Procurement in a nutshell: Duty to report on payment practices and performance

The regulations aim to create a “more responsible payment culture” by promoting prompt payment. Government guidance on the rules is available for businesses which will be affected by the legislation.

This news might sound familiar to some businesses as the rules were originally planned to come into force in April last year. The regulations will now take effect on 6 April 2017. This week’s update answers some key questions in relation to the new rules and will be of particular interest to contracting authorities, including those which have set up applicable commercial trading companies.

Who does the duty to report apply to?

The reporting requirement applies to large companies and large limited liability partnerships (whether private, public or quoted) which, according to their last two balance sheets, exceed at least two of the following thresholds:

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

A new business does not have to report in its first financial year. It will fall under the scope of the rules in its second financial year if it exceeds two or all of the above thresholds.

For entities in a group it is necessary to report on the payment practices for each individual company which exceeds the thresholds, rather than produce a consolidated set of reports for the group.

What needs to be reported?

Businesses are required to publish the following information:

• the business’ standard payment terms including the standard contractual length of time for payment of invoices and the maximum contractual payment period;
• the business’ process for resolving disputes related to payment;
• the average number of days taken to make payments in the reporting period;
• statistics on the number of invoices paid by the business:
  • within 30 days or fewer;
  • between 31 and 60 days;
  • in 61 days or longer; and
  • out with agreed terms
• statements confirming whether:
  • suppliers are offered e-voicing;
  • supply chain finance is available to suppliers;
  • the business’ practices and policies cover deducting sums from payments as a charge for remaining on a supplier’s list and whether such deductions have been made in the reporting period;
  • the business is a member of a payment code and if so, which one.

What is the reporting period?

There will normally be two reporting periods in a financial year:

• The first is the six calendar months starting on the first day of the business’ financial year.
• The second begins the day after the first period ends and runs up until the end of the financial year.

Which contracts does the reporting duty apply to?

The reporting duty applies to all “qualifying contracts”, i.e. those which meet all of the following criteria:

• between two (or more) businesses;
• significant connection with the United Kingdom;
• for goods, services or intangible property, including intellectual property; and
• is not for financial services.

Where does the information need to be reported?

The relevant information will need to be entered into a web service created by the Government which will publish the information. Once published, the information will be immediately viewable by suppliers and other interested parties.

What are the sanctions for non-compliance?

Failure to publish a report containing the necessary information or the publication of a report or information which is misleading, false or deceptive is a criminal offence on the part of:

• the company or LLP;
  AND
• every director of the company or designated member of an LLP.

These offences carry the penalty of a fine.

Why is this important?

The Government’s aim is to increase the level of scrutiny which large businesses are subject to regarding their payment practices. The measures will provide suppliers with the access to information which they need to make informed decisions about which businesses they trade with and to negotiate fairer terms.

Businesses should consider the risk of reputational damage which could result from the exposure of any perceived unfair treatment of the supply chain.

With only a short time before the regulations come into force, businesses should ensure that they have started the necessary preparation to ensure full compliance with the new duty.

How can I find out more?

If you have any queries on the issues raised or on any aspect of procurement, please contact us via our procurement hotline on 0191 204 4464.