Businesses need to be aware of the pending introduction of two sets of regulations in the UK, whose entry into force is imminent. Even before then, companies need to invest time getting their house in order to ensure they are compliant when the time comes.
The Reporting on Payment Practice and Performance Regulations 2017 require businesses above a certain size to publish, twice per year, online reports confirming how long they take to pay their suppliers. The Government considers this important as slow payment can force SMEs out of business. Making payment time more transparent will enable SMEs to choose more carefully who they deal with, rationalising their resources more effectively.
Failure to make reports under the Regulations as and when required will be a criminal offence and punishable by fines against the business concerned. A parallel set of Regulations will specifically govern LLPs, but contain equivalent duties for that type of corporate vehicle.
Which businesses are affected?
The Regulations don’t catch every organisation, but only those of a certain type and above a certain size. First they apply only to companies and limited liability partnerships which have been incorporated in the UK (excluding entities incorporated overseas or to other types of business, such as sole traders or partnerships). In terms of size, the reporting duties will generally catch only those businesses which, in the two preceding financial years, have met two of the following three criteria:
- a balance sheet exceeding £18 million
In considering whether or not they are caught, organisations must also give careful consideration to the specific rules on parent companies, which look at the characteristics of the overall group as well as the entity itself.
The reports cannot be consolidated for the group (each qualifying entity within the group will need to report individually). UK based LLPs or companies which are subsidiaries of overseas companies can be subject to the Regulations where they meet the above test.
Where will the reports be published?
The Government will set up a dedicated website where businesses will upload their reports. The reports will be publicly available.
What will reports need to contain?
The Regulations are highly specific in the information that must be set out in the company reports. The core reporting obligations require qualifying businesses to disclose narrative descriptions of:
- specified information on the organisation’s payment terms, (for example, the standard contractual length of time for payment of invoices); and
- the organisation’s process for resolving disputes with suppliers over payment (or non-payment) issues.
The organisation must also provide statistics on:
- the average time taken to pay invoices from the date of receipt;
- the percentage of invoices paid within the reporting period (see below) which were paid in 30 days or less, between 31 and 60 days, and over 60 days; and
- the percentage of invoices due within the reporting period which were not paid within the payment period.
If that were not enough, the Regulations also mandate certain additional statements the organisation. For instance, it must disclose whether it offers e-invoicing facilities or supply chain finance and divulge any codes of conduct on payment practices to which it has signed up.
The published information must relate to the company’s practices in the preceding six months. The regulations are also quite specific about the types of contracts that must be taken into account (and those that must be disregarded) when compiling the data for the report. For example, payment data derived from business to consumer contracts are not relevant for the purposes of the report.
What are the penalties for non-compliance?
Failing to comply will be a criminal offence which could expose the organisation concerned to prosecution and fines. Both the organisation and its officers (company directors or designated members of an LLP) will be held responsible. However, individual officers will avoid personal liability if they can show they took all reasonable steps to ensure the organisation would respect its legal responsibilities under the Regulations.
It will also be a criminal offence for a director to include in a report any false or misleading statement where that has been done deliberately or recklessly.
When will the reporting obligations take effect?
Although the Regulations themselves will come into force on 7 April 2017, the reporting duties will undergo a more phased introduction in relation to each qualifying organisation. An organisation will not need to report in respect of:
(i) its first financial year (following incorporation); or
(ii) a financial year which began before 7 April 2017.
Thereafter, however, each company or LLP (during a financial year when it is a “qualifying company”) will be required to compile and issue two reports per year. The first will fall due within 30 days of the first half of its financial year. The second will fall due within 30 days of the end of the that financial year.
Clearly, many businesses will see this as a headache that they could have managed without. Unfortunately, it is almost upon us and many of our clients have already been preparing for its introduction. For those businesses who have not yet done so, they should use the breathing space available to:
- familiarise themselves on the reporting duties applicable to their business;
- review dispute resolution systems – do these strike the right balance betweenchallenging unfair invoices and ensuring suppliers are paid in a timely way?;
- put systems in place in order to capture relevant data;
- ensure the relevant staff are trained on the new duties;
- put verification systems in place to ensure reports are compiled accurately(given the sanctions for providing false or misleading information);
- consider signing up to appropriate payment codes of conduct.
Obviously, executives’ minds will be focused on the risk of criminal penalties for non-disclosure of requisite data. It is striking that the Government has chosen to introduce such stark penalties in relation to payment issues. By contrast, the Modern Slavery Act 2015, which also introduces mandatory disclosure obligations, carries only the threat of civil action before the courts for failing to report (at least as the law currently stands).
It will be vital to ensure that payment reports are disclosed punctually, that they are accurate and portray the business as one that treats its suppliers fairly. The third point is one in particular that should not be overlooked. “An army marches on its stomach”, Napoleon once said and, in the same way, businesses are dependent on provision from their supply chains who, in turn, look to customers for timely payment. For many suppliers, delayed payment strangles their cash-flow, which can in turn threaten their existence or at least leave them at risk of litigation from their own suppliers. The risk of alienating suppliers or driving them to deal with competitors through tardy payment arguably presents an even bigger threat to businesses than prosecution for non-disclosure.
We are already advising businesses on the steps they need to take to meet the requirements of the new law. If we can assist you, please don’t hesitate to get in touch.