What’s the issue?
Concerns that small companies are particularly vulnerable to late payment of their invoices, which can impact on their cash flow, their ability to trade and, in the worst cases, lead to insolvency, led to protective provisions being made under s3 of the Small Business, Enterprise and Employment Act 2015. The Reporting on Payment Practices and Performance Regulations 2017 and the Limited Liability Partnerships (Reporting on Payment Practices and Performance) Regulations 2017 (Regulations), come into force on 6 April 2017 and introduce reporting obligations around payment practices on large companies and LLPs in the UK in relation to certain types of business to business contracts.
What’s the development?
In preparation for implementation date, the BEIS has published guidance to help businesses decide whether or not they are caught by the Regulations and how to comply with them if they are. The guidance sits alongside re-published draft legislation and explanatory memoranda.
The Regulations apply to large (as determined by specific criteria) companies formed and registered under the Companies Act 2006, and LLPs registered under the Limited Liability Partnerships Act 2000. If you fall within this category, you will be required to publish certain information about your payment practices on a publicly accessible government website twice a year within 30 days of the end of each reporting period in your financial year from 6 April 2017.
Who has to report? The reporting requirement applies to large companies (whether private, public or quoted) and LLPs incorporated in the UK. A large business is any company or LLP which exceeded two or all of the turnover, balance sheet and average number of employee thresholds for a medium-sized company as set out in s465(3) Companies Act 2006, on both of its last two balance sheet dates. These are currently:
- £36m annual turnover
- £18m balance sheet total
- 250 employees
No company or LLP will be required to report in its first financial year.
A parent company or LLP must report in financial years for which both the parent company or LLP and the group it heads are large. This is evaluated using a two stage test. Is the parent itself large? If not, there is no duty to report its own payment practices and performance. If it is large then it also has to consider whether the group qualifies as large. This is assessed in terms of whether at least two of aggregate turnover, balance sheet and number of employees exceed the thresholds set out in s466(4) CA 2006, on both of its last two balance sheet dates. At the time of writing, the thresholds for groups are:
- £36m net (or £43.2m gross) aggregate turnover
- £18m net (or £21.6m gross) aggregate balance sheet total
- 250 aggregate employees
If both the group and parent are large then the parent will need to report its own payment practices in addition to which, each company within the group that qualifies as large will also need to report individually. This does beg the question as to why a parent which is itself large, is not required to report unless its group is also large.
Which contracts are relevant? Where a company or LLP has a reporting duty, it must publish information about its payment practices and performance in relation to “qualifying contracts”. A qualifying contract:
- is between two or more businesses;
- has a significant connection with the UK (depends on the circumstances but governing law, applicable law, place of performance and place of establishment of the parties will be relevant factors); and
- is for goods, intangible property (e.g. IP) or services (other than financial services).
What information must be reported? Required information includes:
- narrative descriptions of standard payment terms and payment disputes resolution process;
- statistics on average number of days taken to pay;
- percentage of payments made in under 30 days, between 31 and 60 days and 61 days or more;
- percentage of payments not made in accordance with agreed payment terms; and
- statements confirming type of invoicing, availability of supply chain financing, set-off payment terms if any, whether the business is a member of a payment code and which one.
The narrative descriptions may be provided by giving standard business terms (potentially by hyperlink) or, where none, most frequently used payment terms for each type of qualifying contract. Where describing standard business terms, information must be given about:
- the length of time for the business to make payments;
- the longest period the business has agreed to make payment in the relevant reporting period; and
- any variation made to standard payment terms in the reporting period.
Reporting periods There will generally be two annual reporting periods covering the first and second six month periods in the financial year of the business. Required information must be published within 30 days of the end of the relevant reporting period.
The BEIS guidance discusses when first reports are due for companies with financial years starting before and after 6 April 2017. It is expected that some businesses will need to begin reporting from October 2017. More information will be available on the website from mid-2018 when it is expected that the majority of businesses which meet the requirements will have begun reporting.
Where must information be published? Through a government website which will go live in April 2017. An email address will also be provided in order to notify the BEIS of any suspected non-compliance by a business.
Sanctions? It is a criminal offence to fail to publish a required report. The offence is committed by the company or LLP and by each of the directors or designated members. It is a criminal offence to knowingly or recklessly publish a misleading, false or deceptive report. In both cases, fines may be issued.