We previously reported that late payments cost SMEs more than £2 billion a year, as revealed in the data published in 2017 by Bacs, the company behind Direct Debit and Bacs Direct Credit. More recent research revealed that 62% of invoices were paid late in 2017, an increase from 60% in 2016.
New legislation, Duty to Report on Payment Practices and Performance, was introduced last year as a step towards combating late payments and bringing more transparency. Under the legislation, large organisations are required to report how long it takes them to pay after receipt of invoice. Thanks to this, smaller businesses will know before they enter into any business agreement whether a larger business has a good or bad record of paying on time.
Who does the Duty to Report legislation apply to?
It applies to large companies and large LLPs (Limited Liability Partnerships). Companies have to be formed and registered under the Companies Act 2006 or a previous legislation, while LLPs have to be registered under the Limited Liability Partnerships Act 2000. This is applicable to all companies and LLPs, private, public or quoted.
However, the reporting requirement does not apply to partnerships (provided they are not LLPs) and to companies which are incorporated under another country’s laws.
What are the size criteria for large companies/LLPs?
- £36 million annual turnover
- £18 million balance sheet total
- 250 employees
Companies, or LLPs, that are in their first financial year do not need to report, but will have to in their second year.
What are the requirements?
If a business is in scope of the reporting requirements and criteria, they must prepare and publish information about their payment practices and performance in relation to qualifying contracts for each reporting period in the financial year. The information provided must reflect the business’ performance, and the policies and practices which have applied, during that reporting period.
What information do businesses need to provide?
The following are required for each reporting period, as described in the Government’s guidelines on the regulation:
Narrative descriptions of:
- the business’ standard payment terms, which must include:
- 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
- the business’ process for resolving disputes related to payment.
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 the agreed payment period
Statements (i.e. a tick box) about:
- 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, and whether they have done this in the reporting period
- whether the business is a member of a payment code, and the name of the code
What is the government doing?
The introduction of the legislation makes it mandatory now for every business that falls under the reporting criteria to report how long it takes them to pay after receipt of invoice. There are three categories: in 30 days or less, between 31 and 60 days, or longer than 61 days.
Arguably, this is an extension of the Prompt Payment Code, which was established in 2008. Under this Code, many large companies were already voluntarily publishing their payment policies online and following standards for payment practice. The Duty to Report legislation described above takes this Code a step further.
The Government is also taking further action with the appointment of a new Small Business Commissioner, as well as the introduction of a new complaint service on late payments in order to help SMEs resolve payment disputes.
What can your company do to avoid late payments?
There is no magic way to avoid late payments. However, companies can take steps in order to protect themselves and those they do business with. One such solution is to pay regular payments by Direct Debit.
Organisations that use Direct Debit to collect payment should not have to worry about chasing invoices because the payment is processed automatically, leading to a more predictable cash flow.