Companies and directors of larger companies face criminal prosecution and unlimited fines for non or misreporting of payment practices

On 6 April 2017, new criminal offences for companies and directors will be introduced when the Reporting on Payment Practices and Performance Regulations 2017 (“the Reporting Regulations”) come into effect. Similar Regulations relating to limited liability partnerships (LLPs) will also come into force.

The aim of the Reporting Regulations is to increase transparency in respect of the payment practices of larger companies and alleviate the mischief caused to suppliers by late payment of debt. The Government is particularly keen to mitigate the impact of late payments owed to micro, small and medium sized businesses by larger corporate entities. As of December 2016, the level of debt owed to these types of businesses was estimated to be around £26.3 billion. Under the Reporting Regulations larger companies and LLPs must report twice a year on their payment practices and policies and average time taken to pay invoices.

Sanctions

The transparency requirements set out in the Reporting Regulations are backed by criminal sanctions. Where a company fails to publish the required information within the relevant reporting period both the company and each individual director is liable upon summary conviction to an unlimited fine.

A further offence will be committed by any person who makes, publishes or causes to be published a statement under the Reporting Regulations that is misleading, false or deceptive in a material particular.

The Department for Business, Energy and Industrial Strategy ("BEIS") will be 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.  Proceedings can be brought within three years of the commission of the offence, which is an extension of the default six month limitation period in the magistrates' court. The permission of either the Secretary of State or the Director of Public Prosecutions will be required before a person can be prosecuted for publishing a misleading, false or deceptive statement.

Application of the Reporting Regulations

By virtue of section 465(3) of the Companies Act 2006, a company will exceed the threshold for qualifying as medium-sized if it meets any two of the following criteria:

• a turnover of more than £36 million;
• a balance sheet turnover of more than £18 million; and/or
• more than 250 employees within the financial year.

The Reporting Regulations will also bite parent companies that exceed two or more of the thresholds set out in section 466(4) of the Companies Act 2006:

• the group has an aggregate turnover of more than £36 million net or £43.2 million gross;
• the group has an aggregate balance sheet total of more than £18 million net or £21.6 million gross; and/or
• the group has an aggregate total of more than 250 employees.

The Reporting Regulations will not apply to companies in their first financial year regardless of whether they meet two or more of the relevant thresholds.

What is required?

For each reporting period qualifying companies must publish information about their standard payment terms for contracts with suppliers, including:

• the number of days in their standard payment terms;
• whether the company varied its standard payment terms in the relevant reporting period and if so, details of the variation and details of any notice provided to or consultation with its suppliers prior to the variation;
• a description of the maximum payment period the company has entered into during the reporting period;
• a statement about whether a supplier can receive payment for an invoiced and sum before the end of  the payment period;
• a statement about whether the company’s policies provide for electronic submission and tracking of invoices;
• a statement about whether the company is a signatory to a Code of Conduct for payment practices and if so, which one;
• a statement as to whether the company can deduct a sum from the supplier as a charge for remaining on the company’s list of suppliers or potential suppliers; and
• information about their processes for resolving disputes with suppliers.

Qualifying companies are also required to publish statistical information about their performance in the last reporting period, including what percentage of payments falling due within that period the company has failed to pay within the prescribed payment period. 

Contracts for financial services, as defined in section 2 of the Small Business, Enterprise and Employment Act 2015, do not fall within the remit of the Reporting Regulations.

Reporting Regulations in Context

The Reporting Regulations are designed to increase public scrutiny of large corporate entities to treat suppliers in a transparent way. The measures should be viewed within the context of other Government initiatives to amend the way in which the criminal law can be brought to bear on corporate entities and reform of the way in which criminal liability can attach to companies and those responsible for running them.