Internal market, industry, entrepreneurship, SMEs and statistics

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Late Payments Directive

Overall state of play:

Commission proposal: adopted on 8 April 2009, COM(2009)126
Legal act: adopted, Directive 2011/7/EU 16 February 2011
Application from 16 March 2013
Evaluation: finalised, COM(2016)534 and SWD(2016)278, 26 August 2016;
Commission proposal: ongoing; on 14 September 2022, the revision of the Late Payment Directive as part of the relief measures for SMEs was announced.

State of play, main conclusions, outlook

The Late Payment Directive (Directive 2011/7/EU) is a recast of Directive 2000/35/EU, which was repealed. It aimed to improve the effectiveness and the efficiency of remedies for late payment through:

• the establishment of maximum payment periods both in B2B and in transactions where the debtor is a public administration;

• a straightforward entitlement to interests and compensation for late payment,

• the definition of unfair commercial practices.

Although the evaluation of the Directive carried out in 2016 concluded that the Directive was at an early stage of its lifecycle, subsequent assessments and investigations have highlighted the impacts of the inherent weaknesses of the Directive. Both the Commission’s study of 2018 on measures in commercial transactions between businesses¹ and the Resolution of the European Parliament of 2019² concur that the Directive’s effectiveness is hampered by:

1) lack of a strict maximum payment deadline in relations B2B,

2) lack of strict enforcement provisions, including monitoring obligations,

3) lack of clarity about the concepts of “unfair” and “grossly unfair”, which make small operators vulnerable to the abusive practices of larger ones.

Despite the adoption of the Directive eight years ago, only less than 40% of payments in the EU are made within the contractual deadline agreed, and still 1 out of 4 businesses goes bankrupt because of late payments. In certain sectors, such as construction, whose value chain is made predominantly of SMEs, this ratio is 1 out of 3. A Eurobarometer survey on SMEs and start-ups³, revealed that late payments are the second most critical barrier for growth and transition towards sustainable and digital business models, after administrative burdens.

On 14 September 2022, during the SOTEU speech, President Von der Leyen announced the revision of the Late Payment Directive as part of the relief measures for SMEs. The revision of the Late Payment Directive has been included in the Commission Work Programme for 2023.

Estimated savings and benefits

The evaluation of the Directive showed that each day of reduction in payment delays results in estimated savings of EUR 158 million in costs for financing to EU businesses. Thanks to the Directive the average payment period in business transactions in the EU has dropped by more than 10 days since 2013. Further investigation confirmed that if all commercial payments were made on time, the cash flow liberated and reinvested in the economy would pay for additional 6 million jobs in the EU every year.

Fit for Future Platform

The Fit for Future Platform adopted its opinion on Directive on combating late payment in commercial transactions on 8 December, in written procedure. The opinion includes ten suggestions of a wide range non-exclusive measures, divided in short term and long term measures to simplify, modernise and reduce potential burdens in the area of late payment regulated by the directive. Several of the Platform’s suggestions are also being taken into consideration in the framework of the revision of the Late Payment Directive.

These suggestions formulated will feed into the activities and initiatives the Commission has initiated and are followed-up for now as follows:

Short term actions:

Suggestion 1: Define the concept “grossly unfair”

Suggestions 2&3: Explore the reversal of the burden of proof for grossly unfair

Suggestion 4: Encouraging SMEs to exercise their rights by providing advice and information about payment terms

Suggestion 5: Make payment terms transparent

Suggestion 6: Self-regulation

The first action that the Commission will pursue as follow-up is setting up of an EU Observatory of payments in commercial transactions. The contract for this task was awarded in 2022, for a duration of 2 years. The Observatory will monitor the payment performance of both public and private actors and their payment behaviour, including unfair ( and grossly unfair) practices and clauses. One of the objectives of the Observatory, in fact, is to shed light on these practices and clauses and overcome the current lack of data. This information will be instrumental to define the concept of grossly unfair in real situations. The second action is the launching in 2022 of alternative dispute resolution and mediation schemes to help SMEs to solve their payment disputes. The pilot ecosystem selected for this scheme is construction.

Regarding the Platform’s suggestion for the Commission to also look at the possibility to define any agreement between an SME and a large company with a payment period longer than 60 days as unfair, the Commission underlines that there are some sectors for which different ( and often longer-than-60 days) payment terms are inherent to the dynamics of that sector, without being necessarily “unfair”. This is the case, for example, of seasonal goods or goods with long-shelf life (e.g. winter equipment, garden equipment, jewelry).

The actions mentioned above will however increase overall the knowledge and understanding of the concept of grossly unfair, as the Platform recommended.

