UK: Payment Practice and Performance

Background

UK companies often supply goods & services subject to trade credit agreements wherein the supplier agrees to defer payment of invoices for a period of time following delivery of the goods/services. Agreed payment terms differ but are often at least 30 days and in some cases as much as 90 days.
The Government attempted to deter buyers from making late payment by the introduction of the Late Payment of Commercial Debts (Interest) 1998 (“the Act”) by providing for default interest and compensation to be paid by buyers if payment was not made on time. However, despite the introduction and provisions of the Act research undertaken by the Department of Business, Energy & Industrial Strategy (“BEIS”) has shown that buyers continue to delay payment of invoices, particularly where the buyer is a larger business. This causes cash flow difficulties for the supplier and is especially detrimental for small and medium sized enterprises (“SMEs”).  BEIS’ research showed that SMEs will often not enforce their statutory rights under the Act for fear of damaging the ongoing commercial relationship with their buyers.
As a result BEIS has introduced new measures to attempt to bring more transparency to business’ payment practices and performance in order to enable suppliers to be in a better position to make an informed judgment as to whether or not to enter into a contract with a buyer, negotiate fair terms and challenge late payment if it happens.

New measures

Changes brought about by The Small Business, Enterprise & Employment Act 2015 and the Limited Liability Partnerships Act 2000 mean that all medium and large UK companies will now have a duty to report publicly on their payment policies, practices and performance.  The reporting requirements cover contracts between two (or more) businesses that have a significant connection with the UK.  The contracts must be for goods, services or intangible property, including intellectual property but excluding contracts for financial services.

Who will the duty affect?

Broadly, the duty to report will affect any company or limited liability partnership (“LLP”) that exceeds at least two of the following three thresholds in the last two preceding financial years:
(a)    £36m annual turnover;
(b)    £18m balance sheet total;
(c)    250 employees.

What needs to be reported?

The information which must be reported falls into three categories.

1. Statistics

The following information must be reported:
1.1     The average number of days taken to make payments to suppliers in the reporting period, from the date of receipt of the invoice or other payment notice;
1.2     The percentage of payments made within the reporting period which were paid in 30 days or fewer, between 31 and 60 days, and in 61 days or longer; and
1.3     The percentage of payments due within the reporting period which were not paid in accordance with agreed payment terms.

2. Narrative

The following information must be reported:
2.1    The business’ standard payment terms, which must include:
2.1.1 the standard contractual length of time for payment of invoices;
2.1.2 maximum contractual payment period; and
2.1.3 any changes to the standard payment terms in the reporting period, and how suppliers have been notified or consulted on these changes.
2.2    The business’ process for resolving disputes related to payment of invoices.

3. Statements

The following information must be reported:
3.1    Whether suppliers are offered e-invoicing;
3.2    Whether supply chain finance is available to suppliers;
3.3    Whether the business’ practices and policies cover deducting sums from payments as a charge for remaining on a supplier’s list, and whether they have done this in the reporting period; and
3.4    Whether the business is a member of a payment code, and if so, the name of the code.

When does it take effect?

The new reporting procedures apply to financial years beginning on or after 6 April 2017.  Businesses will be required to report twice yearly, once in relation to the first six months of their first full financial year following the duty coming into force, and the second relating to the balance of the financial year.  Reports will be due no later than 30 days after the end of the reporting period.

Who can approve the report?

The report will need to be approved by a director within the reporting business or a designated member of the LLP.

Where and how to report?

Businesses will be required to provide their data to a central location to ensure data is presented in a standard format and easily accessible with the reports being uploaded onto a portal provided by BEIS.

Failure to comply with reporting obligations?

If any business fails to comply with its duty to report within the reporting period, the company (or LLP) and every person that was a director of the company (or a designated member in the case of LLP) immediately before the end of the reporting period will have committed an offence. Such offence will be punishable on summary conviction to a fine.

To find our about the issues in this article or to ask us about how the Dispute Resolution team can help you, get in touch with Ally Tow on 0118 952 7206 or email atow@boyesturner.com.

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