The UK’s Department for Business Innovation & Skills (BIS) have revealed new proposals to ensure that small businesses don’t lose out because of big business’ payment practices – but the new rules will increase the burden for existing businesses.
There is already legislation in place to promote prompt payment by business. The Late Payment of Commercial Debts (Interest) Act 1998 allows businesses to charge interest if debts are not paid on time. But in our experience, very few businesses enforce these rights – sometimes at a great cost to their bottom line.
But equally, there is reticence to impose a maximum time period on payment of debts. This runs contrary to the general principle of allowing the market to set its own limits and the flexibility for businesses in different markets to behave differently. There’s also fear that any maximum would, in effect, become the default, and therefore increase the credit period given by many businesses.
So the UK Government is taking a different tack. Instead of allowing David the right to beat Goliath up after the event (even though David may rightly feel he’s still outgunned), they are giving David an opportunity to size Goliath up ahead of time.
The Proposal: Tell us when you pay
The proposal is that large companies should report on 4 main metrics:
- The proportion of invoices paid beyond terms
- The proportion of invoices paid within 30 days
- The proportion of invoices paid over 30, 60 and 120 days; and
- The average time taken to pay invoices.
The report should be published on the company’s website, or if they don’t have one, another online resource, potentially The Gazette. This will allow those businesses contracting with them both to benchmark their payment practices, but also to adequately cost for any foreseen delay in payment. Cash flow costs money, and late payment has a significant impact. But equally so do extended payment terms – would you rather a late payer on 30 day terms, who always pays by day 45, or a compliant payer, who insists on 60 day terms?
Companies will also need to report on their standard (or average) payment terms, dispute resolution procedures and membership of payment codes, e-invoicing and supply chain financing.
This will apply to all quoted companies, and large companies, being companies or LLPs which have two of the following characteristics in any year:
- Turnover of more than £25.9million
- Balance Sheet total of more than £12.9million
- More than 250 employees
Reporting will be quarterly, and, like other Companies Act reporting requirements, it will be the responsibility of the directors and punishable by a criminal sanction.
This proposal relies on 2 pieces of legislation which don’t yet exist: first, the Small Business, Enterprise and Employment Bill will need to be enacted, and this will include a power for the government to introduce secondary legislation on prompt payment reporting.
The bill is currently before Parliament. A consultation for the reporting proposals was published on 27 November, and responses are sought by 2 February 2015. The consultation is giving a wide opportunity to comment on the merits of having metrics at all, the metrics themselves and even their format.
This is not the UK’s first attempt at legislation on transparency in addition to filed accounts. We have been particularly active in advising on the new transparency rules for the extractive industries and it is hoped that some of the lack of clarity with that legislation can be avoided with these new proposals.
Now is the time to make your view heard. Will knowing what the payment profile of your customers looks like help you, or is this another reporting requirement which adds to the cost of doing business?
For more information contact Gayle McFarlane who is a lawyer with Cordery in London where her focus is on compliance and technology law issues.
Gayle McFarlane, Lexis House, 30 Farringdon Street, London, EC4A 4HH
Office: +44 (0)207 118 2700