By Daniel Hunter

With small to medium sized enterprises (SMEs) accounting for 99.9 per cent of all private sector businesses in the UK in 2012, 59.1 per cent of private sector employment and 48.8 per cent of private sector turnover, the economic recovery of Britain lies in their hands.

But, according to 2B Interface, the leading temporary and permanent staffing solutions agency, late payments are killing the sector and now is the time to look at punitive measures to ‘punish’ the late payers where it hurts — in the bank balance and the mechanism to do this — a simple rule change to VAT.

“I think everyone is agreed that the way out of the recession depends on small and medium sized businesses growing," Beatrice Bartlay, Managing Director of 2B Interface, explained.

"Over the past few years the banks have been criticised for not lending to this sector but in reality a great deal of the borrowing requirement is to fund credit demanded by public companies.

“Many of these public companies are currently hoarding the cash gained by getting extended credit which does not help the economy at all. If the public companies need credit, they are in a better position to borrow from the banks. Furthermore, according to some industry experts UK Plc is currently hoarding in excess of £754 billion of cash on their balance sheets so why are so many holding back recovery by demanding late payment terms from their suppliers in turn?

“Small companies do not want to upset large customers and it would be counter-productive if that sector is seen to be attacking the large companies. The only “attack” so far has come from shaming the companies by requiring disclosures in the accounts of large companies of credit taken. But reputational damage is limited and for many small companies the risk is that they would be the biggest loser if they challenged their customer over late payments.

“So the answer has to be to look at the cost of credit; one way of solving the problem is to make it expensive to take it. But there is a flaw as statutory interest is difficult to enforce by suppliers and it is not expensive enough to encourage payment.

“The rule change would be that every company, large and small, will have to pay over VAT on all invoices for goods and services received which at the date of the VAT return are unpaid for more than 60 days. This would apply to whether the original invoice was zero-rated or standard rated, so that suppliers of zero-rated goods and services are not disadvantaged.

"The VAT paid over would not be recoverable when the relevant invoice was paid. This would have the effect of making any goods or services supplied where the invoice is unpaid after 60 days 20 per cent more expensive than similar goods and services paid for within 60 days. HMRC needs to consider this simple rule change which in one fell swoop would release cash throughout the supply chain and give Britain’s SMEs a chance to thrive and prosper,” she concluded.

Join us on
Follow @freshbusiness