Payment practices: BEIS publishes response and draft regulations
The Department of Business, Energy and Industrial Strategy (BEIS) has published the government's response to its consultation on the proposed duty to report on payment practices and policies. The response contains significantly revised draft regulations for companies and limited liability partnerships (Regulations). The response statement also contains an overview of the changes made to the first drafts. The intention is for the Regulations to be brought into force on 6 April 2017 and to apply to qualifying businesses with financial years which begin on or after that date.
The government has committed to publishing guidance prior to the Regulations coming into force.
Purpose of the legislation
The objectives of the reporting requirement are, firstly, to increase transparency and public scrutiny of large businesses' payment practices and performance and, secondly, to provide small business suppliers better information so they can make informed decisions about who to trade with, negotiate fairer terms, and challenge late payments.
Each business in scope will be required to publish its own individual and non-consolidated report.
The duty to report will be mandatory for large UK companies and large LLPs, whether or not they are quoted, which exceeds two or all of the thresholds below on both of their last two balance sheet dates. The thresholds, which are periodically updated, are:
- £36m annual turnover;
- £18m balance sheet total; and
- 250 employees (see s.465, Companies Act 2006).
For parent companies and LLPs, the size of the group they head determines their size for accounting purposes (see s.466, Companies Act 2006). The duty to report only applies if the parent company or LLP qualifies in its own right.
Contents of the report
Narrative descriptions are required of:
- an organisation's payment terms – standard contractual length of time 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; and
- the organisation's process for dispute resolution related to payment.
Statistics are required of:
- the average time taken to pay invoices from the date of receipt of notice;
- the percentage of invoices paid within the reporting period which were paid within 30 days or fewer, between 31 and 60 days, and over 60 days; and
- the proportion of invoices due within the reporting period which were not paid within the agreed terms.
Statements (i.e. a tick box) are required about whether:
- an organisation offers e-invoicing or supply chain finance;
- an organisation deducts sums for remaining on a supplier list, and whether they have done so in the reporting period; and
- an organisation is a member of a payment code, and the name of the code.
Contracts in scope
The Regulations apply to contracts for goods, services or intangible assets (including IP) and which are connected to the carrying on of a business. Business to consumer, financial services and contracts which do not have a "significant connection" with the UK are excluded.
Frequency of reporting
Businesses must report every six months and not, as previously proposed, on a quarterly basis. The first report will be due 30 days after the end of the first six months of a business' financial year; the second reporting period will end at the same time as the business' financial year, with the second report due 30 days thereafter.
Form and location of the report
Businesses will have to publish their report on a web-based portal provided by the government. This is currently under development. The government was persuaded by concerns about the accessibility of reports published on company websites, although this method of publication may be used in addition to using the portal.
Failure to produce a report or reporting falsely will be a criminal offence, with the company and directors liable to a fine. All directors will be liable unless they can show they took all reasonable steps to ensure the requirement would be met.
Director (in LLPs, "designated person") approval will be required to ensure the accuracy of the information contained in the report.
We will publish a further update when the government publishes its guidance.
Disclosure of LEIs and announcement classifications to be required with all regulated information
The Financial Conduct Authority (FCA) has published a consultation in order to implement certain provisions relating to the Transparency Directive (2004/109/EC) (Directive) which will require the publication of certain details by issuers in relation to all regulated information.
The Directive requires the European Securities and Markets Authority (ESMA) to develop and operate, from 1 January 2018, a European Electronic Access Point (EEAP) to provide fast access to all regulated information filed by all issuers subject to the Directive. This will include all information that a listed company is required to disclose in accordance with the FCA Handbook and Market Abuse Regulation and will, therefore, include its preliminary, interim and annual report announcements and announcements of inside information.
The EEAP will take the form of a web portal accessible through ESMA's website and Member States must enable access to their own national storage mechanisms through ESMA's portal. To facilitate the retrieval of regulated information, the EEAP will allow end users to search by an issuer's legal identification number (LEI), home Member State or by type of regulated information when classified by standardised criteria.
In September 2015, ESMA published a regulatory technical standard (RTS) which requires that once the EEAP becomes operational, all regulated information filed in the year previously will be fully searchable. In turn, this means that all regulated information filed from 1 January 2017 will need to be searchable in the manner envisaged by ESMA when the portal goes live.
Accordingly, the FCA propose to add a new section 6.2 to the Disclosure Guidance and Transparency Rules (DTRs) headed: "Filing of information with the FCA" which will require all relevant issuers to:
- use an LEI when communicating regulated information; and
- classify all regulated information in accordance with a classification table proposed to be included as an Annex in DTR 6.
Responses to the consultation are required by 2 January 2017. Nevertheless, issuers are encouraged to include the additional information on all filings from 1 January 2017 and the FCA intend to put in place means to allow them to do so.