For financial years beginning on or after 6 April 2017, large businesses will be required 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 on an online service set up by the government and available to the public. The aim of the new reporting requirement is to increase transparency and public scrutiny of large businesses' payment practices and to give small business suppliers better information to make informed decisions about who to trade with, negotiate fairer terms, and challenge late payments.
Which businesses are required to report?
UK companies and limited liability partnerships (LLPs) will be subject to the new reporting requirement if they qualify as medium-sized or above for accounting purposes, that is, 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
- Over 250 employees
Smaller businesses will not be caught, whether or not their shares are traded on any stock exchange.
Parent companies and LLPs 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 will be required to publish its own individual and non-consolidated report.
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). Business to consumer contracts are not covered and contracts for financial services are also excluded. Contracts will also have to have a significant connection with the UK to be covered by the duty to report.
To discourage stalling tactics, disputed invoices will not be excluded.
The report must include narrative descriptions of:
- the business's payment terms, including: standard contractual length of time for payment of invoices, maximum contractual payment period and any changes to standard payment terms and whether suppliers have been notified or consulted on these changes
- the business's process for dispute resolution related to payment
It must also include statistics on:
- the average time taken to pay invoices, with day one of the payment period being the day after an invoice is received (or, where an invoice is not used, the day after the date when the large business has notice of a sum to be paid)
- 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
- the proportion of invoices due within the reporting period which were not paid within agreed terms
There must also be tick-box statements about:
- whether the business offers e-invoicing
- whether the business offers supply chain finance
- whether the business deducts sums from payments as a charge for remaining on a list of preferred suppliers, and whether it has done this in the reporting period
- whether the business is a signatory to a code of practice or standards on payment practices, and the name of the code
A company director should be responsible for signing off the report – for an LLP, the equivalent is a designated member.
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 report 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 or below nine months, 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.
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 improvement 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. All directors will be liable, unless they can show they took all reasonable steps to ensure the requirement would be met. 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.
Mike Cherry, National Chairman of the Federation of Small Businesses, said: "Tackling late payments is now a key part of the government's corporate governance agenda. The comprehensive and regular duty to report is the first step to combat a business culture that feels like one where it is OK to pay small firms late. It is not OK - we estimate that 50,000 business deaths could be avoided every year, if only payments were made promptly – adding £2.5 billion to the UK economy. We need to see executive board level engagement and scrutiny of payment practices to deliver lasting cultural change."
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