§ 1.11 p.m.
§ Baroness Miller of Hendon rose to move, That the draft regulations laid before the House on 27th January be approved [10th Report from the Joint Committee].1446
§ The noble Baroness said: My Lords, this statutory instrument makes amendments to the accounting schedules of the Companies Act 1985. I shall now deal with the requirement to disclose payment policies in the directors' report. I apologise to noble Lords if the first part sounds like a repeat performance.
§ Your Lordships will be aware that the problems caused by late payment continue to give concern to a number of small businesses. Indeed, it was one of the main anxieties highlighted last year when we gave small firms the opportunity to shape future policies through the regional Your Business Matters conferences. While there are no easy answers to tackling the problems caused by late payment, the Government are committed to helping small businesses. We have consulted widely and have introduced a number of positive measures to tackle the problems associated with late payment.
§ These regulations are just another element of that package of measures designed to help small businesses to help themselves and to change the culture towards payment practice. We have tried to find a straightforward way of stating payment performance which provides useful information in a readily understandable way. The figure to be disclosed represents in very broad terms the average time taken to pay suppliers. To ensure that all companies are working on a comparable basis, only one method has been stipulated in the regulations. This figure will help meet the needs of small suppliers by providing additional and easily understandable information on the payment practices of larger companies.
§ The new disclosure requirement is a logical next step to complement the payment policy disclosure we introduced last year. It is therefore only sensible that it should apply to the same companies. These are public limited companies and their large private subsidiaries. The new requirement will go in the directors' report alongside the policy disclosure. This should help smaller supplier companies which will not have to go through pages of notes to the accounts to search for just one figure. It should also enable users of the information to keep track, in a relatively straight forward way, of how a company's performance measured up to its stated policy year-on-year. No doubt, it will also give directors at the annual general meeting the opportunity to explain if these figures diverge.
§ The main aim of the regulations is to help small businesses to help themselves. We are providing useful information on the payment performances of PLCs and their large subsidiaries in a readily understandable format. We have consulted with the business community to identify the least burdensome method of doing this and the information should be relatively straightforward for companies to produce.
§ This new requirement is one of a number of measures implemented to tackle late payment. The regulations build upon the payment policy disclosure that was introduced last year and will enable small businesses to obtain more details of the payment record of larger companies that they may be considering doing business with. This measure should not, however, he seen as a substitute for proper credit management procedures but as an additional tool for small businesses which provides 1447 easy to understand information on the payment records of large businesses. As such, it is a valuable tool and shows how this Government are able and willing to listen to the views of the small business community and to act on its wishes and in its interests. I commend the regulations to the House.
§ Moved, That the draft regulations laid before the House on 27th January be approved [10th Report from the Joint Committee].—(Baroness Miller of Hendon.)
Lord Bruce of Donington
My Lords, I am grateful for the Minister's explanation of these new regulations dealing with statements of payment practice. They come not a moment too soon. For many years now it has been the practice of some large companies—not all—and some government departments—but not all—to delay payment to some of their suppliers that lacked the protection of bigness. That is particularly applicable to small businesses, many of which, over the past 18 years—and even before that—have literally gone out of business because they have failed to get bank support in respect of some of their debtors that have delayed payments for as long as possible.
In connection with this, I observe that the regulations will be signed by the Parliamentary Under-Secretary of State for Small Businesses, Industry and Energy in the Department of Trade and Industry. I suppose there is a certain poetry about that because the president himself, the right honourable gentleman the Member for Henley, revealed in his memoirs, published comparatively recently, that one of the foundations of the success of his businesses was the delay he was able to enforce in paying his suppliers. In fact, the document shows that he had some pride in that. His companies paid up at the last possible moment before the coming to court of the writs that would be issued in some cases.
Still, I do not make any point of that now. We are in a very friendly pre-election atmosphere and I would not wish to take undue advantage of it. I understand that since the parliamentary row was created on this matter, mainly from this side of the House, the payment of government departments to their suppliers has considerably improved. I am told that in 85 per cent. of the cases involving government department payments are made within a reasonable time and within the time stipulated by the government department to the suppliers themselves. Mind you, 85 per cent. still leaves 15 per cent., and 15 per cent. of outsourcing government requirements to subcontractors still represents a considerable sum within the national turnover. Therefore, I sincerely hope that the performance will improve.
