The Reporting on Payment Practices and Performance Regulations 2017 came into force on 6 April 2017. Although the regulations have received some publicity, they seem to have fallen under the radar of many within-scope businesses.
The regulations impose a duty on large companies and large limited liability partnerships (LLPs) to report twice yearly on their payment practices and policies in respect of payment of suppliers’ contracts. Depending on the key financial dates of large companies and LLPs, reports will be due within 30 days of each six month period. For example, for a company whose 2016/2017 financial year ended in April 2017, the first report would have been due to be published in November 2017 and the second report will be due to be published in May 2018.
The purpose of the regulations is to promote a culture of better payment practices and increase transparency by allowing suppliers to easily identify which businesses have a poor track record and negotiate terms of supply on that basis, which in turn will hopefully incentivise businesses to improve their payment practices.
The Government has published guidance to reporting on payment practices and performance which can be found here. If you are unsure whether your business is within scope, please get in touch with a member of Penningtons Manches' corporate team.
Businesses that must report
The reporting requirement applies to large UK companies (whether privately owned or publicly traded) and large UK LLPs. A company or LLP qualifies as large if it has exceeded at least two of the following thresholds over a 12 month period:
- annual turnover of £36 million or more;
- total assets on its balance sheet of £18 million or more; or
- an average of 250 employees.
The turnover figure must be proportionately adjusted for financial periods of less than a year. The balance sheet total means the aggregate of the amounts shown as assets in the company's balance sheet and the number of employees means the average number of persons employed by the company in the relevant year.
Group reporting requirements
For companies or LLPs that have one or more subsidiaries, a two stage test applies. The parent company or parent LLP must first consider whether it qualifies as large. If it doesn't, then it will not need to report on its own payment practices and performance. If it does, then it needs to consider whether the group also qualifies as large.
A large group is one that exceeds two or all of the following thresholds on both of its last two balance sheet dates:
- aggregate turnover of £43.2 million gross or £36 million net of certain intra-group transactions;
- aggregate balance sheet of £21.6 million gross or £18 million net; or
- aggregate average of 250 employees or more over the relevant financial period.
The net figures are calculated after netting off of any intra-group transactions, which should be done in accordance with the accounting rules that apply to the group.
If both the group and the parent company, or parent LLP, are large, then the parent company, or parent LLP, needs to report. In addition, any company or LLP within the group that qualifies as large also needs to report individually on its own payment practices and performance.
What should be reported?
Businesses must publish payment practices and performance information in relation to ‘qualifying contracts’. For a contract to be a qualifying contract, it must:
- have been entered into in connection with the carrying on of a business;
- be for goods, services, or intangible assets (including intellectual property);
- not relate to supply of financial services; and
- have a significant connection with the UK.
Whether or not a contract has ‘a significant connection with the UK’ depends on the particular circumstances. Where a contract would be governed by UK law (ie the law of England and Wales, Scotland or Northern Ireland) otherwise than by reason of the parties’ choice of law, then it will satisfy this requirement. There are legal rules that determine whether this is the case and it may be advisable for businesses to obtain legal advice if they are unsure. The guidance gives some examples of contracts that would satisfy the requirement, such as where the contract is to be performed in the UK, or where one or both parties is established in the UK or carries on a relevant part of its business in the UK.
Information to be provided For each reporting period, companies and LLPs must provide the following information in relation to qualifying contracts:
- narrative descriptions of their standard payment terms for different types of qualifying contracts, as well as a description of how the business deals with disputes about payments under qualifying contracts.
- Where there are no standard terms in place (including where a business habitually transacts on suppliers’ standard terms), then the payment terms the business uses most frequently for that type of qualifying contract must be reported on. Where these are suppliers’ terms, then it would be advisable to state this in the report. Rather than summarising terms, a business can instead include a link to its websites if the terms are available there in full.
- Where a business has different standard terms for different circumstances, then this should be explained in the report. It should include details of the standard payment period, the maximum payment period and any changes to the standard terms during the reporting period, including confirmation of whether suppliers were notified or consulted prior to the change (see paragraphs 40-54 of the guidance).
- Contracts concluded verbally where there are no written payment terms must still be included. It some cases, it may be appropriate to seek legal advice to clarify whether a particular arrangement has or hasn’t acquired contractual force.
- statistics (to be calculated based on percentages of the volume of invoices, rounded to the nearest whole number), for:
- the mean average number of days taken to pay suppliers calculated from the day after the business receives the invoice (or is otherwise notified of an amount for payment) (referred to as the ‘relevant date’);
- the percentage of payments made within 30 days, 60 days, or more than 60 days after the relevant date; and
- the percentage of payments falling due within a reporting period that were not made within the contractually agreed period (see paragraphs 55-67 of the guidance).
In calculating these statistics, disputed invoices should be included, but for any given period, invoices that are already overdue at the start of that period should not be included.
- statements confirming whether or not supply chain finance and electronic invoicing are available, whether fees are charged (which may be by way of deduction from invoices) for remaining on preferred supplier lists, and whether the business adheres to any payment code (for example, the voluntary Prompt Payment Code) and, if so, which one (see paragraphs 68-75 of the Guidance for guidance as to how these figures should be calculated).
When and how to report
Within-scope businesses need to publish the required information in respect of each ‘reporting period’. Ordinarily, there will be two reporting periods in each financial year – the first being the period of six months beginning on the first day of the financial period, and the second being the remainder of that financial period.
Where a company or LLP has changed its accounting reference date during a financial period, with the effect that that the financial period is shortened to nine months or fewer, then that financial period will constitute a single reporting period for the purposes of the regulations. Conversely, where the effect of the change in accounting reference date is to extend the financial period to more than 15 months, then that financial period will consist of three reporting periods – the first calculated as it would be in a normal, 12-month period, the second being the period of six months beginning on the day after the end of the first period and the third being the remainder of the financial period.
The information in respect of a particular reporting period must be published within 30 days beginning on the first day after the end of the relevant reporting period.
The report must be approved by a director (or designated member in the case of an LLP) prior to publication and the approving director (or designated member) must be named.
The Government has made available a web service for businesses to publish the information here. The information will be available for viewing as soon as it is published.
Consequences of failing to comply
The main driver of compliance is likely to be public pressure due to the open nature of the reporting requirements. Nevertheless, despite this, the regulations create two criminal offences - the first (which may be committed by the company or LLP and its directors or designated members), of failing to publish a report within the prescribed period; and the second, of knowingly or recklessly publishing a report that is false or misleading. Both offences are triable in the Magistrates’ court and are punishable by way of a fine not exceeding level 5 on the standard scale (currently £2,500).
The offence of failing to publish a report is committed both by the company (or LLP) and any person who was a director (or designated member) immediately before the end of the 30-day period within which the report must be published. Any person proposing to become a director (or designated member, as applicable) within that period, would be well-advised to carry out some pre-appointment due diligence to find out whether the report has been published, as they may face criminal liability following appointment for a failure that was outside their control!