After April 2017, all large UK companies will be required to report on their payment practices and performance. This new requirement is one of a number of ways in which the government is trying to tackle the problem of late payment for small and medium enterprises. The obligation arises under the Small Business, Enterprise and Employment Act 2015 and was originally expected to come into force in April 2016, but has been delayed until April 2017. BEIS published guidance on the new reporting requirements at the end of January 2017, following its earlier response paper. It has also published the draft Reporting on Payment Practices and Performance Regulations 2017, which will implement the duty.
What action should companies take now?
Criminal liability will attach to failure to comply. Companies should review their payment practices and policies in light of this new requirement, as well as ensuring that their internal accounting systems are capable of collecting the data on which they will need to report.
What is the obligation?
An entity caught by the new regime will have to report on:
- its payment practices and policies relating to certain contracts; and
- its performance by reference to those practices and policies.
Which entities will be caught?
All large UK companies (including private companies and public companies, whether listed or unlisted). Large LLPs will also be caught. The definition of "large" will be the same as under the Companies Act 2006, i.e. companies satisfying two of the following criteria on both of its last two balance sheet dates:
- turnover of more than £36m;
- balance sheet total of more than £18m; and
- more than 250 employees.
The rules apply equally to any UK subsidiary in a group which meets the above threshold on a stand-alone basis, even if controlled by a non-UK parent. UK parents of a group must meet both the individual thresholds and a separate group threshold before they have to report.
When will the requirement apply?
Companies will be required to report on their payment practices and policies for financial years starting on or after 6 April 2017.
Which contracts are covered?
The obligation relates to any contract which is:
- between two or more businesses; and
- for goods, services or intangible assets (including IP).
Other kinds of contracts (e.g. business to consumer contracts) will be excluded, as will contracts for financial services. Contracts must have a "significant connection" with the UK to fall within the regime. (English law governed contracts will always be caught).
How often does a report have to be published?
Reports will have to be published twice a year. The first report will be due 30 days after the first six months of the financial year, and the second report will be due 30 days after the end of the financial year. The guidance deals with financial years which are shorter or longer than a year.
Will the report be public?
Reports will have to be published on a website provided by the government. Suppliers and other interested parties will be able to view the report as soon as it is published.
What will companies need to report?
The report must cover the following:
Narrative descriptions of:
- standard payment terms and any variations to these terms over the last reporting period;
- whether suppliers have been notified or consulted in advance of any such variation; and
- an explanation of the business's processes for resolving a dispute with a supplier in relation to payment under a qualifying contract.
- the maximum period for payment entered into during the reporting period;
- the average time taken to pay invoices from the date of receipt of invoice;
- the percentage of invoices paid during the reporting period that were paid (i) in 30 days or less; and (ii) between 31-60 days; and (iii) over 60 days (this being considered bad practice); and
- the percentage of invoices due within the reporting period which were not paid within the payment period.
"Tick box" statements about:
- whether a charge is deducted for remaining on a supplier's list;
- whether the business has any e-invoicing, supply chain finance or preferred supplier lists; and
- whether the business is a signatory to a code of conduct or standards on payment practices.
What if the duty is breached?
Breach of the new requirement will be a criminal offence, and both the company and its directors will be liable to a fine. It will also be an offence to publish false or misleading information.
How will the duty apply to new companies?
The duty will not apply to a new company in its first financial year. In its second financial year, the company will be caught if it exceeded two or all of the thresholds in the previous year. There are specific provisions dealing with mergers and joint ventures.