As of 6 April 2017, "large" businesses will be required by law to report on their UK payment practices twice per year. Failure to do so is a criminal offence with unlimited fines. The government hopes that this new mandatory reporting requirement will encourage businesses to improve their payment practices with suppliers as a result of transparency and public scrutiny.
What is the new reporting requirement and how does it interact with the existing UK late payment legislation and the voluntary UK Prompt Payment Code?
At a glance
- Many UK businesses will be caught by these requirements. The definition of large business captures many mid-market businesses - this is not legislation confined to the very largest multi nationals. A full definition of "large" businesses is below.
- UK businesses will from 6 April 2017 need to have an internal process to ensure they report twice a year.
- The core of the report is the average time it takes businesses to pay invoices for most contracts (excluding financial services and consumer contracts) and breakdown in percentages in 0-30 days, 31-60 days, and 60 + days.
- It applies to UK incorporated companies and LLPs. It does not apply to companies incorporated outside the UK.
Is your business caught by the rules?
The rules apply to "large" companies and "large" LLPs. A business will need to exceed 2 or more of the following thresholds on both of its last two balance sheet dates:
- Over £36 million turnover
- Over £18 million balance sheet total
- Over 250 employees
The thresholds are determined by the thresholds for "large" companies and LLPs for accounting purposes set out in section 465 of the Companies Act 2006 which do change from time to time. The thresholds are correct as at 4 April 2017.
There is no requirement to report in the first financial year.
Parent companies and LLPs will need to review their individual figures and aggregate group figures to consider if they are captured by the requirements.
Twice a year the following needs to be reported:
- Standard payment terms (and details of any changes made to the standard payment terms in the reporting period, including whether any advance notifications and consultations had taken place with suppliers for such changes) for the types of contracts it enters into. If a company has no standard payment terms then it must be the most frequently used payment terms;
- Maximum payment period in a contract (entered into during the reporting period);
- Process for dispute resolution in relation to payment;
- Payment performance statistics including:
- the average time taken to pay invoices,
- the percentage of invoices paid within:
- 30 days
- 31 to 60 days and
- 61 days or more
- the percentage of payments not paid within the relevant payment period.
- Statements on:
- The availability of e-invoicing and supply chain finance (a simple Yes/No),
- Whether the organisation has preferred supplier lists. If there are preferred supplier lists whether charges or deductions are made to be on that supplier list,
- Whether the company is a member of a payment code, such as the UK Prompt Payment Code (see below).
Unlike the initial draft of the legislation, businesses will not be required to report on the amount of late payment interest owed and paid, although this will be kept under review.
Does the reporting apply to all contracts, anywhere in the world?
The short answer is no. Qualifying contracts require the following:
- Contracts with a supplier - i.e. procurement contracts;
- Contracts for goods, services and intangible assets (this means it will include payment under intellectual property licences);
- Business to business contracts. Contracts with consumers are excluded;
- Contracts with a significant connection to the UK (the test is, if the contract was silent on choice of law, would it be subject to a one of the laws of the UK?);
- Excludes contracts for financial services (e.g. lending).
When are the reports to be published?
The timing of reporting is tied to the business' financial year. It only applies to financial years beginning on or after 6 April 2017.
For a normal business (i.e. 12 month financial year) the business will have to report twice a year: once for the first six months and the second for the remaining period.
Where a business has shortened or lengthened its financial year due to a change to its accounting reference date, the requirements will be different. If a business' financial year is nine months or shorter, the business will be required to publish one report for that period. If the financial period is longer than 15 months, the business will prepare the reports for the first six months, the second six months and for the remaining period.
Therefore, the first reports will not be published until early November 2017 and most businesses will not need to report until 2018.
1 April - 31 March financial year
A company with a 12 month financial year starting on 1 April will need to report:
- By 30 October 2018 on the payment arrangements 1 April - 30 September 2018
- By 30 April 2019 on the payment arrangements 1 October 2018 - 31 March 2019
There is no need to report on the financial year 17/18 as that began before 6 April 2017.
1 January - 31 December financial year
A company with a 12 month financial year starting on 1 January will need to report:
- By 30 July 2018 on the payment arrangements 1 January - 30 June 2018
- By 30 January 2019 on the payment arrangements 1 July 2018 - 31 December 2018
There is no need to report on the financial year 2017 as that began before 6 April 2017.
