Q&A: What the UK Procurement Act 2023 means for B2B payments

What is the UK Procurement Act 2023?

The Act “provides for simpler procurement processes to support small businesses and innovation, and to protect against national security risks in public contracts”, according to the UK Government. It received Royal Assent on 26 October 2023 and is expected to come in force in Autumn 2024.

With 50,000 businesses closing each year in the UK due to suppliers not being paid on time, the Procurement Act 2023 should be a welcome piece of legislation. A 2022 survey found that 55% of the British public would support more controls to prevent late payments. In the same year, PwC determined that the length of time taken for invoices to be paid to SMEs reached a five-year high. The FSB concurred, finding that 25% of UK small businesses had reported an increase in late payments in the three months prior.

As digital payments become the norm, there is simply no excuse today for failing to pay promptly. With this Act, those who pay on time will reap the benefits of closer relationships throughout the supply chain. Those who do not, may find themselves removed from preferred buyer lists.

Why has it been implemented?

The government had hoped that its Procurement Policy Note 08/12, now replaced by 10/23, would help reduce late payments by incentivising prompt payment. It aimed to make it more difficult for companies to bid for government contracts without a proven track record of paying promptly. The Procurement Act 2023 will enshrine this in law, aiming to make payment within 30 days common practice in the UK.

The new rules aim to avoid unfairly penalising businesses that lack the resources of larger suppliers, making it easier for suppliers of all sizes to do business with the public sector. This will also prevent unfair practices where larger businesses effectively treat smaller businesses as a free line of credit, by paying late on a regular basis.

So, what are the new rules?

In simple terms, the Act aims to ensure that public sector contract payments of £30,000 or more are always made promptly. It details that contracting authorities must publish specified information about any payment made for more than this amount under a public contract. This information must be published before the end of a 30 day period, beginning with the last day of the quarter in which the payment was made.

Section 68 of the Act requires all authorities to pay undisputed invoices within 30 days of the date the invoice is received, or for which the payment is due. Section 73 of the Act ensures that this obligation passes down through all suppliers in the supply chain (i.e. those who have subcontracted some or all the contract requirements), and who will therefore have to abide by the same terms for prompt payment.

More widely, the Procurement Act 2023 also removes five existing procurement procedures and replaces them with three simpler options: direct awards of contracts; single-stage competitive tendering processes, with no restrictions on who can submit for them; and other competitive tender processes that contracting authorities deem appropriate.

Will the Procurement Act 2023 cause a payment processing nightmare for UK businesses?

No, businesses should not be at all worried by this new Act. Technologies and payment options today mean there are multiple ways to ensure easy compliance and therefore remain open to government contracts.

Buyers can use commercial cards to extend working capital though lines of credit, in many cases for 30-90 days, offered by their card issuer. This means a buyer can pay their supplier faster, while enjoying extended terms with their bank.

Straight-through processing (STP) and virtual cards are also helping businesses automate payments from buyers to suppliers, reducing cost and friction in transaction while strengthening buyer-supplier relationship through choice in payment methods. STP is buyer-initiated rather than supplier-initiated, flipping the entire established B2B payment process on its head to enable buyers to make payments quickly, eliminating card terminals and online pay pages. Accounts Receivable processes can also be enhanced with payment notifications to automate reconciliation and payment allocation.

The Procurement Act 2023 is an opportunity for all businesses to achieve a level playing field, paying a fair amount in a fair timeframe.

Is there anything else interesting in the Act?

A couple of other details that businesses may find interesting include changing “Most Economically Advantageous Tender” to “Most Advantageous Tender”. The Government is broadening the scope of what is considered value for money, intended to encourage consideration of value-adds such as technical, social or cultural benefits and looking beyond a short-term vision led primarily by price.

And while we don’t want to scare any business that is or wants to be involved in public sector contracts, it’s worth noting that as part of the Act’s focus on transparency, ministers will be able to place businesses on a “debarment list”, which removes a supplier from contracting authority markets. This is intended as a last resort measure only for cases where suppliers perform poorly on contracts and show little attempt to rectify any issues.

With the Procurement Act 2023, it pays to pay on time.