European Union backtracks on 5% penalty for late contract payments

MEPs have voted against imposing a 5% penalty on local authorities and other public bodies who fail to settle invoices within 30 days, accepting amendments to the Late Payments Directive after lobbying from the Local Government Association and other public sector representatives.

As originally drafted, the proposed directive would have enabled creditors to demand up to 5% of the invoice value from public sector organisation if their bills were not paid after 30 days, a levy that would not have applied to private sector companies. Instead, on Wednesday, 28th April, the European Parliament's Internal Market Committee voted to increase the statutory interest rate payable if a payment is late to the reference rate plus at least 9%, up from the 7% proposed by the European Commission. In addition, creditors would receive €40 (£35) in damages to cover administrative costs.

Under the proposed directive, as presently drafted, all invoices for transactions between public sector operators and private companies will be required to be paid within 30 days, although this can be extended up to 60 days if “special justification” can be shown. One exception to this rule will be public health institutions and public medico-social institutions, which will have 60 days as their standard deadline for paying bills to private contractors.  

The 30-day rule will also apply to business-to-business transactions, although businesses will have the flexibility to extend this period to 60 days or more at the contracting stage, provided the extension does not cause unjustified damage to either party.

The Internal Market Committee adopted the amendments by 30 votes to 0, with 6 abstentions. The plenary vote on the directive is scheduled for May or June in Strasbourg.

Cllr David Parsons, chairman of the LGA's improvement board, hailed the vote as "a victory for common sense and a positive step forward which will lift the threat of unnecessary bureaucracy from descending on the job of getting paid."

He added: "Small and medium-sized businesses find late payments a problem irrespective of whether they are from the public or private sector. Equal payment of public and private partners in the penalties regime is essential.

"The previously proposed 5% penalty was a potential profiteers' charter for companies to extract money from the public sector by submitting badly drawn up or inaccurate invoices. Today's decision is good for business and the public sector."