Duty to report on payment practices – Government guidance published: who, what, where, when?

Large businesses will soon be required to make twice-yearly reports on how quickly they pay their suppliers. The Government has now published Guidance on that requirement. We've summarised the WHO, WHAT, WHERE and WHEN below.

WHO must report?

  • Only UK-registered companies and LLPs are required to report.
  • A business is required to report if, on its last two balance sheet dates, it exceeded two or more of the following:
    • £36m annual turnover;
    • £18m balance sheet total; and
    • 250 employees.
  • These thresholds may be reviewed by the Government from time to time. If that happens, the new thresholds should be applied retrospectively.
  • Each in-scope business must report individually. Group-wide reporting is not permitted.
  • No business is required to report in its first year. In its second year, only its first financial year figures are relevant for the above thresholds.
  • If a business has one or more subsidiaries then a slightly different set of thresholds apply. The parent business will be required to report if the aggregate figures for the parent and the subsidiaries exceed two or more of the following on its last two balance sheet dates:
    • £43.2m annual turnover (or £36m net of group transactions);
    • £21.6m balance sheet total (or £18m net of group transactions); and
    • 250 employees.
  • The process for deciding if a parent company must report is summarised in a table on page 9 of the Guidance.

WHAT must be reported?

Three types of information must be provided: narrative descriptions; statistics and "yes/no" statements. For all of these, information only needs to be provided in relation to qualifying contracts, being contracts for goods, services or intangible property (including intellectual property), which have a "significant connection" with the UK.

Narrative reports

The following must be provided in narrative form:

  • Details of the payment terms the business has agreed with its suppliers. This includes describing its standard payment terms (and payment period). If it has different terms depending on the products, business areas or other factors it should explain this. If it does not have a "standard" it should describe its most frequently used terms.
  • The maximum payment period has it has agreed with any supplier.
  • Any changes to its standard payment terms and whether suppliers were notified or consulted.
  • A description of its processes for dealing with disputes about payments. The aim here is to help suppliers understand what they must to do if they have concerns about payment.

The following statistics must be provided:

  • Average number of days taken to pay invoices, from the date of receipt.
  • The percentage of payments made within 30, 60, and over 60 days.
  • The proportion of payments not made within the agreed contract terms.

Statistics relate to the number of invoices (not the value) and should be rounded up to the nearest whole number. As to how to measure payment times: Day 1 is classed as the day after the invoice was received by the business (or the amount was otherwise agreed, if there is no actual invoice). The period ends when the supplier receives payment (unless delayed by circumstances outside the payer's control). Invoices should be recorded in the reporting period in which they are paid (even if received in an earlier period).

The guidance deals with various scenarios including:

  • where payment is made not to the supplier directly but to a supply chain finance provider; and
  • where the supplier does not submit an invoice. This could be for example, where payments are triggered periodically under a services agreement.
Yes/no statements

Here, businesses must simply give a yes/no answer in relation to:

  • whether suppliers are offered e-invoicing;
  • whether supply chain finance is available;
  • whether sums are deducted as a charge for remaining on a supplier list (and whether this was done during the period); and
  • whether the business is a member of a payment code.

WHERE are the reports made?

  • On a Government portal (on www.gov.uk) which will be available from April 2017.
  • The information will be available to the public as soon as it is uploaded by the business.

WHEN must the reports be made?

  • The first year of reporting for a business will be in relation to its financial year that starts on or after 6 April 2017.
  • Reporting must be undertaken twice a year. The two reporting periods are the first six months and the second six months of each financial year.
  • Reports must be filed within 30 days of the end of each reporting period.
  • The Guidance deals with financial years which are not 12 months long.

Our commentary

The Regulations provoked a number of questions, many (but not all) of which are answered by the Guidance.

Most useful, is the information on how to decide which businesses are in scope, particularly in relation to parent companies. Similarly, the Guidance clarifies how to calculate the various statistics (for example, how periods of time and average numbers should be calculated).

Unfortunately, businesses are likely to have questions remaining on issues such as: how to determine the contractually agreed payment date where no written contract exists or where it is unclear on whose terms the parties trade. They will also face challenges to implement systems (in advance of their first reporting year) to capture information such as the date of receipt of all invoices and the payment terms agreed with all suppliers. Businesses (and their directors) potentially face criminal liability for failure to report, or for making misleading statements and so there is work to be done.