Process to publish reports?
The report must be published on a website provided by the government. The Guidance states that this will be part of the www.gov.uk website.
The information in the published report has to be approved by a company director (or designated member in the case of a LLP) before it is published, and the published report must include the name of the approving director.
What are the penalties for failure to report?
It will be a criminal offence to both not report and to report false or misleading information. The penalty on summary conviction is a fine (which could potentially be unlimited) and both the business and its directors (or designated members) can be found liable.
If, however, a director took all reasonable steps to ensure compliance before the end of the filing period, and the report was still not published, proof of this can be used as a defence against criminal proceedings.
The government has not indicated if anybody will be tasked with enforcement or if there will be any funding to support enforcement. It has established an email for reporting concerns, however: email@example.com. It will be interesting whether the government will allocate any meaningful resources to enforcement or simply react to complaints.
Interaction with the Late Payment legislation
In the UK, there is already established legislation designed to discourage late payment. In broad terms, it does this by imposing interest for late payment and stating that payment terms beyond 60 days are not enforceable if they are "grossly unfair".
The late payment legislation has had little impact. Many suppliers are reluctant to enforce their rights as to do so risks their ongoing commercial relationship with a customer. It is also unclear just what "grossly unfair" means and therefore it is not unusual for large companies to impose payment terms beyond 60 days (30 days in the public sector).
The reporting obligations do not change the late payment legislation. A company can still have payment days beyond 60 days as long as that is not grossly unfair.
However, failure to report or reporting lengthy payment terms risk attracting negative comment. The risk of reporting poor payment practices is that the business will be perceived as unfair to its suppliers and out of keeping with best practice, presenting a reputational issue. Businesses who pay on extended terms will no doubt point out that to reduce the terms comes at a cost which will need to be passed to their customers.
UK Prompt Payment Code
Part of the new reporting requirement is to confirm whether the business is a member of a payment code. One of those payment codes is the Prompt Payment Code.
The Prompt Payment Code is a government backed voluntary payment code, which historically focused on certainty of payment terms, and ignored length of payment period. That has now changed - by signing up to the code, businesses agree to maximum payment terms of 60 days with the aim (although not a requirement) to pay within 30 days.
Code signatories are required to pay within the maximum (60 day) payment term unless there are exceptional circumstances. There is also now a Code Compliance Board to enforce the Prompt Payment Code, including its maximum payment term.
Therefore, businesses who have signed up to the Prompt Payment Code and comply with its obligation to pay within 60 days, except in exceptional circumstances, have nothing to fear from reporting.
On the other hand, a business which has signed up to the Prompt Payment Code and routinely pays beyond 60 days will be taking on the reputational risk of having its membership of the Prompt Payment Code challenged, creating further negative reporting. Such businesses will need to consider their position. That might mean reducing payment terms, or withdrawing from the Prompt Payment Code, or taking the risk that they may need to publicly justify their position.
It has been a theme over the last 15 years that UK payment terms have got longer. Where once 30 days was typical, 60 days is the new normal, and payment days beyond 60 or 90 days is not unusual. This is driven by large businesses seeking to support their cashflow. After all, it makes financial sense if you can avoid paying your suppliers until your customer has paid.
Small business organisations have increasingly challenged that new normal, protesting that the impact of extended terms is to shift the cost and risk to the small businesses at the end of the supply chain, and those are businesses least able to find cost effective solutions to finance their invoices.
The existing late payment legislation encouraging businesses to pay within 60 days has had little effect - suppliers are loath to enforce their rights given that will damage, if not end, their customer relationships.
That presents a dilemma that the government has struggled with - does it avoid interfering and regulating business relationships (after all, it has frequently demanded a reduction in regulation)? Or does it back any policy priority - the small business.
The reporting obligations are an attempt by the government to avoid regulating, but at the same time back small businesses, by moving the issue into a reputational one.
It will be interesting to see the outcome - ultimately, do the British public and the mainstream media care about late payment?
And as well as the impact on late payment, do the reporting obligations and similar requirements under the Modern Slavery Act indicate a new approach by the UK government to changing behaviour - nudging by way of reporting and reputation, as opposed to strict legal requirements?
The relevant law is:
See here for the government-issued guidance on best practices for business payments and reporting and Gowling WLG's previous alert on late payment.