These regulations deal with companies and the consequent alterations or additions to the Companies Act. I have no complaint about the content of the regulations, which, I understand, have been discussed with the representatives of small business interests and my own profession. Incidentally, I should declare a professional interest in that I am a practising chartered accountant and have to deal with matters of this kind.
What troubles me a little is that the information is to be given not in the notes to the accounts, but in the directors' report. Doubtless there is the very good reason 1448 of convenience, but I am bound to point out that the contents of the directors' report, unlike notes to the accounts to which the report relates, are not subject to surveillance and certification by the company's auditors. It is to be hoped, even though the report contains the particulars required and being unaudited, that they are going to be reliable. I sincerely trust that that will be the case because if not it would be a matter of serious worry.
If one refers to the particular parts of the regulations that have some impact on this, one has to look only to the disclosure in the directors' report:if the company's policy is different for different suppliers or classes of suppliers, the report shall identify the suppliers to which the different policies apply".It continues,In this sub-paragraph references to the company's suppliers are references to persons who are or may become its suppliers".I imagine that that can be quite a lengthy addition to the directors' report which, I am devoutly assured, is read eagerly by all the shareholders.
But what happens to the suppliers themselves? If the company is a very large one it may have perhaps 50 or 70 suppliers. How are they going to get this information? It is no requirement of the Companies Act that the directors' report should be circulated to the suppliers of the company. The accounts of the company are supplied to the shareholders with a copy in due course to the company's file in Companies House. How is a disgruntled supplier going to go about pursuing the company concerned which he is supplying and against which he may have a complaint?
First, he has to go to Companies House and get the information required, and that is not always very easy. It is also time consuming. Then he has to wade all through the material to find out exactly how the company has complied with this particular regulation. It is quite true that if a supplier belongs to a trade association looking after his or her interests or a small company's interests, then that association may have a routine examination of the files of directors' reports at Companies House. All this does not make the information required readily available to the people it most concerns.
I have no doubt that we shall be told, with some justification, that the very existence of this regulation of itself may do much to address the evils of late payment to suppliers and that may well be so. But I would have thought that without some surveillance at some point by the company's auditors, some of the reports are not always going to be reliable, and once that becomes known, then much of the deterrent effect will not be present.
One welcomes the regulations themselves. I believe that it was a great mistake to put the material in the directors' report rather than to formally incorporate it in the notes to the accounts, which, as your Lordships know, are subject to audit by the auditors of the company. I press that point with diffidence because it would mean increased fees to my profession and I do not like to stomach that, of course. Being a very modest man, I would not wish the company to bear unnecessary 1449 costs. The best thing for companies to do, therefore, if they want to avoid the ultimate imposition of my own profession on their activities, is to make quite sure that they never make a mistake and pay all their suppliers promptly as they should.
§ Lord Haskel
My Lords, I too thank the Minister for explaining the statutory instrument and we welcome it but under the "too-little-too-late" heading. I agree with my noble friend Lord Bruce that the matter of late payments has been discussed for many years and I thank him for reminding us that the Deputy Prime Minister told us that is how he financed his business many years ago. Fortunately, business thinking has moved on since then and payments now form one part of the relationship between customers and suppliers. That of course is why this proposal is too late.
It is too little because choosing a balance sheet ratio, as my noble friend Lord Bruce will know, is open to all kinds of manipulation. For instance, a company can be a bad payer for 11 months but pay promptly for one month before the end of the financial year and the ratio will then look very good. Also, many businesses are seasonal and if the financial year-end is at a time of low purchases, then again the ratio will look good. Perhaps the Minister can tell us how this manipulation can be dealt with.
I also believe that this proposal misses the essential point that it is not necessarily quick payment that is important in running a small business, but payment on time. Many small firms give extended credit and cost it in. What firms need to know is which companies pay on time, not necessarily which of them pay quickly. The culture of payment practice needs to be established within the trading relationship between the customers and the suppliers. Customers want good, reliable suppliers as they are essential to their own business; and suppliers want good, paying customers. This culture of mutual dependence needs to be encouraged.
