The Last Word on Retention Deposit Schemes

Construction
By Mark Farrar, Chief Executive of AAT

8 October 2018

Many of the 400,000 small businesses we serve have been stung by appalling payment practices by larger organisations: Mark Farrar on why retention deposit schemes are needed.

The Association of Accounting Technicians (AAT) has recently joined a growing coalition of organisations supporting Peter Aldous MP’s private member’s bill relating to retention deposit schemes.

The organisations represented in the coalition support any solution which will lead to greater protection for Britain’s small and medium-sized enterprises (SMEs), through securing monies retained from businesses for goods and services already supplied.

I believe the idea of withheld monies being held in an independent, government-backed account is long overdue.

Should such a solution come to fruition, the all-too-common practice of payments being unreasonably withheld from SMEs would come to a necessary end. This means the risk of small businesses losing retentions due to bankruptcy of larger contractors – something that 44% have already reported – would be eliminated.

Critical for the economy

Having personally spent many years in the construction industry, and watching the dust still settling from the collapse of Carillion, I believe the idea of withheld monies being held in an independent, government-backed account is long overdue.

That is why AAT became the first accounting body (and 80th organisation overall) to offer its support. In all, signatories representing more than 500,000 businesses and self-employed professionals support the proposal, along with more than 150 MPs.

It’s critical for the economy that small businesses which will not have the time or legal resources to recover withheld monies are supported.

Some £8bn of the £10.5bn annual construction industry turnover held in retention has, as yet, remained unpaid over the past three years.

The Department for Business, Energy and Industrial Strategy (BEIS) reports some £700m was lost by SMEs due to contractor insolvency across the same three-year period, and this figure has already doubled in 2018 as a direct result of Carillion. Lessons must be learned.

The current law is lacking on any real punitive action for withheld payments, meaning that SMEs are too often floundering in cash-flow crises.

Money held in retentions should be returned within 12 months, but often it takes considerably longer than that – in some cases, more than a decade. This clearly isn’t good enough for the construction industry, or the millions of SMEs which serve the sector.

At AAT we are very pleased to add our name to those of organisations including the Federation of Small Businesses (FSB), Institute of Directors (IoD) and the British Chambers of Commerce (BCC).

More than 60% of our 140,000 members are employed by, or own, a small business, and our licensed accountants provide services for more than 400,000 British businesses – many of which have been stung by appalling payment practices by larger organisations.

Why the current law needs to change

The current law is lacking on any real punitive action for withheld payments, meaning that SMEs are too often floundering in cash-flow crises they have not been responsible for causing.

Releasing retentions that the contractor has been keeping back for far too long in order to boost their own working capital could, instead, help many thousands of SMEs to thrive, or indeed, survive. It’s a system that works well with shorthold tenancy deposits, where landlords have, since 2007, been required to hold their lodger’s deposit in a government-backed scheme.

The end of poor payment practices needs to be broader and underpinned by legislation.

At present, we know of some initiatives designed to support small businesses, such as the Prompt Payment Code, where organisations which have signed up (including AAT) work to a best practice of paying suppliers within 60 days, and preferably within 30.

But it’s not enforceable, and typically the companies that have agreed to abide by the code have already employed best practice in this area. The end of poor payment practices needs to be broader and underpinned by legislation.

Perhaps after it comes to fruition we may yet see a dent in the trend that currently leads one in two SMEs to fail within two years of starting.

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