Changes in how large companies report payment practices

What this means and who does it affect?

According to Bacs Payment Schemes Ltd, £26.3 billion in late payments are owed to UK SMEs.

This equates to an average of £32K and has a significant knock-on effect for SMEs with:

• 32% paying their own suppliers late
• 12% having difficulty in paying their staff wages
• 29% relying on costly overdrafts to make up for cash flow shortages

However good news is on the horizon due to recently announced regulations by the Small Business Minister, Margot James. From 6th April 2017, large companies and Limited Liability Partnerships will have a statutory duty to report on their payment practices and performance. They will need to publish this report on a half yearly basis, within 30 days from the end of their reporting period, and it must be approved by a company director. It will be a criminal offence if they fail to do so or publish misleading information.

All businesses that meet two of the following thresholds will be qualifying companies and must abide by this statutory requirement:

• An annual turnover of £36M
• A balance sheet total of £18M
• 250 employees

These qualifying companies must report on the following, which will be publicly visible on a web based service provided by the government:

• A narrative description of their payment terms
• Their process for resolving disputes related to payment
• The average number of days taken to make payments in the reporting period, from receipt of the invoice
• The percentage of payments within the reporting period which were paid in: 30 days or less, between 31 and 60 days, and 61 days or more
• The percentage of invoices within the reporting period which were not paid within the agreed terms
• Whether their suppliers are offered e-invoicing
• Whether supply chain finance is available
• Whether they deduct sums from payments in return for a supplier remaining on a preferred supplier’s list
• Whether they are a member of payment code and the name of the code

Some companies have benefited from delaying payments to suppliers in the past. There was a high-profile case in 2014, when the Grocery Code Adjudicator discovered that Tesco were knowingly delaying payment to their suppliers to improve their own financial position. Due to the public outcry, Tesco CEO Dave Lewis later announced the introduction of a new standardised payment policy, including shorter payment terms for SMEs to help deliver a fairer, more transparent and consistent approach across their supply bases.

It’s important to note that the discovery of Tesco’s delayed payment practices only came to light because of a separate investigation into their false accounting scandal (when they overstated profits by £263M). However, with the new payment practices reporting regulations, companies that continue to operate in the same way as Tesco previously did, by purposely delaying payments, must publicly report on this and their reputations could be tarnished. This should deter such behaviour, which is good news for SMEs.

A later blog post discusses some of the benefits of these new regulations to SMEs. To view it, please click here.