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Government reveals late payment regulations

2nd Feb 2017
Editor AccountingWEB
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Hour glass sitting on a past due invoice
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From April, large companies will have to report their payment practices twice a year – including the average time it takes to pay supplier invoices.

Guidance for large businesses to report payment practices has been published today as regulations are laid in parliament by small business minister Margot James.

The ‘duty to report’ guidance states that from 6 April 2017 large companies and limited liability partnerships (LLPs) will have to publish their payment practices and performance.

At the time of publication, the thresholds for this reporting are:

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

The new law will apply to any company or LLP which exceeds two of any of the three thresholds.

Affected businesses will have to report on their performance twice a year: Once at the half-way point of their financial year, and then at the end of it.

According to the guidance, these reports will be published “on a web-based service provided by or on behalf of government within 30 days of the end of the reporting period”, making it a reputational issue for businesses and giving small and medium-sized businesses (SMEs) publicly available information before deciding to work with firms.

The reports should provide a breakdown of payment performance on the percentage of invoices paid between one and 30 days, the percentage paid between 31 and 60 days, and the remaining balance.

Firms must also calculate and publish the average time taken to pay suppliers over the six-month reporting period.

Qualifying businesses will also have to report on their process for resolving payment disputes, including providing clarity for suppliers about what actions they need to take if such a dispute arises.

Failure to report will be a criminal offence, and business could be prosecuted and fined if they do not comply, or provide false information.

The new legislation requires businesses to report:
  • Descriptions of the business’s payment terms
  • The business’s process for dispute resolution related to payment
  • Statistics on the average time taken to pay invoices (from the date of receipt of invoice)
  • The percentage of invoices paid within the reporting period
  • The proportion of invoices due within the reporting period which were not paid within agreed terms
  • If the business offers e-invoicing
  • If the business’s offers supply chain finance
  • If the business’s 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
  • If the business is a member of a payment code, and the name of the code

Late payments ‘completely unacceptable’

The new ‘name and shame’ regulations are part of a number of measures aimed at tackling the late payment culture. Other actions include the appointment of the long-awaited small business commissioner to support SMEs in resolving payment disputes.

The role was first mooted back in 2014 and was part of the Small Business Act passed in March 2015, but has been subject to a number of legislative delays. According to sources the commissioner’s office is now expected to be operational by the end of 2017.

In a statement accompanying the legislation Margot James said: “The UK is home to a record 5.5 million small businesses and the industrial strategy will help address many of the challenges they face getting finance and scaling up.

“It’s completely unacceptable that small and medium-sized businesses are owed £26.3bn in late payments, which hampers their ability to grow and has no place in an economy that works for all.

“Large businesses have an important role to play and the guidance published today will help them fulfil their responsibilities and improve payment practices across the board.”

A continual problem

Late payments present a continual problem for the economy, and can cause major cashflow problems, hamper investment and, in severe cases, even present solvency risks to small and medium businesses.

The government reported that in June 2015, £26.8bn in late payments were owed to SMEs, while recent research from insolvency trade body R3 found that at least one fifth of corporate insolvencies in the past year were caused by late payment or the insolvency of another company.

Adequate systems and processes in place

Affected businesses now have three months to prepare reporting payment information. Commenting on the announcement law firm DTM Legal said in the light of this impending deadline, businesses need to ensure they have the adequate systems and processes in place for information gathering and reporting, and must carefully scrutinise their payment policies and practices to prepare for the increased transparency.

 

Will this new legislation affect your business? How are you preparing?

Replies (9)

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By David Winch
02nd Feb 2017 10:30

I welcome the suggestion to show the percentages of invoice payments in the different "delay bands", but I am not sure what good an overall 'average' will provide.

We all know an average means little unless we also know about the spread of the numbers from which it is calculated. For example, knowing the average human being has one ovary and one [***] doesn't tell you much about human anatomy!

David Winch
Sales & Marketing Consultant
Cambridge

Thanks (4)
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By rememberscarborough
02nd Feb 2017 10:45

Many ways for the big companies to skin a cat e.g. one of our best payers was taken over by a private equity firm and promptly upped the payment terms to 60 days nett. Complaints were met with the comment "either accept the terms or we'll find others companies who will..."

Thanks (2)
By ireallyshouldknowthisbut
02nd Feb 2017 11:27

The main issue with this is the fact we are assuming the data will be reliable.

if i was working for a big corporate again, there would be a lot of "gaming" on this.
Eg
1. Dating invoice when keyed in, not suppliers date
2. Not entering invoices at all until just before payment
3. Forcing up "agreed terms" to a blanket high rate, eg standard dates are "within 180 days", but with a side agreement to actually pay within 90.

There simply are no resources to police such data disclosures.

Thanks (0)
Replying to ireallyshouldknowthisbut:
By Tom Herbert
02nd Feb 2017 12:06

Thanks IRSKTB,

The gaming issue is a real challenge to these regulations that seem to be coming from a well-meaning place.

Will definitely take this up with BEIS dept and address this closer to the regs coming in.

Thanks (1)
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By Bertie Black
02nd Feb 2017 15:07

A more useful average would be the amount of time it takes to pay each pound of credit. If there's a policy of paying all small invoices under 30 days and all larger ones after 60 days, the average time to pay an invoice means very little.

Thanks (2)
Chris M
By mr. mischief
02nd Feb 2017 15:56

I think the true measure is "from date of invoice". A large company I once worked for had under 30 days in its published accounts, any supplier would tell you the true number was over 60.

Let's say the supplier invoiced today, 2 Feb 17. That invoice goes to accounts payable who log it. It gets matched to the purchase order, and sent to the procuring department. The procuring department then needs to issue a service entry number, which requires 2 authorisations.

That process normally takes 2 weeks. Due to cash flow issues people were being encouraged to take 6.

So the service entry number gets issued on 17 March 17. We now have a 3-way match in the system and, if a standard invoice, that will be scheduled for the next main payment run. Main runs are twice per month on 1 and 15.

So on 1 April 17 that invoice gets paid, which is about 60 days. The figure for the annual report is 15 days, from 17 March 17 to 1 April 17.

Thanks (2)
Replying to mr. mischief:
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By njpandya
04th Feb 2017 10:26

Nice point.

Thanks (0)
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By Ian McTernan CTA
06th Feb 2017 13:11

The replies so far show just how meaningless any set of statistics can be when you can game the data entry.

They need to specify in the regulations the definitions so that fiddling of the figures isn't as easy as the replies show it is.

And they need to define the brackets by size of invoice as well as days to pay.

Perhaps a good start would be to regulate that the date of the supplier's invoice is the date to start counting from..but then the larger firms would just pressurize the small firms to delay invoices until the end of the month or say they only accept invoices dated 1st of the following month.

Well meaning regulations but no way of really enforcing them - large businesses will always find a way of [***] down on the small suppliers to benefit the large one.

Thanks (0)
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By jimeth
08th Feb 2017 10:26

The regulations state that time to pay is measured from the date of receipt of the invoice. There is a problem with this. Does anyone know of an accounting system which records the date of receipt? All systems record the Invoice Date and almost all will record the date of input to the system. I have not seen one that also records the date of receipt (unless received electronically directly into the system), which will normally lie between those two dates. Therefore it will be impossible for most companies to strictly comply with these regulations. I expect most companies will either use invoice date or input date as the only practical way of trying to comply. Any amendments to software to add another date to all invoices will be costly and will not be ready for April.

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