Keeping payment practice up to scratch
Large businesses in the UK now have a duty to report at regular intervals on their payment practices and performance, for the benefit of suppliers, actual or potential
New regulations entered into force on 6 April 2017 requiring certain businesses to report on their payment practices and performance. The duty to report will apply to affected businesses in financial years beginning on or after 6 April 2017. Extra caution must be taken as failure to report could lead to criminal liability for businesses and their directors or designated members.
Aims of the regulations
According to the UK Government's initial guidance published in December 2016, the principal aim of the Reporting on Payment Practices and Performance Regulations 2017 (for companies) and the Limited Liability Partnerships (Reporting on Payment Practices and Performance) Regulations 2017 (for LLPs) (together, the “regulations”) is to drive improvements in payment practices by subjecting large businesses to public scrutiny. The regulations also aim to assist suppliers by providing access to the information they need to make informed decisions about which businesses they trade with, negotiate fairer terms and challenge large business customers to improve their payment practices.
Who is affected?
The duty to report payment practices and performance will be mandatory for all large UK incorporated companies and LLPs (“large businesses”), regardless of whether they are private, public or quoted, and which are in their second financial year or beyond.
Businesses are deemed to be “large” if, on both of their last two balance sheet dates, two out of the three following criteria were met:
- turnover exceeds £36 million; and/or
- the balance sheet total exceeds £18 million; and/or
- the number of employees exceeds 250.
If the business is in its second financial year, it will fall within the scope of the duty if it met at least two of the above criteria in its first financial year.
The criteria are based on exceeding the thresholds for qualifying as a medium-sized company under the Companies Act 2006, s 465(3). The thresholds are updated every now and again, which should be taken into account when determining whether a business qualifies as being “large”.
Parent companies or LLPs which head a group of entities will only be required to report if they are in their second financial year or beyond and they qualify as large (as set out above) in their own right; and the group qualifies as large too.
Groups are deemed to be large if, on both of their last two balance sheet dates, two out of the three following criteria were met:
- the aggregate turnover exceeds £36 million net or £43.2 million gross; and/or
- the aggregate balance sheet total exceeds £18 million net or £21.6 million gross; and/or
- the aggregate number of employees exceeds 250.
The aggregate figures are the sum of the figures for each member of the group. The group includes the parent company or LLP itself. “Net” means after set-offs and other adjustments made to eliminate group transactions. “Gross” means without set-offs and other adjustments.
If the parent business is in its second financial year, it will fall within the scope of the duty if it and its group met two or all of the respective criteria set out above in the parent business's first financial year.
The criteria for large groups are based on exceeding the thresholds for qualifying as a medium-sized group under s 466(4) of the Companies Act. These thresholds are also updated every now and again, which should be taken into account when determining whether a group qualifies as being “large”.
Small and medium-sized businesses are excluded from the reporting requirement, though they may submit a report voluntarily.
What and when to publish?
Large businesses or groups must publish reports on their payment practices, policies and performance. The reports must be published at individual entity level and not at group level.
Additionally, the reports must be approved by a named company director or a designated person of an LLP before publication to ensure the accuracy of the information.
When to publish will depend on the length of the business's financial year, which could consist of one, two or three reporting periods.
If the business's financial year lasts 12 months, or a few days more or less, there will be two reporting periods within that financial year. The first reporting period will be the first six months of the financial year; the second will be the remainder of that financial year. Two reports will be due for the financial year.
If the business's financial year lasts nine months or less, the reporting period will be that financial year. This means that there is only one reporting period, so only one report is due for the financial year.
If the business's financial year lasts more than 15 months, there will be three reporting periods. The first reporting period will be the first six months of the financial year, the second will be the next six months, and the third will be the remainder of that financial year. Three reports will be due for the financial year.
A report is due 30 days after the last day of the reporting period.
Web based publication
Reports will be published on a web based service provided by the Government within 30 days of the end of the reporting period. The service is available from April 2017.
In addition, businesses may publish the report on their own website if they choose to do so.
What to report on?
The payment practices and policies that must be reported on relate to contracts which are:
- between two or more businesses;
- for goods, services or intangible assets (including intellectual property); and
- significantly connected with the UK.
Business to consumer contracts and financial services contracts are excluded from the reporting requirement.
Whether a contract is significantly connected with the UK will depend on the circumstances.
Matters to be reported on include:
- payment terms, including standard (or most frequently used) payment terms and period for payment (in days); any changes to these over the last reporting period; whether suppliers had been notified or consulted on this change in advance; and the maximum period for payment entered into during the reporting period. Businesses can volunteer to provide additional information to explain their standard payment terms and variation of such terms for different circumstances;
- processes for resolving payment-related disputes;
- performance metrics, including the average time taken to pay invoices from the date of receipt of invoice (this covers disputed invoices that were paid); what percentage of invoices paid within the reporting period were paid in 30 days or less, between 31 and 60 days, and in 61 days or longer; and the percentage of invoices due within the reporting period which were not paid within agreed terms (this covers disputed invoices which were not paid within agreed terms);
- statements on whether suppliers are offered e-invoicing; whether supply chain finance is available; and whether the business is a signatory to a voluntary payment code;
- supplier lists and “pay to stay” businesses will be required to report whether they deduct money from invoices for remaining on a supplier list and whether they have done this in the reporting period.
Failure an offence
Failure to publish a report within the relevant time period, or publishing a false or misleading report, is an offence, for which the business and all directors and designated members will be liable on summary conviction to a fine.
Large businesses should review their payment terms and practices now, and ensure that they are able to gather the data required for their first reports.
They should also assess their payment performance against the required metrics and consider whether they are treating their suppliers fairly.
More detailed guidance on how large businesses are to comply with the reporting requirements has recently been published by the Government and is available at www.gov.uk/government/publications/business-payment-practices-and-performance-reporting-requirements.
Tom Stocker is a partner, and Catriona Jardine a trainee solicitor, with Pinsent Masons LLP