Man is using laptop, getting ready to purchase an itemSince April 2017, large UK companies have been required to report on their payment policies, practices and performance, or face severe fines. These regulations were put in place in response to the issues that small- and medium-sized businesses (SMEs) have faced with non-payment by larger corporations, and are intended to make business transactions more safe and transparent. In 2017, an estimated £26 billion was tied up in payments owed to SMEs, and hopefully, this figure will be reduced in years to come.

The launch of these regulations was slow, and there were concerns when only around 1% of qualifying companies had been invited to report by July 2017. However, it is expected that this year reporting will improve.

Businesses that must report

For now, only large businesses and LLPs have to report on their payment performance, specifically those that fulfil a minimum of two of the following three criteria on their last two balance sheet dates:

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

For businesses operating outside of the UK, only the subsidiaries formed underneath the Companies Act 2006 or LLP’s formed underneath the Limited Liability Partnerships Act 2000 will have to report, depending on size considerations.

New companies formed as a result of a merger or takeover are excluded from reporting for the first financial year.

The government defines a parent company or parent LLP as owning one or more subsidiaries, and the rules for group reporting are slightly different. If the parent company as an individual does not exceed the size requirements then neither group needs to report, however if the aggregate numbers exceed the size restrictions listed above, then the parent company or parent LLP must report.

Requirements for reporting

The report submitted needs to give a general overview of how a company deals with payments and how well they follow their own guidelines. The report must include:

  • The standard payment terms of the business, including (but not limited to):
    • The standard contractual length of time for payment of invoices
    • The maximum contractual payment period and any changes to the standard payment terms
    • How suppliers have been notified or consulted on these changes
    • The business’ process for resolving payment disputes
  • Statistics on the following:
    • The average number of days taken to make payments
    • The percentage of payments paid in 30 days or fewer, between 31 and 60 days, and in 61 days or longer.
    • The percentage of payments not paid within the agreed period.
  • Statements concerning:
    • Whether suppliers are offered e-invoicing
    • Whether supply chain finance is available to suppliers
    • Whether the business’ practices and policies cover deducting sums from payments as a charge for remaining on a supplier’s list
    • Whether the business is a member of a payment code, and if so the name of the code.

Full details on what each of these concern are laid out in the government’s official document, along with information on punishments for either failing to include information or providing incorrect data.

The contracts reported on should be any contract for goods, services or assets that have a significant connection with the UK. This is usually the case if the contract is carried out in the UK, at least one of the parties involved is trading in the UK, or the contract is otherwise governed by UK law. Contracts that deal directly with consumers are not affected.

The first report should be made within 30 days after the end of the first six months of the financial year, and the second report should be made within 30 days after the end of the financial year. Failure to report within the 30 day period is a criminal offence, and as such the directors and the company will be liable to a fine if convicted.

How can these regulations help prevent fraudulent activity?

Companies that buy products or services without intending to pay will eventually find it harder to continue with their activities under these regulations. For many smaller businesses and contractors, dealing with such non-payment can be detrimental and halt cash flow. By checking the payment practices report, they will be able to make a more informed decision about who to do business with. While progress has been slow and there have been many technical issues with the system, we can hope that large companies will soon feel incentivised to adopt good payment practices and make the UK a better place to do business.

Unfortunately, if a company is not classified as a large company in the UK, or if they operate overseas, they are not legally obliged to submit a report to the government. Blackhawk Intelligence has years of experience with investigating businesses and entities of any size and can uncover if anyone approaching you for a contract is known for non-payment.

For more information on how Blackhawk can help with due diligence and international investigations, call +44 (0)20 8108 9317 to discuss your situation in confidence.