Grocery Code Adjudicator’s investigation into Tesco’s late payment of debts

The Grocery Code Adjudicator, Christine Tacon, has found that Tesco seriously breached the industry's code of conduct by delaying payments to grocery suppliers. Below we consider the detail of Ms Tacon’s report and its wider implications for businesses.

The report

In September 2014, Tesco discovered that it had been incorrectly reporting its performance against budgeted target margins. In particular, Tesco found that it had been deducting or deferring payment owed to its suppliers for good supplied. When Tesco correctly accounted for this practice, it was left with a £250m hole in its company accounts.

As a result of this, the Grocery Code Adjudicator began an investigation. The investigation considered whether Tesco had breached the Groceries Supply Code of Practice (“the Code”).

The Adjudicator investigated three key issues:

1. the length of time Tesco took to pay money due to suppliers;
   
2. whether Tesco intentionally delayed paying suppliers in some cases; and
   
3. unilateral deductions which Tesco made from its suppliers.

Ms Tacon's investigation found that on some occasions Tesco did not pay for more than 12 months, with some amounts taking two years to be repaid. Ms Tacon found that Tesco had "knowingly delayed paying money to suppliers in order to improve its own financial position". She found extensive evidence that Tesco had acted unreasonably when delaying payments to suppliers.

She reviewed internal emails in which Tesco encouraged its staff to seek agreement from suppliers to the deferral of payments due to them in order to temporarily help Tesco’s margins. In other emails, Tesco suggested that payments should be delayed until a certain date in order to avoid underperformance against a forecasted margin.

One example involved a supplier owed a multi-million pound sum as a result of price changes being incorrectly applied to Tesco systems over a long period. This was eventually paid back by Tesco more than two years after the incorrect charging had begun.

Tesco apologised for the practices, acknowledging that these practices have harmed suppliers.

During her investigations, Ms Tacon found that “delay in payments was a widespread issue that affected a broad range of Tesco suppliers on a significant scale”. She states that the delay in payments had “a financial impact on suppliers, was an administrative burden to resolve, detracted from the time available to develop customer focussed business and had a detrimental impact on some suppliers' relationships with Tesco."

As the Adjudicator only acquired the power to issue a fine after it began its investigation, it cannot fine Tesco. However, the Serious Fraud Office (SFO) has begun an investigation into accounting irregularities and market manipulation. If found guilty of these criminal offences, the penalties could exceed £500m. Furthermore, the sharp fall in Tesco's share price that resulted from the accounting scandal has prompted legal action by a number of institutions and other investors in the retailer.

Business minister Anna Soubry said the adjudicator has commended the Adjudicator for its investigation into a "scandalous situation". She has said that "paying smaller suppliers on time and treating them fairly is good and proper business. Late payment can hinder the growth and productivity of these suppliers and can threaten their existence”.

The wider implications

Though the investigation related to poor practice on the part of Tesco, it highlights an issue that affects all businesses, particularly SMEs, namely the need to be assertive in addressing the culture of late payments.

While it is important to maintain good relationships with customers, it is equally important to bear in mind that late payments can put an otherwise successful business at risk.

The Late Payment of Commercial Debts (Interest) Act 1998 supports businesses by funding the cost of recovering debts and unpaid invoices. It provides for creditors to charge the debtor an amount to cover the reasonable cost of instructing a debt recovery solicitor to recover the unpaid monies.

The advantage of using a debt recovery solicitor to exercise rights under this act are:

1. it reduces the amount of bad debt your business writes-off each year;
   
2. it improves cash flow;
   
3. it discourages future late payment by taking a consistent approach to recovering debts; and
   
4. it reduces the burden on your Accounts Team or administrative staff by outsourcing the process of debt recovery.