I agree with the Minister that it is important to encourage best practice and that that involves credit management and a system of discounts. In addition, I wonder why companies should not be encouraged to adopt the British Standard for Prompt Payment (BS 7890). Announcing the adoption of this standard will overcome all the balance sheet manipulations. The standard can be adopted too by local authorities, government departments and other institutions which do not trade as companies. As part of that best practice auditors could report on the company's record of keeping to their prompt payments policy—how many days early or late they are and not just how long they take. That could be in the audited accounts and not in the directors' report. I often think that the DTI is at its best when it is suggesting and encouraging best practice. In that way we could be doing a lot more to encourage prompt payment.
Setting an example is also important. The Government have promised us league tables on their own payment performance. The initial record was not good so let us see whether the league tables produce an improvement. But if they are an incentive, why does not the Minister adopt Labour's proposal of collating the payment records 1450 of those companies which have reported on them and publish them in the form of league tables? That would help deal with the point made by my noble friend Lord Bruce about how firms are going to find that information. In this way small firms can see for themselves the relative performance of large companies. One may never know, but it may shame some companies and debtors into improving their performance.
As regards the statutory right to interest, which is always involved with this matter of prompt payment, business is divided. I believe that a statutory right could motivate companies to pay on time, but I believe that perhaps that would only work largely between major companies because small ones are not going to sue major companies for the money. The Minister said that the Government are anxious to keep reporting requirements to a minimum, but the Minister may have noticed that recently companies are voluntarily reporting more and more about things other than their financial record. They are reporting on corporate objectives, the development of skills, training, new technology and their relationships with suppliers and customers. In the context of their relationship with suppliers, companies can report on how well they have done regarding their payments policy in terms of both time and promptness.
It is important to encourage best practice because, as my noble friend Lord Bruce reminded us, late payments have helped to drive many small and medium-sized companies out of business or have caused them in turn to pay their suppliers late and thereby set up a chain of trouble. This is a serious matter. We should like to see much more done to change the culture, but we welcome the regulations as a first step.
§ 1.30 p.m.
§ Baroness Miller of Hendon
My Lords, noble Lords have asked many questions and I very much hope that I shall be able to answer them all satisfactorily. I shall read Hansard carefully to see whether I have replied to all of them and if I have not managed to do so, I promise to write to noble Lords.
The noble Lord, Lord Bruce of Donington, explained how very bad it is for a small company to be kept waiting for payment. I totally agree. As the noble Lord rightly said, that was one of the reasons for introducing the regulations. The noble Lord commented on what my right honourable friend the former President of the Board of Trade, now the Deputy Prime Minister, said about late payment. I was interested that the noble Lord, Lord Haskel, also commented on that. So perhaps I should start by saying that the remarks cited are not exactly what the Deputy Prime Minister said. He highlighted the fact that many small businesses are dependent upon trade credit and that if there are temporary cash flow difficulties they will need tolerance from their creditors and the flexibility to negotiate payment terms. That is not condoning late payment; it is recognising a fact of business life. Businesses can, and should where possible, protect themselves from 1451 those who abuse their trust. Effective credit management procedures will reduce the number and degree of payment problems that small businesses face.
Lord Bruce of Donington
My Lords, I am grateful to the noble Baroness for giving way. Before she parts company with the position of the right honourable Member for Henley, perhaps I should advise her that I can if necessary—and shall—confront her with the quotation from his book, which I have in my possession, in which he boasted of the fact that he paid as late as possible in order to found the prosperity of his business.
§ Baroness Miller of Hendon
My Lords, I have no doubt at all that the noble Lord will indeed show that to me. The noble Lord also commented on the fact that in many respects the Government are the worst offender when it comes to late payment. We are now constantly monitoring our payment performance. I think that that is very good news and something to be applauded.
The noble Lord, Lord Bruce, also asked why the disclosure should appear in the directors' report and not in the actual accounts. I know that that has nothing to do with the fact that the noble Lord happens to be an accountant because the noble Lord actually said that that was not why he had made the suggestion. We believe that putting the new requirement in the directors' report, alongside the policy disclosure, should help smaller supplier companies who will not have to go through pages of notes to the accounts to search for one figure. It should also enable users of the information to keep track in a relatively straightforward way of how a company's performance measures up to its stated policy year on year. No doubt, it will also give directors at the annual general meeting the opportunity to explain any divergence of the figures. It will not be a lengthy addition to the directors' report. It is a minimum requirement. We are trying to deal with this problem by means of a light touch. It is always open to directors, however, to explain and to present additional evidence when questioned.
