do more work in their annual reports—the average FTSE 100 company annual report already has 97,000 words—but, none the less, a line has to be drawn against this behaviour.
In closing, I particularly thank the Institute of Chartered Accountants in England and Wales, of which I am a member, as well as Make UK and the British Chambers of Commerce, for their assistance to me to date. I very much look forward to working with the Minister, who I am sure will bring his extensive business expertise to this debate.
Secondly, I ask the Minister: when it comes to the penalties, why does the Bill specify 1% of UK revenues? As has already been noted by the noble and learned Lord, Lord Thomas of Cwmgiedd, in his excellent and powerful speech, we need not only to consider the international context from a trading perspective but to understand the modern environment in which we are working. Do we not need to see something consistent with approaches that have been taken in other pieces of legislation, such as the Online Safety Act, which looks to global turnover in this respect?
The Bill is positive, with many good intentions, which I welcome, but it could be made so much more powerful and impactful if it had the golden thread of inclusion and innovation running right through it. So many of the Bill’s intentions would massively benefit from AI, data analytics and inclusion by design. Take, for example, structured payment event data. AI could perform such a profound service to the intention of the Bill in this respect. Take also the Small Business Commissioner’s enforcement action. That will result in a rich disputes intelligence database, ripe for data analytics to be applied to it.
It is worth considering a number of “no’s” currently in the Bill, which, through amendment, we need to convert to “yeses”. First, there is no digital layer or auto-enforcement provisions. The tasks and responsibilities being given to the SBC very much will the end, but without providing the means in terms of resource, funding and technologies, to set out just three. When one considers the caseload—the amount of data the SBC will have to engage with—this is completely impossible without sophisticated AI, digital case selection tools and so on. What is the Government’s intention in this respect, and, without going into the detail, would it not be better to see some more of this at the principles layer of the Bill?
A second “no” is that there is none of the data architecture required to optimise the solutions sought in the Bill. The current structure involves self- referral in bringing matters to the attention of the SBC, which will inevitably result in a reactive rather than proactive, and potentially predictive, posture on the SBC’s part. What is the Government’s intention in this respect, looking at how, with an effective data architecture framework, we could enable the use of vital data from other parts of the state in the late payment process?
So much of this is about small and medium-sized enterprises and the asymmetry they often experience. The Bill should be focused on SMEs, because, as the Minister rightly identified, they are the backbone of the UK economy and are often described as such by government; but so much more needs to be delivered in order to support that spine. It is easy to talk about, but it is much more difficult to put in place all the measures required to support them. The Bill has the potential to do that, yet it contains none of the digital tools that would enable SMEs to engage with this new process. In order to track progress, to understand their rights, to calculate what is owed to them and to understand the pathway to the enforcement and investigation process, SMEs—which are often the furthest away from digital inclusion, enablement and empowerment —will be in a similar position without greater government action to support, enable and empower them.
The Bill contains nothing on equality. Late payments are not a neutral concept; they fall disproportionately on SMEs and, often, on minority owners, older owners, disabled person owners and community-based businesses. What is the Minister’s view on the analysis we would like to see in the Bill of where late payments currently fall and their impact from an equalities perspective?
Similarly, there is nothing in the Bill on ESG, yet the supply chain is vital to this. Late payments all too often occur at what is described as the lower or bottom end of the supply chain. What provisions does the Bill contain to support the Government’s ambition for supply chain transparency and positivity? Currently, because of the way late payments impact, there is no sense of how that is measured from that critical ESG perspective.
There are some excellent provisions in the Bill, and with amendment they can be excellent plus. We need to empower and enable small and medium-sized enterprises to do what they do best: run and grow brilliant businesses and provide great goods and services right across the United Kingdom. Through amendments, we can make the Bill better economically and environmentally for everybody. With amendments, we can make the Bill well worthy of prompt payment.