The Commission will also follow the suggestion regarding the burden of proof with the mediation and ADR pilot schemes. In practice, the Commission intends to use the mediation and ADR pilot schemes which will provide real life insights on this suggestion. In particular, through mediation, the objective is to overcome the logic “applicant/defendant” and foster a solution that is “co-created” by debtor and creditor together, thereby also avoiding costs related to solving Court cases. Such an approach is vital to safeguard SMEs future business relations and avoid lengthy procedures related to the burden of proof by any part.

The Commission also commissioned a study to take stock of the current provision of financial and credit management training for SMEs and provide recommendations, including to the Commission or Member States on how to improve SMEs financial skills to avoid the risk of being paid late. The study was completed in May 2022. A pilot action to increase financial literacy and credit management skills for SMEs will be lauched in 2023.

Furthermore, the Your Europe website contains a page dedicated to late payment, with information on the main rules and a useful late payment interest calculator. The page contains information about the EU remedies for claiming payment cross-border. The Commission raises awareness of this website.

https://europa.eu/youreurope/business/finance-funding/making-receiving-payments/late-payment/index_en.htm

At macro level, the EU Observatory of payments will also provide a more regular monitoring of payment performance and behaviour. This will contribute to more transparency about payment terms that can help to achieve a new business culture and add transparency to existing payment terms, as the Platform’s suggestion aims. It will also become clear which companies make use of which payments terms. The Observatory will make use of information already collected and made available by third parties in the most efficient way.

The Commission also underlines that at micro level, Directive 2022/2464/EU amending a number of EU acts on corporate sustainability reporting highlights that “Increasing information about payment practices should empower other undertakings to identify prompt and reliable payers, detect unfair payment practices, access information about the businesses they trade with, and negotiate fairer payment terms (Recital 50) . To this purpose, the Directive lays down the obligation to draft specific reporting standards on “the management and quality of relationships with business partners, including payment practices”

Regarding self- regulation, the EU Observatory of payments will include a library of self-regulation codes, codes of conduct, and similar best practices in force in the EU. In this way it will be possible to have an overview of the uptake of these schemes in the business environment. The library could therefore be used as a source of inspiration for drawing on practices of self-regulation. The EU Observatory could also assess and evaluate their impact in improving payment behaviour. As the Platform also points out in its suggestion, self-regulation however cannot be a stand-alone solution and must be supported by other actions.

Long-term suggestions

Suggestion 7: Explore tightening up contractual payment terms to a maximum of 30 days for payments from a large company to an SME

Suggestion 8: Automatic offsetting for damages resulting from late payments by government organizations

Suggestion 9: E-invoicing

Suggestion 10: Governmental supervisor

The Commission services (DG GROW and JRC) assessed the impacts of capping payment terms at 60 and 30 days on key business indicators (e.g. turnover, investment, employment), with particular focus on SMEs and across ecosystems. The assessment was finalised in August 2022.

Regarding the automatic offsetting for damages resulting from late payments by government organizations, the Commission recognises that the timely receipt of VAT reimbursements is important to European businesses. Delays and refusals could generate adverse financial consequences, which are likely to hit SMEs harder than larger businesses. The Commission has carried out an extensive assessment on this issue, collecting and analysing evidence through analysis of domestic legislation and administrative practice, surveys of businesses and tax administrations. The assessment has highlighted a number of areas in which the VAT recovery regimes operated by Member States are inconsistent with EU law or jurisprudence and has identified ways in which they could be improved. The Commission follows-up by promoting greater understanding of the rules for claiming VAT reimbursements, and support actions to reducing language barriers, ensuring that claim verification procedures are proportional, reducing financial risks for claimants generated by the current regimes, and promoting systematic data collection by tax administrations. The cooperation of the Member States in this respect is key.

https://ec.europa.eu/taxation_customs/system/files/2019-07/20190620_final_report_vat_reimbursements.pdf

In line with the Platform’s suggestion for the Commission to explore in how far e-invoicing systems are ready for widespread use and what support for businesses or governments is needed in order to make it’s use widespread, the Commission services assessed in a study the impacts of making e-invoicing compulsory in business to business (B2B) transactions across the EU.

