Small businesses have urged the Government to introduce ‘tougher penalties’ for large companies that pay their suppliers late to protect them against another Carillion-style collapse.

The Federation of Small Businesses (FSB) has called for a strengthening of the Prompt Payment Code, a voluntary system of rules governing payment terms, in order to stop large businesses squeezing smaller ones.

The FSB is urging Whitehall to do more to stamp out poor payment practices one year on from the collapse of Carillion, which the FSB national chairman Mike Cherry describes as a ‘watershed moment’.

‘The construction giant used its dominant position to squeeze smaller firms with late payments and unreasonable payment terms in an attempt to shore up its own precarious position,’ said Mr Cherry.

‘These practices did not save them and their failure has resulted in very real human consequences. Many small businesses were left with nothing for the hard work they had undertaken beforehand and given nothing in compensation after. Some didn’t survive.’

Mr Cherry welcomed recent reforms to crackdown on public sector suppliers that don’t pay on time. However, he argued more needs to be done.

As well as strengthening the Prompt Payment Code, the FSB said non-executive directors responsible for payment practices and supplier relationships should be appointed to the boards of big companies.

They also called for the adoption of Project Bank Accounts in all major public sector contracts, with proper parliamentary accountability to ensure their use.

‘These reforms are not the silver bullet that will immediately bring an end to the scourge of poor payment practices but they will certainly go a long way to achieving this,’ said Mr Cherry.

For more on outsourcing read our feature, 'Local government buying: the smart way forward.'