The watchdog says there is ‘little evidence’ that the government’s stated commitment to pay 80% of undisputed invoices within five working days is having the intended effect of helping the UK’s five million SMEs.

Central government spends £40bn a year on goods and services, of which about £4.5bn billion is spent directly on purchases from SMEs. While SMEs report that, in general, government pays more quickly than the private sector, they also say that, in about a third of cases, their public sector clients take more than 30 days to pay them.

The NAO looked in detail at four departments (the Ministry of Defence, Home Office, Department for Business, Innovation & Skills and Cabinet Office) and found their reported performance on paying promptly is skewed in their favour by a high volume of low-value electronic transactions with a few large suppliers.

The watchdog says these departments are failing to record the date many paper invoices are first received and, as a result of a lack of accessible guidance and non-compliance by departments, their reported performance is overstated and not comparable.

Departments currently report their performance based on the number of invoices paid within five working days of the recorded date of receipt at their bill paying team. The NAO found that the four departments take much longer than this to pay most suppliers, including SMEs.

When measured from the invoice date, these departments took between three and seven weeks to pay 80% of the value of paper invoices, which are most commonly used by SMEs.

As a result, the NAO says that the Cabinet Office cannot demonstrate that the implementation of the prompt payment commitment is achieving its intended purpose and therefore providing value for money.

Amyas Morse, NAO head, said: ‘There has been a disappointing lack of effort by government to check whether the implementation of the policy is actually helping SMEs. We are also seriously concerned about the prompt payment performance figures publicly reported by departments. These were overstated by the four departments we looked at.’

Commenting on the findings Margaret Hodge, chair of the Public Accounts Committee, said the government was ‘failing to get the basics right’.

‘It beggars belief that government departments do not record the date when paper invoices, commonly used by SMEs, are first received, and that around a third of SMEs don’t get paid within 30 days by their public sector clients. This is despite government’s claim that it is committed to increasing the role of SMEs in providing public services rather than allowing large companies like Serco and G4S to continue dominating the market, often at the expense of the taxpayers’ interest,’Hodge said.

The NAO’s own estimates suggest government suppliers could benefit from reduced interest costs of up to £88m a year as a result of government paying invoices in five working days rather than 30 calendar days.

However, the policy also increases government’s working capital requirement, and the NAO estimates this generates a cost to the taxpayer of £55m a year in increased interest costs on government debt.

Amongst the NAO’s recommendations is that the Cabinet Office should set out the principal objectives of the five-day payment commitment and its benefits and costs. The watchdog also notes that the changes proposed in the Small Business, Enterprise and Employment Bill should also result in improvements in prompt payment in both the public and the private sector.