The Platform’s suggestion also falls within the outcomes of the study that the Commission published on the uptake of the supply chain finance in the business environment.

https://op.europa.eu/en/publication-detail/-/publication/c1c781c1-5137-11ea-aece-01aa75ed71a1

One of the study’s recommendations referred to a more widespread use of e-invoicing in B2B transactions. While e-invoicing is an integral part of the EU public procurement framework and therefore is required in public authorities to businesses (PA2B) transactions, currently it is not compulsory in B2B transactions, except for a few Member States. E-invoicing enables faster payment, reduces human error, fraud (including tax fraud) and increases transparency and certainty. By creating an automatic invoice approval process and audit trail, e-invoicing can reduce invoice disputes significantly, in particular unfair practices related to invoicing, and improve financial management. It has been estimated that e-invoicing can save, in average, up to 30 euros per invoice. Unfortunately, lack of awareness, lack of simple, user-friendly platforms and systems, and lack of digital skills by many entrepreneurs is hampering its wider uptake.

The Commission will draw on the conclusions of the study to understand the barriers and on how to address these obstacles.

Regarding the governmental supervisor, the roll out of the alternative dispute resolution and mediation pilot schemes that the Commission announced in its SME Strategy (COM 2020 103) will help collecting additional evidence on this matter. Also, Directive 2019/33/EU on unfair trading practices in the agro-food sector lays down the obligation for the MS to set up an enforcement authority. Late payment is one of the “black-list” unfair practices in that sector.

Several of the F4F Platform’s suggestions are being taken into consideration in the framework of the revision of the Late Payment Directive.

REFIT Platform

In its opinion on the Late Payment Directive, the REFIT Platform (the predecessor of Fit for Future Platform) recommended improving the implementation and enforcement of the Directive.

A number of actions to improve implementation have been recommended by the Commission. Some of these actions fall within the responsibility of the Member States, such as increasing transparency about average payment periods or setting up systems and procedures to measure payment performance, raising awareness about the issue of late payment, and support initiatives that encourage correct payment discipline. The Commission continued identifying and spreading best practices in this area. For example, some Member States are making use of the option laid down in Directive 2014/24, enabling contracting authorities to make direct payment to subcontractors, thus ensuring that the whole supply chain benefits from timely payment and fair payment terms. In addition, payment discipline towards suppliers should also be included amongst the criteria for selecting a potential contractor and fines or sanctions are be imposed in case of delayed or non-payment to subcontractors.

On this point, the Resolution of the European Parliament of 17 January 2019, called for enhanced synergies between the Late Payment Directive and Public procurement rules, in particular for “the possibility for contracting authorities to take action to enable the exclusion of non-performing contractors from future procurements if subcontractors are not paid in time by the main contractor when it is required to do so” … and for Member States to ensure the transparency and traceability of payments by public authorities to contractors and sub-contractors, and of payments by the contractor to its sub-contractors or suppliers.

¹ https://op.europa.eu/en/publication-detail/-/publication/400ecc74-9a54-11e5-b3b7-01aa75ed71a1

² http://www.europarl.europa.eu/sides/getDoc.do?type=TA&language=EN&reference=P8-TA-2019-0042

³ https://ec.europa.eu/newsroom/growth/item-detail.cfm?item_id=688053, September 2020

State of Play:

Finalised, COM(2016)534 and SWD(20176)278), 26 August 2016

Scope:

Evaluation of the Late Payment Directive 2011/7/EU

Evaluation findings:

The main conclusions of the evaluation were:

• The Directive has raised awareness about the issue of late payment, which currently features high in national political agendas.

• The Directive has proven to be effective, as it has contributed to the reduction of the average EU payment periods, both in B2B and P2A transactions. However, the average term of 30 days is still not respected across the EU, and more efforts need to be done by the MS.

• The Directive has proven to be efficient, with very limited regulatory costs for business and public authorities.

• The Directive is coherent with other EU policies, as it has concurred to create a more favourable environment where business can grow and become competitive

• There is general consensus that the Directive has generated significant added value. Payment practices have been streamlined across the EU, removing uncertainty, thus creating the right conditions for more cross-border transactions.

• On the basis of this background, the Report concluded in 2016 that it was necessary to allow more time for the Directive to produce its expected results.

However, the Report also highlighted a few key weaknesses: the lack of a maximum payment deadline in B2B transactions, the lack of clarity concerning the concepts of “unfair” and “grossly unfair”, the lack of obligations concerning monitoring and reporting payment performances. It also recommended to the Member States to put implement initiatives that would further support the implementation of the Directive (e.g: ADR and mediation, and incentives to build a prompt payment culture).

In the light of these results, the Commission carried out a study, published in 2018, which concluded that lack of proper enforcement and the flexibility granted in the provisions relating to transactions B2B are preventing the Directive from reaching its intended objectives. The study pointed out that late payment in B2B is mostly an intentional practice, deeply embedded in business environments where there is a strong asymmetry between contracting parties. . Against this background, the study suggests that there is no one-size-fits-all-solution, and it recommends instead a spectrum of interventions, both compulsory and voluntary. The conclusions of this Study were widely included in the EP resolution of 2019.

