15 August 2017

New Payment Reporting Regulations

New Payment Reporting Regulations designed to follow Richard Branson’s tip to “Never take your eyes off the cash flow because it’s the life blood of business.”

It’s undoubtedly a global business truth, but for smaller or medium-sized businesses it can feel even more acute, when that life blood is ebbing away from you, out of control.  Without the bargaining power of the likes of the Virgin Group, businesses of any size can often struggle not necessarily through shabby products or poor customer service, but more often through an inability to manage their supply chain and resulting cash flow issues.  Particularly when that customer base is a collection of much larger, perhaps more aggressive businesses.

It’s the need to give smaller and medium-sized businesses another tool to support them in managing that cash flow which has led to the Reporting on Payment Practices and Performance Regulations 2017 (and the equivalent Limited Liability Partnerships (Reporting on Payment Practices and Performance) Regulations 2017), which came into force on 6 April 2017.

So is the introduction of a new reporting regime in the UK going to change all that supply chain pressure?

It certainly feels like a positive step; to increase the transparency of the businesses we’re dealing with, to know their track record on payments and to encourage a positive attitude to demonstrating good payment practices.  This new set of Regulations, which came into force in April 2017, bring into effect an obligation on the UK’s bigger companies and LLPs to report their payment practices and performance statistics on a publicly available website twice a year. 

What kind of business needs to report their payment information?

For these purposes ‘qualifying companies’ are:

- companies formed and registered in the UK under the Companies Act 2006 or previous laws; or

- limited liability partnerships (LLPs) registered under the Limited Liability Partnerships Act 2000;

 which meet specific size thresholds in the previous 2 financial years.

The individual qualifying companies in question (there are different thresholds set for reviewing at a group level) must have exceeded 2 or more of the following criteria in each of their previous 2 financial years:

- £36 million annual turnover;

- £18 million balance sheet total; or

- average of 250 or more employees.

A qualifying company does not need to report in its first financial year and in its second financial year could become a qualifying company purely on its first financial year’s figures exceeding 2 or more of those stated criteria.

Does this affect UK businesses operating overseas or overseas companies trading in the UK?

Regardless of where the qualifying company operates, if it was formed and registered under the Companies Act, it will need to comply with these Regulations.  What might differ for a business primarily operating outside the UK is the extent of information it reports depending on the extent to which it relates to qualifying contracts, the definition of which is explained below. 

So businesses incorporated outside of the UK need not report under these Regulations.

What kind of information needs to be submitted?

The information to be provided is in relation to all of that businesses ‘qualifying contracts’.  Remembering, of course, that contracts can be verbal as well as in writing, qualifying contracts are those which:

- are between 2 or more businesses;

- are for goods, services or intangible property (which includes intellectual property); and

- are not for financial services.

To be a qualifying contract the second condition is that the contract is governed by a UK law (so Scottish law, North Irish law or the laws of England and Wales) either:

- other than by the parties’ choice or automatically without the parties’ choice; or

- by the parties’ choice and having a significant connection to the UK; or

the contract is governed by a law of a country outside the UK by the choice of the parties and:

- without that choice, it would have been governed by a UK law; and

- it has no significant connection with any country outside the UK.

A summary of the information required:

In relation to those qualifying contracts, each business is required to submit the following information to a public website service:

Narrative descriptions of:

- the qualifying company’s standard payment terms in the qualifying contracts, including:

  • specified payment periods in days;
  • details of any variation to payment terms during the reporting period; and
  • details of any notification or consultation with suppliers before the variation took effect.

- the maximum payment period specified in all qualifying contracts entered into during the reporting period.

Explanations of:

- the qualifying company’s process for dispute resolution in relation to payment under a qualifying contract.

Statements of whether the qualifying company:

- offers its suppliers any arrangements for payment through a finance provider;

- provides for any system of electronic submission and tracking of invoices;

- is signed up to a code of conduct or standards on payment practices and, if so, which; and

- has any practices or policies allowing the deduction of sums as a charge to a supplier in order to remain on the qualifying company’s list of suppliers and confirmation of any occurrence of such a practice during the reporting period.

Performance statistics of the following:

- the average number of days taken to make payments under qualifying contracts during the reporting period;

- the percentage of payments made between day 1 and day 30, between day 31 and day 60 and on or after day 61; and

- the percentage of payments not made within the payment period.

When does this obligation kick in?

In any qualifying companies’ financial year there will be 2 reporting periods; the first being the first 6 calendar months starting on the first day of the business’ financial year and the second being the following 6 months ending on the last day of the financial year.  The filing requirement is within 30 days of the end of each reporting period.

So although the new Regulations came into force on 6 April 2017, the first publications will start to become due, for those businesses whose financial year actually started on 6 April 2017, within 30 days of the 5 October 2017.  The deadline for the first reporting obligations is therefore 4 November 2017.

What are the repercussions of failing to report or reporting any misleading, false or deceptive information?

It’s a criminal offence for a business, and for every director or member of that business, to fail to file the necessary report by the deadline.  It is also a criminal offence for a director or member of a business to knowingly or recklessly report information as part of this regime which is misleading, false or deceptive.  Each of these criminal offences would be punishable by fines upon a summary conviction.

So, is your business ready to report the right information on time and, probably more importantly, what does that information say to the rest of your supply chain about your business as a potential customer?  The introduction of these Regulations certainly seems like an interesting step in trying to create a culture of prompt payment and improving the bargaining position for those smaller and medium-sized businesses a little further down the supply chain battling their cash flow demons.