Company directors could face criminal charges under new rules designed by the UK Government to help small businesses get paid on time by larger corporates.
The new criminal offence kicked in when the Reporting on Payment Practices and Performance Regulations 2017 came into effect on April 6, 2017.
Now, when a company fails to publish information about how long it takes to pay suppliers, both the business and each individual director will face criminal prosecution and unlimited fines.
The requirement affects companies and LLPs who exceed two or more of the qualifying thresholds at the date of their last two balance sheets. The thresholds are based on the definition of ‘medium-sized’ under the Companies Act 2006 and are an annual turnover of £36 million, a balance sheet total of £18 million, and an average of 250 employees during the year.
Since April 6, 2017 those qualifying are required to publish information on a Government website about their payment practices and policies and how they have performed against them, including the average time taken to pay suppliers, and to update the information every six months.
James Andrew, commercial law specialist at Tayside-based solicitors Miller Hendry explained: “It’s important that larger businesses check whether they are required to report under the Regulations, and ensure that they keep an eye on the thresholds as these will be updated over time. Smaller businesses can ask new customers whether they are required to report and, if they are, check out payment performance as part of their pre-contract checks.
Mr Andrew added: “It’s worth remembering that there are other existing measures already available to tackle late payment, including the option of claiming interest and recovery charges, and it’s worth checking that existing contract terms don’t undermine those rights with something less advantageous.”
The Government introduced the Regulations in a bid to increase payment practise transparency in larger companies and cut down on the problems caused by the late payment of debt to suppliers.
The move comes after research revealed that close to half of the UK’s 5.5 million small and medium companies receive late payments, with the level of debt owed to SME’s estimated to be around £26 billion at the end of last year.
Under the new Regulations big businesses must report on their payment practises twice a year, as well as their policies and the average time taken to pay invoices.
Late payment is recognised as causing serious financial and administrative problems for businesses and the aim of the new Regulations is to tackle concerns about adverse treatment of smaller suppliers by larger, more powerful customers, through increased transparency and scrutiny.
The Reporting on Payment Practices and Performance Regulations 2017 came about as part of the Small Business Enterprise and Employment Act 2015, and applies to public, private and listed companies and to limited liability partnerships through a separate set of Regulations.
Businesses will not be required to report in their first financial year and those in their second year will be expected to check the requirements against their single, first financial year. For parent companies and LLPs, reporting will be required if the aggregate group figures exceed the thresholds. Any company or LLP within a group that satisfies the test individually, will need to report separately on its own payment practices and performance.
Under the Late Payment of Commercial Debts (Interest) Act 1998 commercial businesses are expected to pay their supplier invoices within thirty days, unless they have both agreed a longer time limit of no more than sixty days. Alongside, all public bodies are required to pay suppliers within thirty days, except for some specific or devolved activities.
Statutory interest can be applied, together with a fixed sum of between £40 and £100, depending on the sum owed, for the cost of recovering the late commercial payment. The interest is currently set at eight per cent plus the Bank of England base rate, and starts to run automatically at thirty days from the latest date of either receiving the supplier’s invoice, or of receiving or accepting the goods or services.
Mr Andrew added: “You can agree a longer period for payment, but if it’s more than sixty days it must be fair to both businesses. In additional, unless a ‘reasonable’ longer period has been agreed, any purchaser must confirm that goods or services conform with the contract within thirty days.
“Late payment legislation does not have to be referenced in trading terms, as it will apply automatically in any commercial relationship, unless an alternative process has been set out in the contract.”
The new Regulations also carry another offence for any person who publishes – or causes to be published – a statement that is misleading or false in their reports.
The Department for Business, Energy and Industrial Strategy (BEIS) is responsible for investigating offences and bringing proceedings. Guidance issued in January 2017 suggests that BEIS will generally seek to encourage a business to comply with the Reporting Regulations before steps are taken to prosecute.
For further advice or information on employment law or other legal issues, visit www.millerhendrysolicitors.co.uk