New regulations introduce a criminal liability for large entities that fail to report on their payment practices. How can accountants help their clients stay within the law, asks Liz Loxton
Caption: Illustration: Phil Hackett
New payment practices regulations requiring large entities to report on their payment practices publicly every six months took effect in April 2017. Private and public companies as well as LLPs are affected and, in line with an interesting trend, these regulations introduce the prospect of criminal sanctions in the form of fines for non-compliance – an element of the legislation that finance directors won’t want to overlook.
The facts
The regulations form part of the Small Business, Enterprise and Employment Act 2015. Businesses and firms that meet two out of the following three criteria on their two last balance sheet dates – an annual turnover of £36m, a balance sheet total of £18m, and 250 employees or over – need to provide statistics on their most recent payment performance, plus a narrative on their policies and procedures.
The statistics companies need to provide are: the average number of days taken to make payments; the proportion of payments made within 30, 60 or more than 60 days; and the proportion of payments within the accounting period not made within agreed terms.
Organisations will also need to provide information on any process they have in place for resolving disputes relating to payment; whether or not suppliers are offered a mechanism for e-invoicing; whether supply chain finance is offered; whether or not the business makes a charge for placing companies on their key suppliers list; and finally whether the business is a member of the Prompt Payment Code, administered by the Institute of Credit Management.
Not all business that an entity carries out will have to be reported, as Michael Hatchwell, officer and director at Globalaw, explains. “Contracts which will be covered are contracts which are for goods, services or intangible assets (including intellectual property). Only contracts with a significant connection with the UK will be covered by the duty to report,” he says.
What you need to know
The government’s intention is to provide the SME sector with a reliable source of current information on the payment habits of the larger organisations with whom they contract. The information is to be made available via a government portal and accessible to those SMEs who want to research the payment habits of prospective clients.
These regulations represent a significant element of an effort to level the playing field for smaller businesses. “Businesses of all sizes have got used to operating in uncertain times but one key factor that has hampered the growth of SMEs has been late payments by large corporates which would be expected to have more funding available to settle their debts on time. The amount of late payments owed to SMEs has been put at around £26.3bn in total,” says John Jones, partner and head of corporate finance at accountants and business advisers Beever and Struthers.
The introduction of a criminal liability ups the pressure on larger organisations to act as good corporate citizens. It is a criminal offence on the part of the business and every director of the company or designated member of an LLP if the organisation fails to publish a report including all the relevant detail within 30 days of their filing period.
The criminal sanction element puts finance directors firmly in the spotlight, says Clive Lewis, head of enterprise at ICAEW. “They would incur a fine, and the reputational damage is something that will tend to concentrate the mind,” he says.
The wider intention is to influence behaviour. “The new regulations, aimed at putting pressure on larger companies to report on their payment record and practices, will place more scrutiny on large corporates and shine a spotlight on those who have a bad payment track record. In the current climate where general sentiment towards big business is often pretty negative, large corporates will risk reputational damage if they’re seen as having unfair practices,” says Jones.
Jenny Barker, counsel in the business crime team at law firm Peters & Peters, says that while these new offences stop short of criminalising the underlying behaviour which the regulations seek to address, this is clearly an attempt to alter corporate culture through the criminal law. “It is notable that the Criminal Finances Bill, which will create new criminal offences for those corporates that fail to prevent their employees or agents from facilitating tax evasion, is currently before parliament.”
Advice to clients
Since not all business or contracts will be caught by the regulations (payments to non-UK businesses for example), the first step for accountants is to raise awareness and help clients to understand which contracts are caught by the regulations, says Ros Baston, a director with Deloitte and leader of the firm’s Centre for Corporate Regulatory Insight. So financial services contracts won’t be caught, but supplies of goods to a retailer with significant UK interests will be.
After that, important data points in the payment cycle must be identified: the date an invoice is received and the date of payment. After consultation, the first data point was changed from the date at which a supplier generates an invoice to the date on which the customer receives it, Baston says. The change was made to avoid a situation where a business that misdirects its invoices ends up penalising its customers, inflating the number of days between issuing an invoice and getting it paid through simple error.
The principles are straightforward enough, Baston points out, but large organisations will have a lot of data to capture and a degree of variation within their operations to cope with. “There will be a wide range of payment terms within one organisation and so finance departments will need to identify how many exist. That’s not necessarily something they needed to track before,” she says.
Awareness of the detail of the legislation will be central, says Baston. Some businesses will need to start submitting information from October 2017. However, the website, which will be part of the gov.uk website, will have more reporting information from mid-2018, when it is expected that most businesses meeting the requirements will have begun reporting.
Accountants will need to recognise and communicate the correct deadlines for their clients. For a company with a financial year beginning after 6 April, the first reporting period is the first six months of the business’s 2017-2018 financial year. Its first report must be made within the 30 days starting on the day after the end of the business’s first reporting period.
More broadly, accountants will need to acknowledge and communicate a continuing move towards using criminal sanctions. “Inevitably, the practical effect of this continued expansion of the criminal law will depend on the level of enforcement forthcoming. Nevertheless, it seems certain that the evolving issue of corporate criminal liability will be an increasingly important consideration for those advising businesses in the years to come,” says Barker.
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