Cash flow is essential to the survival of any business. However, despite previous government interventions, businesses continue not to be paid on time for goods and services they provide, with a total of £32 billion being due to small and medium sized businesses in 2022 alone.
In 2017 the Government took steps to try and address the issue of endemic late payment culture with the Reporting on Payment Practices and Performance Regulations. Six years on from the introduction of this legislation, the Government has now announced that it intends to extend and improve upon these regulations, with further steps to improve transparency from larger companies on their payment practices and by broadening the powers of the Small Businesses Commissioner to investigate non-compliant business.
What are the Current Rules?
The 2017 Regulations apply to large companies and LLPs who meet two of the three thresholds to qualify as a “medium-sized company” under the Companies Act 2006, namely:
- £36 million annual turnover.
- £18 million balance sheet total.
- 250 employees.
They require any companies who have met this criteria on their last two balance sheet dates, to publish information on a designated government website about their payment practices in respect of the majority of their UK business to business contracts for goods, services and intangible property.
The information which currently has to be published includes payment periods, the company’s procedure for resolving payment disputes, statistics on the average number of days taken to make payments and statements on their current payment practices and policies.
Failing to comply with the Regulations, either by failing to publish a report or by knowingly or recklessly publishing a report that is misleading, false or deceptive is a criminal offence by the company and its officers, which can be punished by an unlimited fine.
What are the Proposed Changes
Whilst the 2017 Regulations have gone some way to improving transparency on large companies’ payment practices, the issue of SME companies not being paid in good time has persisted, leading the Government to announce further measures to address it.
The changes now proposed by the Government in respect of late payments include:
- Extending current requirements to require reporting on the value of invoices paid late, disputed invoices and retention payments for businesses in the construction sector.
- Broadening the powers of the Small Business Commissioner enabling the Commissioner to undertake investigations and publish reports.
- Strengthening the Prompt Payment Code so that businesses who have signed up must reaffirm their commitment every two years to stay on it. This voluntary code gives companies and public bodies the opportunity to commit publicly to paying their suppliers on time and fairly
- Providing greater advice to small businesses on negotiating payment terms and using digital payment technology to manage cash flow.
What should you do?
For larger businesses who might meet the current reporting thresholds, it is vital to ensure that you are submitting the data currently required when it is due each year. You should also keep a close eye on the upcoming changes and ensure that your reporting systems are set up to be able to output the new data which will be required.
For smaller businesses, these announcements should be good news in improving the culture of prompt payment between UK businesses. If you are having problems with persistent late payment, don’t be afraid to engage with the Small Business Commissioner to see what support they can offer. It is also well worth making use of the publicly available data to find out about the payment practices of your customers and to see if any of them are obliged to comply with the Prompt Payment Code.
It remains to be seen how effective these additional measures will be and how robustly non-compliance will be enforced moving forwards, given the ever present commercial incentive for businesses to maximise their own cashflow with extended payment terms.
However, given the Government’s increased use of transparency reporting in a variety of areas of compliance in the past few years and, in particular, HMRC’s success in generating publicity for national minimum wage compliance through its “name and shame” lists it seems likely that these kinds of measures won’t be going away any time soon and businesses of all shapes and sizes will need to familiarise themselves with what’s required.
If you have any questions regarding the legislation on prompt payment report, the proposed changes or how to manage late payment issues within your business, please contact a member of our Commercial team here.
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