Estimated savings and benefits

The Directive has had a noticeable effect in reducing the exit rate of businesses and increasing employment. The more a business is dependent on contracts with the public administration the stronger were these effects.

Furthermore:

• Due to the Directive the average payment period in business transactions in the EU has dropped by more than 10 days since 2013.

• Costs associated with applying correctly the Directive are more relevant for businesses than for public authorities, who have a more steady stream of liquidity.

• Business who were paying previously late, should now pay, in average, in 60 days. The cash transfer resulting from shorter payments terms amounts to larger sums of money to be released. However this is quickly offset by the expected benefits, as these same businesses will also be paid within shorter delays.

• For each day of reduction in payment delays, EUR 158 million are saved by EU businesses in finance costs.

Further investigation carried out in 2018 confirmed that if all commercial payments were made on time, the cash flow liberated and reinvested in the economy would pay for additional 6 million jobs in the EU every year.

State of Play:

• Adopted, COM(2009)126, adopted by the Commission on 8 April 2009
• On-going: On 14 September 2022, during the SOTEU speech, President Von der Leyen announced the revision of the Late Payment Directive as part of the relief measures for SMEs. The revision of the Late Payment Directive has been included in the Commission Work Programme for 2023.

Which objective(s) did the Commission pursue?

The initial 2009 proposal aimed at providing creditors with instruments that enabled them to fully and effectively exercise their rights when paid late, and by confronting public administrations with measures that would effectively eliminate late payment practices. These objectives were to be achieved through:

• The introduction of an automatic entitlement to the recovery of administrative costs and compensation for internal costs incurred due to late payment.

• In the case of public administrations, the proposal aimed at shortening payment periods through the harmonisation of periods for payment by public authorities to businesses and at reinforcing disincentives to late payment by a flat compensation rate from the first day of the delay amounting to 5% of the invoiced amount in addition to the interest for late payment and the compensation for recovery costs.

• Finally, the proposal also abolished the possibility to exclude claims for interest of less than EUR 5. In addition, this recast of Directive 2000/35/EC on combating late payment in commercial transactions aims at improving the cash flow of European business, especially SMEs, which is particularly important in times of economic downturn. It also aims at facilitating the smooth functioning of the internal market via the elimination of related barriers to cross-border commercial transactions

Estimated savings and benefits

The impact estimated that by harmonising the period of payments by public authorities to businesses (PA2B), the additional liquidity for business would amount to almost EUR 180 billion.

State of Play:

Adopted on 16 February 2011 - Directive 2011/7/EU

Outcome of legislative procedure

The European Parliament, supported by the Council, introduced a possibility for Member States to extend the time limit of payments by public authorities to businesses up to a maximum of 60 calendar days for any public authority which carries out economic activities of an industrial or commercial nature or public entities providing healthcare.

The compensation fee was eventually set as a flat sum of at least EUR 40 (or equivalent), instead of the scale of fees (varying according to the invoice amount), as in the initial proposal. Two Member States, however have maintained in their national transposition the variable scale of fees according to the amount of the invoice.

Capping of payment terms for B2B contracts at 60 days (provided that this is expressly agreed and it is not grossly unfair for the creditor) was introduced by the European Parliament and confirmed by the Council. However the capping at 60 days can be derogated by the parties, as long as it is not grossly unfair to the creditor and it is expressly agreed in the contract. The statutory interest for late payment was raised to at least 8 percentage points above the European Central Bank reference rate.

Estimated savings and benefits

No changes to estimated savings in legislative procedure.

State of Play:

Entry into force: 16 March 2011
Transposition deadline: 16 March 2013

Implementation reported by Member States

The last national implementing measure was communicated to the Commission in August 2014. As of May 2016, the Directive is fully and correctly transposed in all the Member States.

Some Member States have either maintained or brought forward provisions that are more favourable to the creditor than the Directive, for example:

• In B2B transactions, some MS have set up, by law or by court decisions, maximum payment terms

• In PA2B transactions, some MS have not made use of the option to extend payment terms for certain public sectors (i.e. healthcare) to up to 60 days

• In some MS, the statutory interest rate is increased of more than 8% percentage points (from the reference rate)

• Some MS have introduced additional support measures, either voluntary or compulsory, to support the objectives of the Directive, such as: prompt payment codes, electronic invoicing, mandatory reporting of average payment periods, penalties/fines