Drafts of the regulations were published by the Department for Business, Energy and Industrial Strategy (BEIS) on 2 February 2017 and are expected to come into force on 6 April 2017. BEIS has also published guidance on the regulations.
To whom does it apply?
The new reporting requirements will apply to qualifying companies and qualifying LLPs - large companies (whether or not their shares are traded) and LLPs which exceed two or more of the thresholds set for a medium-sized company by section 465(3) of the Companies Act 2006. At present, the thresholds are:
£36m annual turnover,
£18m balance sheet total, and
The thresholds are updated periodically and so will need to be monitored.
Companies and LLPs incorporated outside of the UK are not caught by the rules. However, a UK subsidiary of a foreign parent which meets the thresholds will have to report.
Qualifying companies and LLPs do not have to report in the first financial year. However if they were caught by the thresholds in the first financial year, then they have to report in the second financial year.
What about group companies?
The rules are a little complex but BEIS explains them as follows:
“Parent companies or parent LLPs would need to report if the parent’s own turnover, balance sheet total and number of employees (or two of these) on its last two balance sheet dates exceeded the gross group thresholds.... Using the current thresholds…a parent which exceeded £43.2 million turnover, £21.6 million balance sheet total and 250 employees (or two of these) will be required to report on its payment practices and performance.”
More detailed information can be found in the guidance at paragraphs 15 to 22.
In addition, individually qualifying companies and LLPs within large groups still have to report on their own practices and performance.
Determining whether to report
To assist with this, the BEIS guidance includes a helpful flow chart, which we have reproduced at this link.
Only qualifying contracts are covered
Qualifying companies and LLPs will have to report on their payment practices and performance in relation to qualifying contracts. Qualifying contracts are business-to-business contracts, with a significant connection to the UK, for the goods, services or intangible property such as intellectual property.
Contracts for financial services are expressly excluded, meaning that financial services businesses only need report on contracts for other services and goods such as office supplies.
Whether or not a contract has a significant connection to the UK will depend on the actual circumstances. The BEIS guidance (see paragraphs 36 to 39) gives examples, such as the contract being governed by the laws of England and Wales, Scotland or Northern Ireland without the parties choosing a governing law, or where the parties choose a non-UK law but the contract has some other significant connection to the UK, which would include performance in the UK, or where one or both parties are established in the UK or carry on a relevant part of their business in the UK. Conversely, if the parties choose a UK law to apply to the contract but there is no significant connection to the UK, then the BEIS guidance states that the contract must not be reported.
Businesses with multiple contracts may consider the use of artificial intelligence software to parse through multiple contracts to determine which have, and which do not have, a significant connection to the UK, although defining the business rules for what may prove to be a subjective decision might prove difficult.
Information to be reported
The information required in relation to qualifying contracts is extremely detailed. At a summary level (for further detail see the BEIS guidance, paragraphs 41 to 75), it covers:
A description of the company or LLP’s standard payment terms, including standard payment periods and maximum payment periods;
Information about the company or LLP’s dispute resolution processes, essentially how disputes about payments are dealt with;
Statistics showing average number of days to make payments; percentages of payments made over time (≤30 days, 31 to 60 days, ≥61 days); and
Other information covering topics such as availability of e-invoicing and supply chain finance, charges for being included on a preferred supplier list, and membership of voluntary payment codes.
Each report must be published on the government web-based service within 30 days of the end of the reporting period and must be approved by a named company director or (for LLPs) a designated member. Failure to report within the filing period will be a criminal offence by the business, and every director of the company or designated member of an LLP.
Businesses which will be caught by the new rules should be taking steps to review payment practices and policies, analyze qualifying contracts and update financial systems to enable the appropriate reports to be produced.
Interest in the data reported is likely to be high and businesses should consider the extent to which they are exposed to reputational damage based on current payment policies and policies.