CPD 11 2017: Complying with payment practices and reporting

INTRODUCTION

The Department for Business, Energy & Industrial Strategy has introduced a new duty for qualifying businesses to report on their payment practices. This is set out in a white paper published in January 2017, entitled “Duty to report on payment practices and performance”.

This is in recognition that late payment is a key issue for business, especially smaller businesses. It can impose severe administrative and financial burdens, adversely affecting cash flow and jeopardising ability to trade.

Regulations made under section 3 of the Small Business, Enterprise and Employment Act 2015 (and under the Limited Liability Partnerships Act 2000) introduce a duty on the UK’s largest companies and limited liability partnerships (LLPs) to report – on a half-yearly basis – their payment practices, policies and performance for financial years beginning on or after 6 April 2017. The information must be published through an online service provided by the government, and will be available to the public.

The legislation will inevitably affect the vast majority of UK supply chains, but no more so than in the construction sector, which accounts for 31% of late payments across all sectors. From an administrative perspective, large principal contractors will take the biggest hit. Full transparency of payment practices stands to benefit smaller businesses, which are fully dependent on fair and timely payment from their clients. On average, subcontractors wait 107 days to receive payment, with only 5% receiving payment within 30 days.

Qualifying criteria

All registered companies, whether public or private, and LLPs, must comply if they qualify with the criteria as set out below. This includes a company or LLP registered under the Companies Act 2006 or the Limited Liability Partnerships Act 2000 respectively. Information must be provided at individual company level: group-level information is not sufficient.

A company or LLP will be required to submit information for a financial year if their last two balance sheets exceed two or more of the thresholds for qualifying as a medium-sized company. These are:

• Annual turnover of £36m
• Balance sheet total of £18m
• Average of 250 employees

The thresholds will be periodically reviewed and updated so companies should always check to see whether they still fall within the reporting criteria. If the Companies Act thresholds have been updated for that financial year, the updated thresholds should be applied retrospectively to preceding years for the purpose of the reporting requirement size tests.

No company is required to report in its first financial year. Companies in their second financial year should refer to their first year figures only. They will be required to report if their first-year balance sheet exceeded two or all of the thresholds. New companies or LLPs created as a result of a merger or takeover will be excluded from reporting in their first financial year if they are newly registered. Companies involved in mergers, takeovers or acquisitions that continue with the same registration number will be required to report if they exceed the size thresholds. Joint venture vehicles incorporated as a company or LLP will also need to report if they exceed the size test.

Table 1: Applying the criteria

		Business A	Business B	Business C	Business D	Business E
Last balance sheet	Annual turnover	£45m	£40m	£30m	£35m	£40m
	Balance sheet total	£25m	£17m	£19m	£17.5m	£25m
	Average number of employees	350	200	450	250	251
Balance sheet before last	Annual turnover	£40m	£40m	£35m	£35m	£35m
	Balance sheet total	£20m	£17m	£20m	£20m	£17.5m
	Average number of employees	350	200	450	450	249
	Did the business exceed the thresholds for a medium-sized company in both financial years?	Yes, the company’s figures exceeded at least two of the thresholds for a medium-sized company in both years	No, figures were below two of the thresholds in both years	Yes, the company’s figures exceeded two of the thresholds for a medium-sized company in both years	No, figures were below at least two of the thresholds in the last financial year	No, figures were below at least two of the thresholds on the balance sheet before last

There are separate criteria for parent companies (or LLPs) and groups. If a group or part of a group exceeds the qualifying criteria below, it must submit a group report as well as individual reports for qualifying companies within the group. The group criteria are:

• Aggregate annual turnover of £36m net (or £43.2m gross)
• Aggregate balance sheet total of £18m (or £21.6m gross)
• Aggregate number of 250 employees

International companies with a UK-registered subsidiary that meets the criteria must submit for that subsidiary, but not the overall company.

Qualifying contracts

Businesses are only required to publish information about contracts that satisfy all of the following criteria:

• It is between two or more businesses
• It has a “significant connection” with the United Kingdom, as set out in paragraphs 36-39 of the government white paper
• It is for goods, services or intangible property, including intellectual property
• It is not for financial services – so financial services companies will only report on contracts for other services and goods such as office supplies, and businesses contracting to receive financial services will not include information about those contracts in their submissions.

Submission requirements

To comply with the requirements, there are certain criteria that the submission must meet.

Submissions must be made twice yearly, aligned to the company’s financial year. The first report is due within 30 days of the end of the reporting period.

Financial year beginning	What is the first reporting period?	When must the first report be published on the web service?
01-Jan	1 January 2018 to 30 June 2018	On or before 30 July 2018
01-Apr	1 April 2018 to 30 September 2018	On or before 30 October 2018
05-Apr	5 April 2018 to 4 October 2018	On or before 3 November 2018
06-Apr	6 April to 5 October 2017	On or before 4 November 2017
After 6 April	First six months of the financial year 2017-18	Within 30 days, starting on the day after the end of the first reporting period

Submission requirements

• A written statement of the company’s payment terms – including standard contractual length for payment of invoices, maximum contractual payment period, and any changes to standard payment terms and whether suppliers have been notified or consulted on these changes
• A written statement on the company’s process for dispute resolution when related to a payment
• Statistics on the average time taken to pay invoices from the date of receipt
• Statistics on the percentage of invoices paid in the reporting period within 30 days of fewer, between 31 and 60 days, and more than 60 days
• Statistics on the proportion of invoices due in the reporting period that were not paid within the agreed terms.

Companies must also answer yes or no to the following:

• Does the company offer e-invoicing?
• Does the company offer supply chain finance?
• Does the company charge for suppliers to remain on the supplier list? If yes, have they have done this within the current reporting period?
• Are they a member of a payment code? If so, what is the name of the code?

Non-compliance

The regulations are intended to force behavioural change among businesses, rather than impose strict punishments or fines. However, failure to report is a criminal act under the Companies Act 2006, for both the organisation and its directors. Publishing a report that contains information that is materially misleading, false or deceptive is also classed as a criminal offence. This means companies and directors that breach the reporting requirement face prosecution and a fine.

The new regulations also hold other implications for businesses, such as:

• Naming and shaming – the open nature of the report could lead to public pressure over payment practices or failure to report
• Competitors, suppliers and other third parties could compare the reports and make the information public
• Companies risk being compared to rivals with more favourable payment practices and losing business as a result. The most reliable suppliers will only work for the most trustworthy clients.

For more information, the Department for Business, Energy & Industrial Strategy white paper, Duty to Report on Payment Practices and Performance, can be accessed at https://www.gov.uk/government/publications/business-payment-practices-and-performance-reporting-requirements