The Reporting on Payment Practices and Performance Regulations 2017 come into force on 6th April. This means that a large share of contractors will be required to publish details of their payment practices and policies twice a year. Following in the footsteps of gender pay gap reporting, payment practice reporting is designed to tackle the issue of late payments by making the performance of large business a matter of public record.
Late payments can have a disastrous effect on a firm’s bottom line, especially if they fall into the SME bracket. The Federation of Small Businesses (FSB) has calculated that 50,000 “business deaths” could be avoided if payments were made on time – adding £2.5bn to the UK economy.
The issue is particularly pertinent for the construction sector. A 2016 report from credit insurer Euler Hermes found the industry registered more payment delays than any other UK sector, making up 31% of all recorded incidents.
The government’s intention is that a public airing of payment practices will encourage businesses to ensure their policies are fair on suppliers. Contractors that publish an unflattering picture of their payment practices will leave themselves open to scrutiny from clients, stakeholders and the media. Being named and shamed as irresponsible could see essential commercial relationships damaged as a result.
Firms should already be preparing by reflecting on current processes and gearing up their back offices to comply with the change. Failure to comply with the new regulations, either by failing to report, or through the publishing of false or misleading information, will be a criminal offence. Companies and their management teams could be liable for hefty fines.
Affected contractors have one financial year from the regulations’ start date to report information on the payment terms for all relevant contracts. The new rules apply to businesses which have met – in the two financial years after 6th April 2017 – two or more of the following conditions:
- an annual turnover exceeding £36 million
- a balance sheet total exceeding £18 million
- an average number of employees exceeding 250.
Simple steps to take
There are some simple measures contractors can take now to ensure a smooth transition into the new regime and, in the long term, avoid reputational damage. Businesses should:
- Establish which contracts fall within the scope of the reporting requirements
- Review payment practices and policies to ensure they are fair and reasonable
- Communicate the steps being taken to comply with the regulations internally and to suppliers
- Make sure legal, regulatory and finance teams have the capacity and resources needed to meet the reporting requirements
- Update payment control systems to ensure they can compile all the data necessary for compliance.
What needs to be reported?
Deals that need to be reported on include contracts for goods, services or intangible assets and any agreements both parties have made relating to the continuation of a business relationship.
The first report is due within 30 days of the end of the first six months of the financial year and the second must be published within 30 days of financial year-end. Reports are to be submitted through an online government portal and must include the signature of a company director.
For each contract signed during the six-month reporting period, firms will need to provide:
- Standard payment terms
- Details of any changes to standard payment terms for the contract in question
- Steps taken to alert suppliers to any changes in standard payment terms
- The maximum, contractually agreed amount of time allowed for payment of an invoice
- An explanation of the process for resolving a payment-related dispute with a supplier.
They will also have to supply a range of payment data, including:
- The average time taken to pay invoices during the six-month reporting period
- A breakdown of payments made in 30 days or less, between 31 and 60 days and over 60 days
- Details of payments due during the reporting period that were not paid
- Details of any disputed invoices.
To accompany this, contractors must prepare a statement outlining whether or not their business provides supply chain finance, electronic submission and tracking of invoices or “pay to stay” contract payment deduction agreements.
Once contractors have met all the reporting requirements they will have a detailed overview of their payment practices and policies. This will ensure they are meeting their legal obligations, but it also gives firms the opportunity to demonstrate that they are committed to best practice payment principles – something they can leverage to strengthen relationships with existing and prospective suppliers and customers.