THE Government is being urged to improve payments to small companies after an official report found delays across the public sector.

The National Audit Office (NAO) said small and medium enterprises (SMEs) were paid more quickly by the government than the private sector, but in a third of cases, public sector clients took more than 30 days to settle up.

The spending watchdog said business welcomed the government's commitment to pay invoices more quickly than the 30 days required by law, but added there was a risk the policy helped main contractors rather than others down the supply chain.

There was little evidence that the commitment to pay 80 per cent of undisputed invoices within five working days was having the intended effect of helping the UK's five million SMEs, the report stated.

The NAO looked in detail at the Ministry of Defence, Business Department, Home Office and Cabinet Office, and found that their reported performance was "skewed" in their favour by a large number of low value electronic transactions with a few large suppliers.

The NAO estimated that up to £1.8bn worth of invoices in 2013/14 (or 7 per cent of the total value) may have been paid after 30 days by the four departments.

"We estimate the resulting liability to interest and penalties would have been around £18m," the report said.

Amyas Morse, head of the NAO said: "UK businesses told us they welcome the government's commitment to pay invoices early.

"However, 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.

"It remains to be seen whether the changes proposed in the Small Business, Enterprise and Employment Bill and secondary legislation will be enough to bring about improvements, not just in public sector payment practices but the private sector as well."

The NAO said the four departments were failing to record the date when many paper invoices were received, so their reported performance was "overstated".

Suppliers could benefit from reduced interest costs of up to £88m a year if government paid invoices in five working days, the report said.

Margaret Hodge, who chairs the Public Accounts Committee said: "Small and medium-sized enterprises have a vital role to play in the UK's economy, yet Government is not getting the basics right when it comes to promptly paying SMEs, from which it directly buys £4.5bn of goods and services each year.

"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.

"The Cabinet Office, representing the centre of government, should be doing much more to improve current poor practice in departments, which can put SMEs out of business and jeopardises government's ability to deliver value for taxpayers' money."

Mike Cherry, policy chairman of the Federation of Small Businesses, said: "This new report demonstrates the need to tighten up prompt payment practices right across the economy.

"Central Government has raised its game and is recognising the absolute priority of paying its suppliers on time, making it a requirement to pay within 30 days. It now needs to use this record to improve the wider payment culture, both in the rest of the public sector and in the private sector.

"It's a scandal that thousands of businesses have gone under because of late payment, with numerous others struggling with their cashflow because of poor payment practices.

"To improve the payment culture, the FSB believes that being a signatory to the prompt payment code must become a prerequisite for supplying the Government."

A Government spokesperson added: "As part of our long-term economic plan this Government is reforming public sector procurement, saving taxpayers £5.4 billion last year alone compared to spending before the last general election. Our reforms are supporting suppliers of all sizes and we have substantially increased the proportion of business won by small firms.

"The report recognises that we are making progress, but there is more to do. This year we will enforce payment within 30 days all the way down public sector contracts' supply chains."