New regulations, coming into force from 6 April 2017, will require large UK companies and LLPs to issue twice-yearly reports on their payment policies, practices and procedures. Failure to report will be a criminal offence by the company and its directors can be liable personally for knowing or reckless false reporting.
The regulations are designed to help smaller businesses by improving transparency, enabling suppliers to identify poor payers, and encouraging larger businesses to adopt good and timely payment practices. However, complying with the regulations will obviously require a degree of effort and expense on the part of reporting companies, and could open them up to reputational damage if payment practices are seen to be below industry best practice.
These regulations form part of the trend in the UK towards ever-greater corporate transparency. This can be seen in other recent developments, in relation to supply chain transparency statements (under the Modern Slavery Act), tax transparency, and transparency of beneficial ownership of companies (under the PSC register).
As we explain below, there is also a potentially important issue in relation to legal privilege, of which businesses should be aware.
Who needs to comply?
The duty to report will apply to large UK-registered Companies and LLPs which on the two preceding balance sheet dates have exceeded at least two of the three qualifying criteria for a medium-sized company under s.465(3) Companies Act 2006, namely:
- £36 million annual turnover;
- £18 million balance sheet total; and
- 250 employees.
There is no provision for consolidated group reporting. Therefore, each member of a group will need to report individually. A parent company will only be subject to the obligations if both it individually and the combined group exceeds the threshold.
What payment practices need to be reported?
The reporting obligations extend to commercial contracts with suppliers which have a significant connection to the UK and are for goods, services, or intangible assets (such as IP rights).
The obligations will not apply to business to consumer contracts or financial services contracts.
Businesses affected will need to provide the following information:
- Standard payment terms – including commentary on the period for payment, any changes, whether suppliers were notified or consulted on any changes, and what the maximum period for payment was in the last reporting period. Different sets of standard terms should be commented on separately. Where a business does not have standard terms, it should report on the basis of payment most frequently used terms.
- Payment Performance – including the average time taken to pay invoices, the percentage of invoices not paid within contract periods, and the percentage of invoices paid in less than 30 days, 31-60 days, or more than 60 days.
- Dispute resolution – including the process for resolving payment-related disputes.
- Other information – including whether e-invoicing of supply-chain financing is available; whether the business is a signatory to any payment codes; and whether the business levies a charge for companies to be “preferred suppliers”.
How and when to report?
The required information will need to be published on a government web-based service (due to be available from April) and must be approved by a director.
Reports are to be made twice-yearly, relating to the first and second six-month periods of an entity’s financial year. Reports will be due within 30 days of the end of each reporting period. The first report will be required in relation to the first full financial year after the regulations come into force.
This means that the first reports will need to be made from October 2017.
Penalties for non-compliance
Failure to report will constitute a criminal offence for the company and knowingly or recklessly making a false report will be an offence for directors, in each case punishable by a fine (unlimited in England and Wales).
A trap for the unwary – protecting legal privilege
Delayed or non-payment of an invoice is often caused by an actual or threatened dispute. Confidential documents created for the dominant purpose of litigation should be privileged. This means that they do not have to be disclosed to the other side in any subsequent litigation. However, documents that relate or refer to those disputes, but are created for other purposes, such as this type of reporting exercise, are unlikely to be privileged.
As such, when undertaking the information gathering exercise for the purpose of reporting, care must be taken not to create any record or document (hard copy or electronic – including, for example, instant messaging and voicemails), commenting on the issues or merits of the dispute in relation to any invoices in respect of which payment may be withheld or delayed. This can be a complex issue, but the issue can be minimised by appropriate internal processes and legal input.
What should businesses be doing now to prepare?
- Businesses should first consider whether they are subject to the new regulations or are likely to become so in the foreseeable future.
- If the regulations do apply, steps should be taken to put procedures in place now for identifying, gathering and assimilating the requisite information.
- Where there is a concern that disclosure of payment information could lead to reputational damage, businesses may wish to take the opportunity to revise their policies and/or contractual documentation.
Businesses may also wish to take the opportunity to integrate new reporting processes with other compliance or corporate reporting obligations. As we have discussed in previous articles, developing multifunctional compliance and reporting systems can help businesses to control risks and future-proof themselves against future legislative requirements, but can also deliver real business benefits.
Please contact us if you would like to know how we can help you to prepare for these regulations, or help you to manage your wider compliance and legal risks.