Recently, the Government published new draft regulations relating to the obligation that is to be imposed on large businesses to publish reports about their payment practices, policies and performance.
The Reporting on Payment Practices and Performance Regulations 2017 and the Limited Liability Partnerships (Reporting on Payment Practices and Performance) Regulations 2017 (the “Regulations”) aim to improve the level of information available to small business suppliers, enabling them to make informed decisions about who to trade with, negotiate fairer terms and challenge late payments. The Regulations differ significantly from the draft regulations previously published by the Government in November 2014. The Government plans to bring the Regulations into force on 6th April 2017.
In this article, we take a look at which businesses will be caught by the new requirements, the key elements of the duty to report and the penalties for non-compliance.
Which businesses will the Regulations apply to?
The duty to report will apply to companies (private, public or quoted) and LLPs which 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
- Over 250 employees.
What will the report need to contain?
The report must include the following:
the organisation’s payment terms, including the standard contractual length of time for payment of invoices, the maximum contractual payment period, any changes to standard payment terms and whether suppliers have been notified or consulted on these changes; and
the organisation’s process for dispute resolution regarding payment.
- 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.
- whether the organisation offers e-invoicing;
- whether the organisation offers supply chain finance;
- whether the organisation’s practices and policies include deducting sums from payments as a charge for remaining on a list of suppliers and
- whether it has done this during the reporting period; and
- whether the organisation is a signatory to a code of conduct or standards on payment practices and, if so, the name of that code or standards.
Is director approval required?
As proposed in the consultation relating to the Regulations, the information prepared by a qualifying company must be approved by a director of that company signing off the report. For an LLP, the equivalent is a designated member. The report must also contain the name of the director or designated member who has approved the information.
Not all contracts are covered
The report only needs to supply the information listed above in relation to contracts connected to the carrying on of a business for the purchase of goods, services or intangible assets (including intellectual property).
However, the Regulations do not apply to:
- business to consumer contracts;
- contracts for financial services; and
- contracts which do not have a significant connection with the UK.
Where must the report be published?
The report will need to be published on a website set up by the Government. This is currently under development.
The draft regulations published in November 2014 required that reports should be made available on a company’s website, but this requirement has been abandoned due to concerns that reports would be difficult to find.
The reporting dates will be aligned to a business’ financial reporting cycle. Businesses caught by the Regulations will be required to publish a report on the Government’s website every 6 months. The first report will be due 30 days after the end of the first six months of a business’ financial year, with the second report due 30 days after the end of the financial year.
The previous draft regulations required businesses to report quarterly. However, the government decided that this might be overly burdensome for businesses, without delivering much in the way of improved data.
What are the consequences of failing to report?
Under the Regulations, the failure to publish a report will be a criminal offence, for which both the organisation and its directors (or designated members in the case of an LLP) will be liable to a fine on summary conviction. However, company directors and designated members of an LLP will not be personally liable if they can show that they took all reasonable steps to ensure the requirement would be met.
It will also be an offence for a person knowingly or recklessly to publish a report, information or statement that is materially misleading, false or deceptive.
The Government also hopes that pressure from the public and the activities of competitors will encourage businesses to adhere to the requirements of the Regulations.
When will the duty come into force?
The Government intends to bring the Regulations into force on 6th April 2017. If this time-frame is adhered to, the duty to report will apply to financial years beginning on or after 6 April 2017.
The Department for Business, Energy & Industrial Strategy has published detailed guidance for companies and LLPs caught by the requirements of the Regulations. You can access the guidance here.
Further Information and Legal Advice
If you would like any further information about any of the issues covered in this article, please do not hesitate to contact any member of the Commercial Team.