New pressure for better payment practices
It’s over a year since regulations requiring large companies and limited liability partnerships (LLPs) to report on their payment practices came into force. However, 30 July 2018 marks the first reporting deadline for many of these large companies – those with December year ends. So now is a good time to highlight what this reporting involves and the new information – and potentially power – it gives to smaller entities when negotiating payment terms.
Who is affected
In brief, large companies and LLPs are defined as those that exceed at least two of the following criteria:
- £36 million annual turnover;
- £18 million balance sheet;
- 250 employees.
There are additional tests for companies or LLPs with one or more subsidiaries.
What you need to report
The regulations are intended to help tackle late payment, and this is reflected in the information that large companies and LLPs will have to report twice a year. This includes narrative descriptions, statistics and statements. For example, you must give narrative descriptions of your standard payment terms (including the standard contractual length of time for payment of invoices) and your process for resolving payment disputes.
Reported statistics must cover:
- the average number of days taken to make supplier payments in that reporting period;
- the percentage of payments made within 30 days, between 31 and 60 days, and in 61 days or more; and
- the percentage of payments due but not paid within the agreed payment period.
Finally, you must make a number of statements, such as whether or not suppliers are offered e-invoicing and whether or not the business is a member of a payment code.
More negotiating power for suppliers
Any party interested in the payment practices of a large company or LLP can look up their reported information via a government portal. It‘s hoped that this information can help potential suppliers, particularly smaller suppliers, make informed decisions about whether to do business with a large company. In addition, if they see that the payment terms they are being offered are worse than those reported, they can use that knowledge to press for improved contract terms.
Users of the information companies report need to assess it carefully, of course. For example, care should be taken when interpreting the reported percentage of payments not paid within the agree payment period. One company’s standard terms may be for payment within 30 days, while another’s may extend to 75 days or more. Even if the first company pays a lower percentage of invoices within its standard period (30 days) than the second company, it may still be a more reliable payer.
It’s hoped that the new transparency into payment practices will encourage slow-paying large companies and LLPs to improve their performance. There are some complexities with the reporting requirements, however. For example, reporting on payment practices is required for ‘qualifying contracts’ only. These include contracts that have ‘a significant connection with the UK’. Contracts that relate to the supply of financial services are excluded.
Non-compliance could result in fines
Poor performance in reporting could be a source of embarrassment for large companies and LLPs, but they will need to report twice a year regardless. The regulations create two criminal offences – the first for failing to publish a report within the prescribed period, and the second for knowingly or recklessly publishing a report that is false or misleading. Both offences are punishable by fines.
The Chartered Institute of Credit Management (CICM) played a pivotal role in the development of this legislation and undertook research into the late payment of invoices earlier this year. Philip King, Chief Executive of CICM, says: “The Payment Practices Reporting Regulations are already delivering an increased level of transparency and accountability. Comparisons can be drawn between organisations within the same sector, signatories to the Prompt Payment Code (administered for BEIS by the Chartered Institute of Credit Management) are being challenged if their reported performance fails to meet the Code commitments, and payment behaviour is being forced up the corporate agenda.
“Perhaps most important of all, SMEs can start supplying a larger business with their eyes open; the portal allows them to know what to expect, and to make a better informed decision about the benefits, or otherwise, of entering into the trading relationship.”
Large companies and LLPs affected by the regulations need to make sure their systems are up to the job. We can help review your current accounting systems, in order to capture and extract the information you need to report. If you would like help in complying, please get in touch.