The UK Government has recognised that thousands of smaller businesses experience severe administrative and financial burdens because they are not paid on time. Consequently all large UK companies now have a statutory duty to report publicly on their payment policies, practices and performance.
A survey by the Institute of Directors found 52% of its members have faced issues of delays in the past year. Late payment practices harm business cash-flow, hamper investment and in extreme cases can risk business solvency. The collapse of construction giant Carillion has also drawn greater focus to the problem, as it has been found that its subcontractors were typically paid with a 120-day delay and so its failure left firms and workers facing a financial hole for work done as long ago as four months prior to its failure.
On 6 April 2017, regulations came into force that require qualifying UK companies and Limited Liability Partnerships (LLPs) to report on their practices, policies and performance relating to the payment of their suppliers. The new reporting requirement provides increased transparency over payment practices and ensures that poor payment practices are exposed. Conversely, those businesses that are already treating suppliers fairly and paying on time will be able to use the data to highlight their positive behaviours and track record.
Businesses in scope of the reporting requirement must prepare and publish information about their payment practices and performance in relation to qualifying contracts every six months.
What are the possible sanctions?
The Department of Business, Energy and Industrial Strategy is responsible for investigating any breaches of the rules and bringing proceedings as needed.
Every director of the company, or equivalent in an LLP, is at risk of committing a criminal offence under these regulations, and will be tried in a Magistrates court.
It is a criminal offence to:
- fail to publish a report;
- fail to include the necessary information in the report;
- fail to report within the specified timelines; and
- provide a false, deceptive or misleading statement within the report, whether it be by a business or individual. See https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/649941/payment-practices-performance-reporting-requirements-oct-2017.pdf.
If convicted there will be a financial penalty, but there are also reputational risks to consider.
Do you qualify as a company that needs to report, and do all your contracts need to be reported on?
The reporting requirements apply to qualifying companies which are deemed to be in scope for a financial year if, on their last two balance sheet dates, they exceed a minimum of two of the following three thresholds: £36 million annual turnover; £18 million balance sheet total; and 250 employees.
There are slightly different limits if a company or LLP is a parent or group company that has one or more subsidiaries. These thresholds are periodically updated and subject to change.
Reporting of payment practices is required with regard to qualifying contracts only; these contracts are categorised as such if they satisfy all of the following criteria:
The contract is:
(a) between two (or more) businesses;
(b) sufficiently linked to the United Kingdom;
(c) for goods, services or intangible property, including intellectual property; and
(d) not for financial services.
What should be reported?
Businesses are required to provide the following information in relation to the reporting period on www.gov.uk.
Narrative descriptions of:
- Standard payment terms, expressed in days
- Maximum payment terms
- Changes to these terms and the associated consultation process with suppliers prior to these changes
- Dispute resolution process.
Statement of policies and practices as to whether:
- Suppliers are offered e-invoicing
- Supply chain finance is available
- Sums can be deducted from suppliers to remain on the supplier list and whether they have done so
- The business is a member of a payment code of conduct and the name of the code.
Statistics on payment performance, including:
- The average number of days taken to make payments
- The percentage of payments made within 30 days, 31-60 days, or on or after 61 days
- The percentage of payments due which were not paid within the payment period (agreed terms).
The report must be approved by a director of the business before it is published.
Businesses are 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
For example, a business with a financial year beginning 1 January 2018, should have already submitted its first ½ yearly report by 30 July. If it has not done so, the business and its directors will be liable for a fine.
The reporting must also be accurate. It will also be an offence for a person to knowingly or recklessly publish a report, information or statement that is misleading, false or deceptive in a material manner.
What should Heads of Internal Audit do?
In view of the financial penalties and the reputational damage to directors and the company in receiving a conviction, businesses need to take this seriously and it must be on the Audit Committee agenda. If it is not, Heads of Internal Audit should be alerting the Audit Committee to the potential risks.
By now, all qualifying businesses should have established the processes necessary to extract data in relation to their contracts, payment performance statistics and reviewed their policies for suppliers. Some companies have already reported. The data must be accurate, so robust procedures need to have been put into place to ensure that this is checked carefully before reporting.
This is an important area for assurance. If management is not already providing assurance to the Audit Committee directly, Heads of Internal Audit should consider including this area within their annual audit programmes. If you wish to discuss any of the matters covered in this article or require advice in relation to meeting the requirements of the regulations, please contact Nick Eggett, BDO’s national supply chain specialist. [email protected]