This article looks at the new reporting on payment practices and performance regulations and the unlimited fines in place for non-compliance.
On 6 April 2017, new regulations come into force which require larger companies and Limited Liability Partnerships (LLPs) to publish information about payment practices twice a year. This is part of a government initiative to encourage timely payments and thereby improve cashflow for smaller suppliers.
The Reporting on Payment Practices and Performance Regulations 2017 and the Limited Liability Partnerships (Reporting on Payment Practices and Performance) Regulations 2017 (together 'Regulations') create new criminal offences for companies and their directors (or designated members in the case of LLPs) who fail to comply.
Who do the Regulations apply to?
The Regulations apply to companies and LLPs that exceed any of the two or more qualifying thresholds:
- a turnover of £36 million;
- a balance sheet total of more than £18 million;
- an average number of employees of 250.
Where the business is a parent, the total group figures must be considered in determining whether the Regulations apply, but this does not absolve a UK subsidiary from the need to comply with the Regulations in its own right, if it qualifies on a standalone basis. All UK companies formed and registered under the Companies Act 2006 or previous legislation and all LLPs registered under the Limited Liability Partnerships Act 2000 must consider their own position.
What is required?
Businesses which meet the threshold are required to report on payment practices and performance for contracts entered into on a business to business basis for goods, services or intangible assets, including intellectual property (with an exception for contracts for financial services).
Information including narrative descriptions of standard payment terms, statistics concerning the late payment of invoices, and statements about the business's process for resolving payment must be included in the report, which will be published on a government website and accessible by the public.
The report must be approved by a director (or designated member) before it is published. By comparison, it is worth noting that a recent review of Modern Slavery statements found that many early reporters did not in fact comply, simply because they were not signed by a director.
Generally, a business will have two reporting periods in the financial year; one for the first six months of the financial year and the second for the remaining period until the financial year end. Under the Regulations, businesses are required to report within 30 days of the end of the reporting period.
A business with a financial year commencing on 6 April 2017 (the date that the Regulations come into force) will be obliged to report on the period to 5 October 2017 by 4 November 2017.
Breach of the reporting requirements is a criminal offence.
- The company and directors (or designated members in the case of LLPs) are liable if the requirements to prepare and publish a report are not met, save that a director will not be liable if he or she took all reasonable steps to ensure compliance. There is no requirement that the director must know or ought to have known that an offence was being committed;
- It is also an offence to publish, or cause to be published, false or misleading information;
- Prosecutions can be brought up to three years after an offence; and
- Offences are punishable in the Magistrates' Court by an unlimited fine.
The Explanatory Memorandum to the Regulations states that 'The Department [the Department for Business, Energy and Industrial Strategy] will generally seek to encourage a business to comply with the reporting requirement before steps are taken to prosecute', which indicates that criminal proceedings are likely to be reserved for incidents of serious or persistent non-compliance.
There is a growing trend towards using the criminal law to impose moral and ethical requirements on corporate bodies, with liability attaching to both companies and company directors. The Corporate Finance Bill which is currently before the House of Lords, for example, will create corporate offences where a person associated with a body corporate or partnership facilitates the commission by an employee or agent of a tax evasion offence.
- Assess whether your business meets the threshold criteria to determine whether it is required to report under the new Regulations and keep decision making under review, especially in growing businesses, or those close to the qualifying thresholds;
- Put a procedure in place with Board level approval to ensure compliance:
- Decide who will prepare the report for your business;
- Review payment practices and contract performance to gather necessary information;
- Prepare the report in good time to ensure its accuracy;
- Ensure that a director or designated member approves the report before publication; and
- Minute publication of the compliant report at Board level.