The noble Lord was also concerned about how the requirement would be enforced. He felt that if the information was in the directors' report, it would not be as secure and safe, as it were, as if it formed part of the auditors' responsibility when preparing the accounts. Under the Companies Act, it is a criminal offence for company directors to fail to comply with the disclosure requirements in the directors' report. Of course, the noble Lord, Lord Bruce, knows far more about that than I do. In addition, it is currently the case that auditors are required to ensure that information given in the directors' report is consistent with that given in the accounts. There is an obligation on them to do that. Furthermore, any supplier is entitled to ask for annual accounts from any company that he wants to supply.
I turn now to the questions asked by the noble Lord, Lord Haskel, who was concerned about whether there might be some "manipulation" of the figures. I believe that the noble Lord used that word. We do not believe that companies will manipulate their trade creditor figure at the end of the year simply to achieve a better 1452 payment practice figure as that would have an adverse effect on their overall cash flow and on their liquidity position. It could be the case that the year-end figure for trade creditors is unrepresentative. However, overcoming that would require a more onerous calculation; for instance, through requiring a monthly rather than an annual calculation, which would increase compliance costs and so negate the overall advantage of the proposal.
The noble Lord, Lord Haskel, was also concerned that there might be seasonal distortions in the overall manipulation of the figures, as he put it. I hope that any fluctuation due to seasonality would be explained by the company. The only way of avoiding such a fluctuation would be to devise a more onerous calculation, for instance, through requiring a monthly rather than an annual calculation. However, that would increase compliance costs and negate the overall advantage of the proposal. As I said earlier, we have tried to deal with this problem by means of a light touch. I believe—I stress that this is only a belief and that if I am wrong I shall write to noble Lords and place a copy of my letter in the Library—that there was wide consultation on the point and that this was felt to be the best way of dealing with the problem.
The noble Lord, Lord Haskel, was also concerned about how long it takes a company to pay its creditors. He said that a supplier would want that information. Any requirement to provide such information on a detailed statistical basis would be quite burdensome, but it will be open to companies to comment on their performance. As the payment performance figure will be reported alongside the statement of payment policy, any discrepancy between the two will be apparent to readers of the accounts.
§ Lord Haskel
My Lords, I thank the noble Baroness for giving way. The point I was trying to make was that it is not the length of time taken to pay that is important—firms sell credit; many firms give long credit and cost it in—but the promptness of the payment. If somebody is due to pay in three months' time, what matters is whether they pay in three months or in four months. That extra month of credit is what causes the difficulty.
§ Baroness Miller of Hendon
My Lords, I know that the noble Lord suggested that the Government should produce or introduce league tables showing that performance so that everybody can have access to such information. We do not have any plans to do that. The disclosure of payment performance will be publicly available in the directors' reports of companies which are filed with the Registrar of Companies. It will, of course, be open to anyone who would like to produce league tables of such information to do so. As an aside, I should point out that there are an enormous number of companies and that I am not quite sure of how practical such a suggestion might prove. In any event, the Government do not see that as their role.
The noble Lord, Lord Haskel, also asked why the Government have again rejected legislation on a statutory right to interest. The recent review of the case 1453 for legislation highlighted concerns about the possible effects of statutory interest, particularly on small businesses. It was notable that a number of organisations representing the interests of small firms had changed their views on the merits of legislation. The vast majority of such organisations are now opposed to statutory interest. Concerns continue to be raised that legislation would be used primarily against small businesses rather than for and by them. As the noble Lord said, small businesses would be reluctant to use such legislation for fear of jeopardising their business relationships and legitimising late payment, and large businesses would simply extend their credit terms.
The noble Lord, Lord Haskel, also asked me about BS7890. Both the Department of Trade and Industry and Her Majesty's Treasury have acknowledged that they will be adopting that standard. We believe that all other departments will follow their lead.
It may be that I have not answered all the points that have been raised by noble Lords. I will ensure that a fuller answer is provided if my response has not covered the points that have been made.
On Question, Motion agreed to.