Legal briefing | 11 Nov 2019 |

Payment Practices: are you paying your suppliers on time?

Many organisations are failing to publish information on their payment practices, which could lead to being barred from government contracts or even the spectre of regulatory enforcement.

Introduction

Regulations came into force in 2017¹ requiring all large UK companies and LLPs to publish information on their payment practices and performance twice a year (for further background see Travers Smith's earlier briefing here). A key aim of these measures was to promote transparency around large business' payment of suppliers and the timeliness of payments to small and medium enterprises.

As with the Modern Slavery Act (reported on in our briefing here), this forms part of a continued trend towards increasing corporate transparency and accountability.

Our recent review would suggest that many companies and LLPs are failing to publish the information required. Not only could this lead to legal liability, but it could also directly impact their ability to bid for government contracts.

Government procurement

As of 1 September 2019, any organisation that bids for a central government contract in excess of £5M per annum needs to answer questions about its supply chain management and payment tracking systems. This includes details about payment practices, processes and performance such as the percentage of invoices paid within 60 days.

As a part of this, the government has set a standard of 95% of all supply chain invoices to be paid within 60 days in at least one of the two previous six month periods for organisations who wish to do business with the government. Suppliers who do not comply with this standard could be prevented from winning government contracts.

The Cabinet Office has taken a pro-active approach in this area by recently contacting a number of UK companies who are selling or may plan to sell to government, reminding them of their prompt payment obligations.

For more detail, please see the UK Government's Prompt Payment Policy guidance (available here).

Quick recap - who is caught by the regulations?

All 'large' UK companies (including private companies and public companies, whether listed or unlisted). 'Large' LLPs are also caught.

The definition of 'large' is the same as under the Companies Act 2006, i.e. companies satisfying two of the following criteria on both of its last two balance sheet dates:

turnover of more than £36M;
balance sheet total of more than £18M; and
more than 250 employees.

The rules apply equally to any UK subsidiary in a group which meets the above threshold on a stand-alone basis, even if controlled by a non-UK parent. UK parents of a group must meet both the individual thresholds and a separate group threshold before they have to report.

Additional consequences of a breach

Criminal liability attaches to failure to comply, which can be punishable on summary conviction by an unlimited fine. Prosecutions can be brought up to 3 years after the offence takes place. It is also an offence to publish false or misleading information.

That said, the Explanatory Memorandum to the Regulations states that 'The Department [the Department for Business, Energy and Industrial Strategy] will generally seek to encourage a business to comply with the reporting requirement before steps are taken to prosecute', which would suggest that criminal proceedings are likely to be reserved for serious or persistent breaches only.

Failure to comply or having a poor payment practices record can also cause significant reputational damage. By way of example, Holland & Barrett were “named and shamed” by the UK Government's Small Business Commissioner ("SBC") in April 2019, following a complaint from one of their suppliers that they were owed £15,000 by the company. The company’s delay in paying the supplier and historical frequency of late payments, coupled with their refusal to engage with the SBC, led to the SBC publishing a press release on Holland & Barrett's poor supplier payment practices (here).

The SBC has indicated that it will continue to "name and shame" other companies who flout their prompt payment obligations.

What is the obligation?

An entity caught by the PPP Regulations has to report on its payment practices and performance in relation to "qualifying contracts".

A qualifying contract is a contract which satisfies all of the following:

it is between two or more businesses;
it is sufficiently linked to the United Kingdom;
it is for goods, services or intangible assets (including IP); and
it is not for financial services.

What will companies need to report?

The report must cover the following:

Narrative descriptions of:

the business' standard payment terms, including (i) contractual length of time for payment of invoices, (ii) maximum contractual payment period and (iii) how suppliers have been notified or consulted of any changes to such terms; and
the business's processes for resolving a dispute with a supplier in relation to payment under a qualifying contract.

Statistics on:

the average time taken to pay invoices from the date of receipt of invoice;
the percentage of payments made during the reporting period that were paid (i) in 30 days or less; and (ii) between 31-60 days; and (iii) over 61 days (this being considered bad practice); and
the percentage of invoices due within the reporting period which were not paid within the agreed payment period.

"Tick box" statements about:

whether suppliers are offered e-invoicing or supply chain finance;
whether a charge is deducted for remaining on a supplier's list; and
whether the business is a member of a payment code (e.g. the Prompt Payment Code).

What are the relevant timing considerations?

Qualifying companies needed to report on their payment practices and policies for financial years starting on or after April 2017. Reports should be published twice a year and within 30 days from the end of each reporting period. For example, companies with financial years which commence on 1 January each year should have posted their first report by 30 July. The guidance deals with financial years which are shorter or longer than a year.

Are reports public?

Reports are published on the government's website here. Suppliers and other interested parties are able to view the report as soon as it is published.

How does the duty apply to new companies?

The duty does not apply to a new company in its first financial year. In its second financial year, the company will be caught if it exceeded two or all of the thresholds in the previous year. There are specific provisions dealing with mergers and joint ventures.

What are the next steps?

Companies and LLPs who have not yet reported should:

assess whether they meet the thresholds and, if so, allocate responsibility for preparing the report;
review payment practices, policies and internal accounting systems and make sure they are capable of collecting the relevant data;
check that all details being reported on are accurate and up-to-date;
ensure the report is uploaded in good time on the government's website;
seek director or designated member approval of the report before publication; and
minute publication of the compliant report at Board level by way of best practice.

Further Government Guidance on the Duty to Report on Payment Practices and Performance prepared by the Department for Business, Energy & Industrial Strategy can be found here.

References

¹ The Reporting on Payment Practices and Performance Regulations 2017 and the Limited Liability Partnerships (Reporting on Payment Practices and Performance) Regulations 2017 (together, the "PPP Regulations").

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