Large businesses would be well advised to review their payment practices ahead of new reporting rules due to come into effect on 6 April 2017. Qualifying businesses will be required to file relatively detailed information on their payment practices and terms on a Government website in respect of their financial years commencing on or after that date. The new rules are aimed at giving greater transparency to payment practices for the benefit of SMEs and, no doubt, to encourage large businesses to reduce timescales for paying their suppliers.
Non-compliance with the new regime will be a criminal offence for which both the business and every director of the company (or designated member of an LLP) will be liable (subject to a defence of 'all reasonable steps' for directors/designated members). Aside from the risk of criminal prosecution, the Government's aim is to 'shine a light on bad practice'.
The Government has issued useful guidance on a number of aspects of the new reporting regime which clarifies which businesses the rules apply to, what must be reported and when. The final regulations have also been published. For qualifying businesses with financial years commencing on 6 April, the first report would be due as early as November 2017, covering payment practice in the first half of the year. Accordingly, it is important that procedures are put in place now to collate all relevant information. This would include accurately tracking the process of an invoice from receipt to payment (particularly for those businesses where invoices may not be received initially by the accounts department).
For more information, see the FAQs below.
Who must report?
The regime applies to qualifying UK companies and LLPs, based on size criteria. A new company/LLP is not required to report in its first financial year. A company/LLP that is not obliged to report (because it does not meet the size criteria) may decide to do so on a voluntary basis.
Qualifying companies and LLPs
Companies and LLPs other than parent companies will be subject to the reporting regime if, on their last two balance sheet dates, they exceeded two or all of the medium sized company threshold criteria. The criteria are taken from those applicable to assessing which accounting regime applies to the company/LLP. Currently, these thresholds (which are periodically updated) are as follows:
- Turnover: £36 million
- Balance sheet total: £18 million
- Employees: 250
The reporting obligation attaches to companies/LLPs on an individual basis, not at a group level. Accordingly, each individual subsidiary undertaking in a group that meets the qualifying criteria must submit a report. A parent company/LLP will also have to report separately, if certain slightly more complex threshold criteria are met.
When will businesses need to start submitting information?
Businesses required to report must submit their first report for the financial year which commences on or after 6 April 2017. For businesses with a 12 month financial year, reports must be prepared for each 6 month period ("reporting period") of the financial year and submitted within 30 days after the end of each reporting period. So while some companies will be doing their first reports this year, others may not need to file until next year.
What contracts must be reported on?
Businesses that are subject to the regime will need to publish certain information about their payment practices and performance in relation to 'qualifying contracts'.
What is a 'qualifying contract'?
A qualifying contract may be in writing or be an oral contract. It must satisfy all of the following conditions:
- It is a business to business contract, i.e., between two (or more) businesses
- It is for goods, services or intangible property, including intellectual property
- It is not for financial services
It must also fulfil one of a number of tests aimed at a connection with the UK depending on choice of law, applicable law and other significant connections with the UK. It may not be straightforward in all cases to determine whether a contract meets these tests and it may be necessary to go beyond the terms of the contract itself.
Contracts which will be performed in the UK, or where one or both parties is established in the UK or carries on a relevant part of their business in the UK, should be considered for disclosure.
What information must be included in the report?
For each reporting period, a business must submit the following information in relation to all qualifying contracts (including any contracts where there may be a dispute over payment):
Narrative descriptions of:
- Its standard payment terms, including for different types of qualifying contracts. Businesses could choose to include a link to their website if the full terms are displayed.
- Its process for resolving disputes related to payment
- The average number of days taken to make payments in the reporting period, from the date of receipt of invoice or other notice
- The percentage of payments (by reference to volume of invoices, not value) made within the reporting period which were paid in
- 30 days or fewer
- Between 31-60 days
- 61 days or longer
- The percentage of payments due within the reporting period which were not paid within agreed terms
Tick boxes (yes/no) on:
- Whether suppliers are offered e-invoicing (i.e., whether payment practices provide for invoices to be submitted and tracked electronically, for example, with invoice document management systems software, which can speed up the process of payment)
- Whether supply chain finance is available to suppliers
- Whether the business's practices and policies cover deducting sums from payments as a charge for remaining on a supplier's list, and whether they have done this in the reporting period
- Whether the business is a member of a payment code, and the name of the code
Clearly, in order to be able to report this information, businesses must have in place robust procedures dealing with, and recording, inception of invoices and processing of payments.