Duty to report on payment practices and performance - what large businesses need to know

Companies and partnerships within the scope of the new rules will have to report twice a year on metrics including the average time taken to pay supplier invoices. The information will be published on a central government website, giving suppliers a single place in which to access the information and compare company performance.

Requiring businesses to publish this information will increase transparency and public scrutiny of large businesses' payment practices and performance, as well as giving suppliers access to the information that they need to make informed decisions about who to trade with, according to the government. Small and medium sized businesses were owed around £26.8 billion worth of late payments as of June 2015, according to government figures.

The new requirement comes as part of a package of government measures to tackle late payments to small suppliers. These also include the appointment of a Small Business Commissioner to support small businesses with payment disputes from Autumn 2017, and continuing support for the Prompt Payment Code.

Who will the new duty apply to?

The duty to report will apply to large businesses and limited liability partnerships which meet two or more of the following criteria on both of their last two balance sheet dates:

• over £36 million annual turnover;
• over £18 million balance sheet total;
• over 250 employees.

It will apply regardless of whether the entity is public, private or quoted.

Each business in scope will be required to publish its own individual reports, in order to give suppliers access to the most meaningful and comparable information. Therefore a group of companies may be required to publish a report for each group company which satisfies the above criteria, as opposed to consolidated information about the wider group.

When will it come into force?

The government has published draft regulations which would give effect to the new duty. It intends for these to come into force in April 2017.

Assuming this timetable is met, the duty will apply to financial years beginning on or after 6 April 2017. Businesses will be required to report twice-yearly, with reporting dates aligned to the financial reporting cycle as follows:

• first report: within 30 days after the end of the first six months of the financial year;
• second report: 30 days after the end of the financial year.

Businesses with financial years significantly shorter or longer than 12 months will be required to report once or three times in that financial year.

It is the government's view that a twice-yearly reporting requirement strikes the right balance between providing suppliers with access to timely information and keeping burdens on businesses to a minimum.

Where must the report be filed?

Reports will be published on a web-based service provided by the government. This service, which is currently in development, will be "user friendly and accessible", and "allow large businesses to easily upload their information", according to the government's consultation response.

Businesses will be free to publish the information on their own websites if they choose to do so, but this would be in addition to publishing through the central government service.

What must be reported on?

Businesses will be required to publish information about their payment practices and policies in relation to contracts for goods, services or intangible assets, including intellectual property, and connected to the carrying on of a business. Contracts will also have to have a significant connection with the UK to be covered by the report.

Other kinds of contracts will not be covered, including business to consumer contracts and contracts for financial services.

Metrics which must be reported on include:

Payment terms

Businesses should report on their standard payment terms for the types of contract that they enter, or the most frequently used payment terms for each type of contract where there is no standard. This information should include:

• standard payment terms, including the period for payment;
• any changes to these over the last reporting period;
• whether suppliers had been notified or consulted on this change in advance;
• the maximum period for payment entered into during the reporting period.

Businesses will be able to provide additional narrative information to explain their standard payment terms on a voluntarily basis, or to set out why they vary the standard terms for different circumstances or companies.

Dispute resolution

Businesses will be required to set out their processes for resolving payment-related disputes in the report.

Performance metrics

The report must include certain performance metrics:

• the average time taken to pay invoices from the date of receipt of invoice;
• what percentage of invoices paid within the reporting period were paid in less than 30 days, between 31 and 60 days, and over 60 days;
• the percentage of invoices due within the reporting period which were not paid within agreed terms.

Businesses will only be required to report on the proportion of invoices paid within each of these periods, and not the value.

The start of the payment period will be triggered by date of receipt of the invoice rather than the invoice date, as originally proposed. 'Day one' will be the day after the invoice is received, to ensure the time of receipt does not affect the result. If an invoice is not used, the payment period will be counted with day one as the day after the date when the large business has notice of a sum to be paid.

Disputed invoices will not be excluded from the metrics, to discourage 'stalling tactics' on the part of large businesses.

Supplier lists and 'pay to stay'

Businesses will be required to report on whether they deduct money from invoices in exchange for remaining on a supplier list. The government intends to keep this metric under review and consider if it is necessary to broaden the practices covered by this metric.

Other reporting requirements

Businesses will be required to report on whether they offer e-invoicing and supply chain finance, and whether they are signed up to a voluntary payment code - for example, the Prompt Payment Code.

The requirements around e-invoicing and supply chain finance will be simple, tick box requirements. If the business is signed up to a voluntary payment code, it will need to state which one.

Who will be responsible for the report?

A company director or, in the case of partnerships, a designated person, will be required to approve the information in the report before publication. This will ensure that the information provided is accurate.

Failure to report, or publishing false or misleading information, will be a criminal offence for which both the company and its directors will be liable to a fine on summary conviction. A director will not be liable if he or she has taken all reasonable steps to ensure compliance.

What should affected businesses do now?

Businesses that will be subject to the new requirements should be reviewing their payment terms and practices now, and ensure that they have systems in place to gather the data that they will need to provide when submitting their first reports.

In particular, businesses should consider whether their performance against the required metrics is reasonable and the likelihood of any reputational issues which may result from their treatment of the supply chain.  Where performance may be considered as sub-standard, businesses should consider whether any narrative can be included in the report to add context to the metric and minimise the likelihood of further scrutiny following publication. 

The government will shortly publish guidance to help large businesses understand how they should comply with the new requirements. This guidance will include general, as well as sector specific, information about the requirements of the duty.

Ben Gardner is a commercial law expert at Pinsent Masons, the law firm behind Out-Law.com.