The National Audit Office (NAO) found a commitment to pay bills in five working days generally benefits large contractors, rather than the UK’s five million small and medium-sized enterprises (SMEs).
The Cabinet Office defended Government policy, saying procurement reforms supported suppliers and saved money.
Central government spends around £40m a year on goods and services, £4.5m of which is purchased directly from SMEs, the NAO said.
While SMEs said the Government generally settles up quicker than private sector clients, the public sector took longer than the 30-day deadline in law to pay in a third of cases.
In 2008, 4,000 SMEs ceased trading because of late payment of invoices.
Amyas Morse, head of the National Audit Office, 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.”
Departments are now expected to pay 80 per cent of undisputed invoices within five working days of receipt. Four departments with good performance against the goal were found to be making high volumes of low-value transactions to a few large suppliers.
The Department for Business, Innovation and Skills, the Ministry of Defence, the Home Office and the Cabinet Office also failed to record the date many paper invoices are first received.
When measured from the invoice date, these departments took between three and seven weeks to pay 80 per cent of the value of paper invoices, which are commonly used by SMEs.
NAO calculations suggested businesses could save £88m in interest payments annually if invoices were paid in five days rather than 30.
Conversely, the policy increases the Government’s working capital requirement, which the NAO estimated costs the taxpayer an extra £55m a year in interest on Government debt.
The Cabinet Office cannot demonstrate the policy is working and providing value for money, the NAO concluded.
A Government spokesperson said public sector procurement reform had saved £5.4bn last year alone.
They said: “Our reforms are supporting suppliers of all sizes and we have substantially increased the proportion of business won by small firms.”
The Government is now insisting on payment within 30 days on all invoices throughout the supply chain, they added.
Matthew Fell, CBI director for competitive markets, said the Government must help shape a culture of prompt payment. “Transparency is the best way to drive behaviour change so greater monitoring of these payment practices is welcome,” he added.
Mike Cherry, Federation of Small Businesses policy chairman, said it was a “scandal” so many businesses had gone under as a result of late payment.
“This new report demonstrates the need to tighten up prompt payment practices right across the economy,” he said. “Central Government has raised its game... It now needs to use this record to improve the wider payment culture.”