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What is a Prompt Payment Policy?

All self-employed individuals and small business owners will have experienced the frustration and inconvenience of a late invoice at some point. There are few things in working life as sobering as sending emails and making phone calls begging for money that you earned weeks or even months ago. That’s why the recent changes to the UK’s prompt payment policy (or prompt payment code) are so welcome.

What is the prompt payment code?

The prompt payment code (PPC) is a standard set forth by the government that ensures businesses are paid what they are owed promptly. It was created by the government in 2008 after businesses had made frequent pleas for a change in payment culture so that late  invoices would hopefully become a thing of the past. It established a set of principles for paying fairly and on time that all signatories must abide by.

The code states that:

•   All suppliers should be paid within the timeframe established in the contract (generally 30 days and rarely any more than 60 days).

•   They should be paid within the terms agreed upon and without attempting to change terms or length of payment on unreasonable grounds.

•   Suppliers must be given clear guidance on all payment procedures.

•   A system must be in place for dealing with payment disputes.

•   If there is a legitimate reason for an invoice being delayed, the supplier must be  informed and advised.

•   Lead suppliers should encourage the adoption of the code within their supply chain.

When it comes to government contracts, meanwhile, the government is committed to paying 90% of all undisputed invoices within 5 days and 100% within 30 days. This is a standard that has also stretched into the public sector in recent months.

It’s also worth noting that all businesses that have committed to the prompt payment code can use the official PPC logo on their website and documentation.

Changes to the prompt payment code in 2021

In January 2021 it was announced that changes were being put in place that would strengthen the prompt payment code and ensure the majority of small businesses would receive payment within 30 days.

The changes came into effect on July 1st and stated that all code signatories must pay 95% of invoices to all businesses with less than 50 employees within 30 days. They also state that they must recognise the right of suppliers to charge interest on late payments if they are paid late without legitimate justification. All small and medium businesses that sign the policy must also supply a clear contact point for payment queries and should make annual payment performance reports.

Currently, the code has over 3,320 signatories and while it is completely voluntary, larger enterprises can still be suspended if they’ve paid less than 90% of their invoices after 60 days.

Why the prompt payment policy is important

For businesses, signing up to the prompt payment code reveals mutual respect. It shows that, as a business and as a brand, you care about not only your suppliers but the standards of the industry as a whole.

For small businesses, it’s also beneficial because the more people that sign up to the code, the more likely they are going to benefit from it in future. However, even if you are not signed up to the code, we would always recommend paying invoices within 30 days simply as good business practice.

We can help

If you’re interested in finding out more about prompt payment policy, or any other aspect of your business finances, then get in touch with our financial experts at GoCardless. Find out how GoCardless can help you with ad hoc payments or recurring payments.

GoCardless is used by over 60,000 businesses around the world. Learn more about how you can improve payment processing at your business today.

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