From next month, UK businesses will be legally required to report on their payment practices. Treasury Today takes a closer look at what the Duty to Report on Payment Practices and Performance Regulation means for businesses.
On 6th April 2017, new regulations made under section three of the Small Business, Enterprise and Employment Act 2015 will come into force, requiring UK businesses to report twice a year on their payment practices and performance.
Under the new regulation businesses will be required to provide a narrative description of the business’ standard payment terms, including: the standard contractual length of time for payment of invoices, maximum contractual payment period and any changes to the standard payment terms in the reporting period, how suppliers have been notified or consulted on these changes and the process for dealing with disputes.
Businesses will also have to provide statistics on:
The average number of days taken to make payments in the reporting period, from the date of receipt of invoice or other notice.
The percentage of payments made within the reporting period which were paid in 30 days or fewer, between 31 and 60 days, and in 61 days or longer.
The percentage of payments due within the reporting period which were not paid within agreed terms.
According to the regulatory text, companies that have been formed and registered under the Companies Act 2006 (or previous legislation), LLPs registered under the Limited Liability Partnerships Act 2000 and international business’ subsidiaries incorporated in the UK and registered under the Companies Act will all be required to report if they meet two of the following three criteria.
“There are estimated to be around 7,000 companies operating in the UK that meet these criteria,” says Matthew Stammers, European Marketing Director at Taulia.
Prompt payment in law
The focus on corporate payment practice is not a new phenomenon for UK businesses who already comply with the EU’s Late Payment legislation and may be signatories of the Prompt Payment Code.
But for Stammers, the Duty to Report on Payment Practices and Performance legislation that is coming in, is a game changer. “Publishing payment practices is a key tenet of the Prompt Payment Code,” he says. “But the code is voluntary; this new regulation is mandatory and it is a criminal offence not to comply. This really puts the onus on businesses to not only understand their actual payment practices but also to be able to report on them.”
From theory to reality
Stammers believes that most companies see this regulation as a positive, in theory, because it promotes more transparency around payments. But in practical terms businesses have issues.
“The regulations are still not fully clear,” he explains. “Many businesses I have talked to express concerns with this.”
Companies are also concerned about the work it is going to take to get their hands on all the necessary data. “FTSE100 businesses have thousands of suppliers with different payment terms and payment dates and often this information isn’t held centrally,” says Stammers. “One company I have recently been speaking to has had two full-time employees working to obtain this information for two years – it is a big challenge for businesses.”
Another issue that companies have around the regulation is that it runs the risk of companies who offer less favourable payment terms being demonised by the media. The reason being that simply reporting aggregated payment data doesn’t account for the complexity of supplier relationships.
“Not all supplier relationships and commercial agreements are the same,” says Stammers. “Businesses will therefore very likely have different payment terms for a local catering company than they will a big multinational, for example. This doesn’t make them evil.”
There are also nuances that often don’t appear in the numbers, he adds. “One media aggregator I know wanted to extend their payment terms with their customer to over 120 days because it gave them a competitive advantage. This won’t reflect well on the customer’s payment practices even thought it was proposed by the supplier.”
Stammers therefore recommends that companies take full use of the ‘notes’ box when reporting on payment performance. “Explain what you do, the rationale behind this,” he says. “Also, highlight the use of any e-invoicing or supplier finance solutions that accelerate payments as these will be seen favourably.”