Introduction

The Payment Practices and Performance Regulations 2017 require, as of financial years beginning on or after April 6 2017, large UK businesses to report publicly twice yearly on their payment practices and performance, including the average time taken to pay supplier invoices. The reports must be published through an online service set up by the government and made available to the public. Failure to publish may result in fines and criminal liability for directors.

The new reporting requirement aims to increase transparency and public scrutiny of large businesses' payment practices and to give small business suppliers better information to help them make informed decisions about who to trade with, negotiate fairer terms and challenge late payments.

Where a large UK franchisor acts as a supplier of goods or services to its franchise network, it will now have to comply with this new ongoing compliance regime. Large UK franchisors may even be required to disclose information on certain terms in their licence or franchise agreements.

For franchise businesses which fall below the reporting threshold, but whose supply chains rely on large suppliers, the regulations are good news, as they are designed to improve and promote transparency and fairness in supply chain management, which is often seen to be an unfair playing field.

Equally, the regulations are good news for franchisees and prospective franchisees, as they will inevitably result in more information being placed in the pubic domain, which might inform a prospective franchisee's decision to invest in a franchise system and encourage franchisors to operate in a fairer, more transparent way towards their franchisees.

Which businesses must report?

UK registered companies will be subject to the new reporting requirement if they qualify as medium sized or above for accounting purposes − that is, if they exceeded two or all of the following thresholds on both of their last two balance-sheet dates:

  • over £36 million annual turnover;
  • over £18 million balance sheet total; and
  • over 250 employees

Smaller businesses will not be caught, whether or not their shares are traded on any stock exchange.

Parent companies will be caught if their group qualifies as medium sized or above for accounting purposes and they also meet the definition above in their own right. Each group business which meets the definition must publish its own individual and non-consolidated report.

Independent franchisees (ie, where there is no franchisor shareholding) will not form part of a franchisor's group for the purposes of these thresholds.

What must be reported?

The reporting obligation applies to payment practices in relation to business-to-business contracts for goods, services or intangible assets (including intellectual property) with a significant connection to the United Kingdom. Business-to-consumer contracts and contracts for financial services are not covered.

To discourage stalling tactics, disputed invoices are not excluded.

The report must include narrative descriptions of:

  • the business's payment terms; and
  • the business's process for dispute resolution related to payment.

It must also include statistics on:

  • the average time taken to pay invoices;
  • the percentage of invoices paid within the reporting period which were paid in 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 agreed terms.

There must also be tick-box statements indicating whether:

  • the business offers e-invoicing;
  • the business offers supply chain finance;
  • the business deducts sums from payments as a charge for remaining on a list of preferred suppliers, and has done this in the reporting period; and
  • the business is a signatory to any code of practice or standards on payment practices.

A company director should sign off the report.

When must reports be published?

The first report will be due 30 days after the end of the first six months of a business's financial year and the second will be due 30 days after the end of the financial year. Where a business changes its year end and has a financial year of nine months or less, it will be required to report only once after the end of that financial year. If a change to the year end results in a financial year of over 15 months, the business will be required to report after each of the first and second six months of the financial year and in respect of the remainder of the financial year.

Penalties

It is hoped that publicity, public pressure and good payment behaviour by responsible companies leading the way will encourage compliance with the new reporting requirement and lead to improvements in payment practices. In addition, failure to publish a report is a criminal offence, with the company and directors liable to a fine on summary conviction. It is also an offence to publish false or misleading information, and a company or individual who does so will also be liable on summary conviction to a fine. Guidance to help businesses understand and comply with the new reporting requirement has been published.

Comment

For large UK franchise businesses, it will be critical to undertake a review of contracts and payment performance metrics to ensure that these obligations − and the reporting requirements, where applicable − are complied with.

Even though pre-contractual disclosure is not a legal requirement for franchisors in the United Kingdom, this is required of members of the British Franchise Association under the Code of Ethics and is seen as industry best practice. Large UK franchisors should therefore consider embracing this trend towards greater transparency by getting ahead of the competition and turning this type of disclosure into a force for good, which can mitigate the risks of supply chain disputes and increase engagement with and investment in their systems.

This article was first published by the International Law Office, a premium online legal update service for major companies and law firms worldwide. Register for a free subscription.

For further information on this topic please contact Gordon Drakes at Fieldfisher LLP by telephone (+44 20 7861 4000) or email (gordon.drakes@fieldfisher.com). The Fieldfisher LLP website can be accessed at www.fieldfisher.com.