A new legal duty is to be introduced from April this year, putting large businesses' payment practices under the spotlight.
Large businesses will have to publish information about their payment practices on a central government website. The idea is to "name and shame" those organisations that take a long time to pay.
Suppliers should gain more information to help make informed decisions about trading partners.
Why is the duty coming?
The duty is part of the UK government's efforts to tackle late payment. Late payment causes cash flow problems, hampers investment and, in severe cases, can present solvency risks to businesses.
It is a particular problem for SMEs. In June 2015, £26.8 billion in late payment was owed to SMEs.
What does the duty entail?
Large companies and LLPs will be required to publish information on their payment practices and performance twice yearly on a government-provided website. The information should be easily accessible and searchable.
The report will comprise three sections:
1 Narrative descriptions of payment terms including:
- the standard contractual length of time for payment of invoices and the maximum contractual payment period; and
- the process for payment disputes resolution.
2 Statistics on payment practices including:
- the average time taken to pay invoices;
- the percentage of invoices paid within the reporting period in 30 days or less, between 31-60 days, and over 60 days; and
- the proportion of invoices not paid within the agreed terms.
3 Statements about whether the organisation offers e-invoicing or supply chain finance or operates "pay to stay" practices or policies i.e. where sums are deducted from payments as a charge for remaining on a supplier list.
Who must comply with the duty?
The duty will apply to a company or LLP that has met two or more of the following criteria on both of their last two balance sheet dates:
- Over £36 million turnover
- Over £18 million balance sheet total
- Over 250 employees
It applies to business-to-business contracts.
The reporting requirement applies at individual entity level. So a group company will not be able to consolidate their payment practices statistics with other group companies.
When does the duty begin?
The duty applies for financial years beginning on or after 6 April 2017.
One report has to be published after the first half of the organisation's financial year and the second report at the end of that year. Each report must be published within 30 days of the end of the reporting period.
What are the sanctions?
It will be an offence to fail to publish a report, or to publish misleading or false information. Both the company and the directors could be liable for a fine. Directors will have a defence for failure to publish if they took all reasonable steps to ensure compliance.
In the light of the above timescales, businesses in scope should be:
- ensuring that they have adequate systems and processes in place for the information gathering and reporting; and
- scrutinising their payment policies and practices in the light of the increased transparency.
Those who already pay on time and operate good payment practices will be able to use the new report to highlight their track record.
For more information, please get in touch with your usual Brodies contact.