Following on from our previous briefing on how to prepare, the Reporting on Payment Practices and Performance Regulations 2017 are now in force.
The Regulations apply to all companies and LLPs that meet the threshold test. Obligations kick in from as early as 6 April 2017. Reports will be highly visible: they must be made available on the company website. Non-compliance could be a criminal offence both for the company and its directors. Companies required to report must start taking action now.
Q: Do the Regulations apply to my company?
A: Only if you meet either of these threshold tests:
The individual company test
A company must report if it meets two or more of the three threshold figures in its last two balance sheets:
- £36 million annual turnover
- £18 million balance sheet total
- 250 employees
A company is not expected to report in its first year following incorporation.
The parent company test
A parent company might alternatively be caught by the obligation to report on its own payment practices (only; not its subsidiaries) if the Group meets two or more of the three threshold figures in its last two balance sheets:
- aggregate turnover: £36 million net (or £43.2 million gross)
- aggregate balance sheet total: £18 million net (or £21.6 million gross)
- aggregate number of employees: 250
“Net" includes set-offs and adjustments for Group transactions. “Gross” excludes these changes.
Potential Pitfalls
A merger, acquisition or entry into a JV may put a company or its parent over the threshold.
Businesses incorporated outside of the UK are not caught, even if they are registered within the UK. But a non-UK Group could still have a UK subsidiary which is caught by the reporting obligation, even if the rest of the Group is not.
Q: What contracts must I report on?
A: All 'Qualifying Contracts' with a 'significant connection to the UK' for each company over the threshold. Breaking this down:
1. The Report is at individual company level, not a group level. The reporting requirement is not met if reporting is only at a group level.
2. A Qualifying Contract is any contract which is:
- between two (or more) businesses
- for goods, services or intangible property, including intellectual property
- but not for financial services.
3. A significant connection with the UK: Where the laws of England and Wales, Scotland or Northern Ireland would automatically apply to the contract (even if the contract did not say it was to be governed by those laws), then that contract has 'a significant connection with the UK’.
What this means is that, if a contract has no particular connection with the UK, the fact that the contract states that UK law applies and/or that the UK courts have jurisdiction is not determinative; so that contract does not have 'a significant connection to the UK'. Conversely, if enough of the factors point to 'a significant connection with the UK', for example one or both parties being based in the UK and/or the place of performance is wholly or partially in the UK, then the fact the contract is made under a foreign law and/or refers to the courts of that other country does not mean it does not have 'a significant connection to the UK'. Contractual performance taking place in the UK, establishment of one or both of the parties in the UK, or the parties carrying on part of their businesses in the UK may be sufficient.
Companies may want to take legal advice to audit which of their contracts are caught.
Q: What detail do I have to provide about these contracts in my report?
A: There are three strands to this:
1. The standard business terms: this means:
- a narrative description(s) of the company's standard terms for payment. If a company has different terms for different contacts (e.g. different for different goods, or supplies, or for framework agreements), it must explain any differences. This should include the standard timeframe for invoice payment, the maximum recorded time for payment in that reporting period, any changes to the terms in the reporting period, and how suppliers have been consulted and notified of such changes.
- An outline of the standard term dispute resolution processes.
2. Payment Statistics: the metrics you must report on are:
- the average time it takes for payments to be made in the reporting period from the date of receipt of the invoice.
- the percentage of payments due within that reporting period which did not meet the standard business terms.
- the percentage of payments (total number) raised within that reporting period made:
- in 30 days or fewer
- between 31 and 60 days
- in 61 days or longer
Disputed invoices are included in the calculation but not if they began in a different reporting period. If certain invoices are giving a poor picture, there is nothing to prevent companies adding a narrative explanation to put it in context.
3. A Statements List concerning whether suppliers can be e-invoiced, the availability of supply chain finance, whether the standard terms agree to a reduced payment due to remaining on a supplier’s list and whether the business follows a payment code. This information is mandatory.
Giving the actual name of any payment code is voluntary, as is any further information on how a supplier might apply for supply chain finance.
Q: When do I start?
A: Now. If your financial year started after 5 April 2017 you should already be collating the information you need for your first report.
If you have not reached the start of your financial year yet then you still have time but should be getting your reporting systems ready and briefing relevant directors, compliance officers and others.
The Government website service is ready and waiting for its first submissions in October 2017.
A company and its directors may be prosecuted for failing to publish the report within the 30 days. It is also an offence to knowingly or recklessly make a false or misleading reporting statement.
Q: When do I report?
A: For most, reporting will occur twice per year. The first reporting period will start on the first day of the company's financial year. The second period starts immediately following the previous reporting period.
Examples: For a company whose financial year ended on 5 April 2017, the first day of its financial year will be 6 April 2017, so if that company currently undertakes biannual reporting its first report should cover the 6 month period between 6 April to 5 October 2017 and should be published on or before 4 November 2017. Conversely, as the obligations came into force on 6 April 2017, if the company had a financial year ending on 4 April 2017 then its first reporting period would not be until the financial year commencing 5 April 2018. Its first reporting period would be 5 April 2018 to 4 October 2018 and it would have to publish its first report on or before 3 November 2018.
For those companies with a financial year of less than nine months, one reporting period is sufficient. For those with a financial year of 15 months or longer, three reports must be made.
The report must be filed within 30 days of the end of the reporting period.
Practical advice
Companies may have to change the invoicing information they currently capture and the way they collate and analyse that information. This may involve investing in new accounting or invoicing software.
Companies should consider if they need to provide training to those who need to know. That might be more than just the accounting team and the board. For example, in-house counsel and procurement personnel may also have to have an awareness of when their contracts are Qualifying Contracts and keep track of when they are and are not contracting on the Company's standard terms.
Consider whether your standard terms may be making reporting more difficult. For example, it may be harder to report if the terms provide for payment from the date of the invoice since the reporting metric is linked to the date of receipt of the invoice.
Groups should consider which of their companies are caught and which of their contracts qualify.
These new regulatory measures require forward planning and investment time now. Companies can find out more by reading the Government Guidance (PDF).
If you would like to discuss any of the issues raised in this article or would like further information, please contact Andrew Burnette, Lloyd Nail.