Payment practices reporting: shining a light
The government recently laid the Reporting on Payment Practices and Performance Regulations 2017 before Parliament to require large UK companies to report on their practices, policies and performance in paying their suppliers. The intention is to shine a light on bad payment practices and to drive improvements and so help small business suppliers whose cash flows suffer from long payment terms or late payment.
Businesses are increasingly being asked to show that they take account of their responsibilities to wider society. As part of this agenda, the government recently laid the Reporting on Payment Practices and Performance Regulations 2017 (2017 Regulations) before Parliament to require large UK companies to report on their practices, policies and performance in paying their suppliers. The intention is to shine a light on bad payment practices and to drive improvements, and so help small business suppliers whose cash flows suffer from long payment terms or late payment.
The government has also laid before Parliament regulations to impose similar requirements on large limited liability partnerships (LLP): the Limited Liability Partnerships (Reporting on Payment Practices and Performance) Regulations 2017. In this article, references to companies and directors include LLPs and designated members, respectively.
Both sets of regulations apply for financial years commencing on or after 6 April 2017 and implement the duty to report on payment practices that was introduced by the Small Business, Enterprise and Employment Act 2015 (see News brief "Small Business, Enterprise and Employment Act 2015: changes and challenge ( www.practicallaw.com/6-610-3065) s"). Both sets of regulations also have a sunset provision that calls for a review after five years. If not remade, they will expire in 2024.
The Department for Business, Energy & Industrial Strategy (BEIS) has published guidance to assist businesses in complying with the regulations (the guidance) (www.gov.uk/government/publications/business-payment-practices-and-performance-reporting-requirements).
Which entities must report?
UK companies which, on their last two balance sheet dates, exceeded two or all of the individual thresholds for qualifying as a medium-sized company will be required to publish a report. The thresholds are updated from time to time and are currently:
£36 million turnover.
£18 million balance sheet total.
Slightly different rules apply for new companies. A company will be required to report in its second financial year if, in its first financial year, it exceeded two or all of the thresholds.
A parent company with one or more subsidiaries will only be required to report if it exceeds two or all of the individual thresholds given above and the group it heads is large. A group will be large if it exceeds two or all of the following thresholds on the last two balance sheet dates:
Aggregate turnover of £43.2 million, or £36 million turnover net of group transactions.
Aggregate balance sheet total of £21.6 million, or £18 million net of group transactions.
Aggregate number of employees of 250.
These thresholds are based on the criteria for determining whether a group is medium-sized for accounting purposes in the Companies Act 2006. They operate solely to determine whether the parent company is within the scope of the requirement to report but do not require a consolidated report to be produced. All information in the report must be given on a non-consolidated, entity-by-entity basis (see "What information is required" below).
The guidance includes a helpful flowchart to assist companies in determining if they are required to report.
Reporting must relate to "qualifying contracts". A qualifying contract is a contract:
Between two or more businesses.
For goods, services or intangible assets, but not financial services such as insurance and banking.
Which has a significant connection with the UK.
According to the guidance, contracts with a significant connection with the UK include contracts that 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. The governing law (if any) stated in the contract is not relevant.
It will not always be obvious which contracts are caught, especially where the significant connection test turns solely on the place of performance.
What information is required?
The information should include:
A narrative description of the company's standard payment terms, including the contractual length of time for the payment of invoices, any changes to the standard payment terms in the reporting period and how suppliers were notified or consulted about the changes.
The maximum contractual payment period specified in a qualifying contract which the company has entered into during the reporting period.
A narrative description of the process for resolving disputes relating to payment.
Statistics on the average time taken to make payments in the reporting period.
The percentage of payments made in 30 days or fewer, between 31 and 60 days, and over 60 days.
The percentage of payments due within the reporting period which were not paid within agreed terms.
Statements, in a tick box format, as to whether supply chain finance is available to suppliers, whether the company charges suppliers to remain on its list and whether it is a member of a payment code, with the name of the code.
Information is to be provided on an individual non-consolidated basis to facilitate comparison across businesses. Also, since a group may have different practices in different entities, suppliers will benefit from information about the specific business with which they are considering contracting rather than consolidated information from the wider group. The information must be approved by a director, who should be named in the report.
The information will need to published within 30 days of the end of each reporting period. To meet this deadline, companies will also need to allow time for the information to be approved by a director.
Generally, the first reporting period is the six calendar months starting on the first day of the company's financial year, with the second reporting period starting on the day after the first period ends and running until the end of the financial year. Different rules apply where the financial year is nine months or shorter, or longer than 15 months. (For more information, see box "Calculating reporting periods".)
The report must be published on an online web service. This is to be provided by the government and is intended to allow information to be located and searched easily. However, no format requirements have been specified.
According to the guidance, the web service will be available from April 2017 and will be part of the www.gov.uk website. Companies can also publish the report on their own websites, if they wish, but this is in addition to the requirement to publish on the government web service.
Liability for failure to comply
As with many other corporate reporting requirements, it is a criminal offence by the company, and every director, to fail to publish a report containing the necessary information within the required 30-day period. All directors will be liable unless they can show that they took all reasonable steps to ensure that the requirement would be met.
It is an offence, too, for any person to publish a report containing false or misleading information. There may also be reputational risks associated with failure to publish the required report.
Corporate groups should bear in mind that disclosure is on an entity-by-entity, rather than group-wide, basis. Each company or LLP caught by these rules will need to allocate responsibility for compliance and for approving the report. It should also ensure that it has the necessary processes in place to identify relevant contracts, and to extract and approve the information.
Wilma Rix and Judy Pink are both senior associates at Linklaters LLP.
Calculating reporting periods
Companies with an April year-end, falling after 6 April 2017, will be the first to publish information on payment practices in October or November 2017. For companies with a calendar year-end, the starting dates are set out in the table below.