It is all too common that Small and Medium Sized Enterprises (SMEs) in the UK experience the negative effects of receiving late payments from their larger counterparts, with the level of late payment owing reportedly standing at £26.8bn in June 2015.
Whilst larger companies may have adequate reserves to continue business unaffected during periods of late or delayed payments, late payments can cause much more disruption to SME’s as suppliers. For SMEs late payments can present cash-flow problems and pose a real risk as to solvency.
It is to this end that on 6 April 2017, large companies and Limited Liability Partnerships (LLPs) will be subject to a mandatory duty to report twice yearly on their payment practices. The intention of such a duty is to encourage transparency in order to allow SME suppliers to evaluate the payment practices of those to whom they are considering supplying.
What is the Duty?
Section 3 of the Small Business, Enterprise and Employment Act 2015 grants the secretary of state the power to require large businesses in the UK to report on their payment practices and performance. The Department for Business, Energy and Industrial Strategy recently published a draft of the regulations that are due to come into force in April 2017 to implement this duty.
The draft regulations require companies that are subject to the duty to publish (on a government website) a report on their payment practices to include information such as:
- The businesses’ standard payment terms;
- An explanation of the businesses’ process for resolving a dispute with a supplier in relation to payment;
- The average number of days taken to pay invoices;
- 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 percentage of invoices that were due within the reporting period but not paid within the payment period; and
- A statement as to whether the business is a signatory to a code of conduct or standards on payment practices.
A large company will be required to produce the first report within 30 days after the end of the first six months of the financial year. The second report will be due within 30 days of the end of the financial year.
Who is subject to the Duty?
The mandatory duty to report twice yearly will apply to “large” UK companies and LLP’s that exceed two or all of the thresholds set out below on both of its last two balance sheet dates:
- A turnover in excess of £36m;
- A balance sheet total in excess of £18m; and
- More than 250 employees.
Importantly, irrespective of whether part of a group structure, each business that meets the requisite thresholds will be required to publish individual and non-consolidated reports. This will effectively allow SME suppliers access to accurate payment information that may otherwise be distorted by differing business practices across a group structure.
The incoming duty will not however apply to a new company in its first financial year as it will not be able to conclusively identify (when the reports are due) whether it will exceed the requisite numerical thresholds at this stage.
A Price to Pay for Non-Compliance
Alongside the possible detriment to the reputation of large companies that do not comply with the duty to report, the draft regulations provide that non-compliance is a criminal offence that could render both the Company and Directors liable to a fine on summary conviction.
Given that a Director or equivalent Designated Person (for LLPs) will be required to sign off the report to ensure its accuracy, producing a false or otherwise misleading report will also warrant an offence with the same consequences under the proposed regulations.
Time to Act: Organise your Organisation
The transparency envisaged by the introduction of these new regulations will afford SME suppliers a right to review prospective large companies on the basis of whether and the extent to which they are good payers. In order to mitigate the risks resulting from late payments, SME suppliers should consider the payment practices they require from their customers who are large companies in line with their business models.
With April 2017 now just a few months away, now is the time for large companies to review existing payment practices and internal policies in order to ensure compliance with the incoming regulations. Although still in draft form, it is considered unlikely that any wholesale changes will now be made to the regulations.