There is a significant amount currently owed in late payments in the UK, with a recent government estimate standing at just over £41 billion.
In recent years, the EU and UK legislative landscape has developed in an effort to improve payment practices in commercial transactions and in particular, assist SMEs in securing more favourable payment terms, particularly when dealing with large organisations.
Late Payment of Commercial Debts Regulations
In 2013 the UK implemented the Combating Late Payment in Commercial Transactions Directive 2011/7/EU into national law through the Late Payment of Commercial Debts Regulations 2013/395 (the 'Regulations').
The Regulations apply to B2B contracts entered into on or after 16 March 2013 and set out when statutory interest (or such other rate of interest as the parties may agree) starts to accrue.
Therefore, while the Regulations do not prescribe statutory payment terms, the effect is that, if purchasers want to avoid paying interest on late payments they must comply with the following time limits for payment:
- purchasers must pay a supplier's undisputed invoice within 60 days unless otherwise agreed between the parties and the agreed terms are not 'grossly unfair' to the supplier;
- where the purchaser is a public authority, payment of an undisputed invoice must be made within 30 days; and
- where the parties do not agree payment terms, payment must be made within 30 days from the later of (i) receipt of the supplier's goods/services; (ii) receipt of the supplier's undisputed invoice; or (iii) verification / acceptance of the goods/services (if such a right is included in the contract or any relevant statute).
What constitutes 'grossly unfair' depends on various factors including the nature of the goods or services in question, the extent to which the clause was negotiated and the relative bargaining power of the parties but broadly it comprises anything that is a gross deviation from good commercial practice, good faith and fair dealing.
Recent commentary on this point suggests that extended payment terms would not be grossly unfair if there was an objective and commercially reasonable reason for extending the terms which was not principally in the purchaser's own interest. Conversely, a blanket application of extended payment terms is likely to be grossly unfair.
For more detailed information on the Regulations, please see our previous article: Late payment of commercial debts: New developments of interest.
How successful have the Regulations been?
In August 2016, the European Commission published a report on the extent to which the Directive has achieved its aims. The EC found that although companies are aware of the rights the Directive confers, its usage is not yet widespread, particularly among larger purchasers. The report recommended that member states:
- establish a system to monitor and report on progress on average payment terms in both the public and private sectors; and
- encourage the development of initiatives such as voluntary prompt payment codes.
Prompt Payment Code & Reporting Requirements for Large Companies
A voluntary prompt payment code ('PPC'), which sets standards and promotes best practice for payment practices, has existed in the UK for seven years and is administered by the Chartered Institute of Credit Management on behalf of The Department for Business, Energy and Industrial Strategy. Organisations are invited to sign up to the code in return for which they can publish the PPC logo on their documentation and website and benefit from the reputational boost this brings.
To bolster the PPC, back in 2015, it was announced that regulations would come into force in April 2016 (giving effect to s3 of the Small Business, Enterprise and Employment Act 2015) requiring large companies to publish details of their payment practices with the aim of increasing transparency and enabling suppliers to identify customers with good payment practices.
Following a delay, these regulations are now due to come into force on 6 April 2017 and will impose on large companies (being those with a net turnover in excess of £36 million or more than 250 employees) and large LLPs, a statutory duty to publish via an online portal a report on its payment practices which will include the following information:
- standard payment terms;
- the average time taken to pay invoices;
- the percentage of invoices paid outside of the payment terms;
- the proportion of invoices paid between certain periods i.e. 1-30 days, 31-60 days and 61 days'+; and
- membership of the PPC.
With April 2017 just around the corner, it is a good time to reflect on your existing payment practices, or indeed the payment practices you demand as a supplier. In particular, if you are a large organisation, consideration should be given to who in the business is best placed to collate the required information to make compliance with the new regulations as smooth as possible.