Contractors working through umbrella companies or limited companies may welcome news that end-clients who make late payments will soon be liable to minimum fixed sum compensation penalties.

The coalition has brought an EU directive on late payment forward so that it will take effect in 2012 and not in 2013, as originally planned. The directive will impose a maximum 60-day deadline for payment on commercial contracts unless suppliers, such as contractors, have already agreed to a longer period.

From next year, any terms offering payments in excess of the 60-day limit are likely to be torn up in UK law courts as grossly unfair and unlawful. Standard payment terms set out in the directive are set at a maximum of 30 days, and include a £35 fee for costs if exceeded, along with interest payments of 8%. This period could even be reduced to ten days, according to Liberal Democrat MP for Solihull, Lorely Bert.

Ms Bert seemed to have one-person contractor companies especially in mind. She told the House of Commons “First-tier suppliers are often paid promptly but keep the little guys further down the supply chain waiting. If first-tier suppliers are being paid quickly it should be extended to everyone down the supply chain, and the further down the supply chain a business is the more important prompt payment is to it.”

The Professional Contractors Group (PCG), which supports the EU directive as a “powerful adjunct” to existing legislation, believes that charges and compensation payments should be automatic for late-paying customers. Individual contractors, the PCG warns, may be reluctant to apply the rules for fear of losing their clients.

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