Duty to report on payment practices legislation: gaining traction or falling flat?

A survey by MarketInvoice on 80,000 invoices from UK businesses revealed that 62% were paid late in 2017, up from 60% in 2016. On average, SMEs are paid 18 days late, with £21.1 billion outstanding in late payments annually.

Enter the duty to report on payment practices and performance legislation. This is in effect an extension of the Prompt Payment Code, which was established in 2008 and under which many large companies were already voluntarily publishing their payment policies online and following standards for payment practice.

The new legislation, however, means that all companies over a specified threshold (turnover, balance sheet total, number of employees) need to report on their payment record. The Government is taking further action to support SMEs with a new complaint service on late payment and the newly appointed Small Business Commissioner.

Are things looking up?

So, are we seeing real, tangible results?

“Whilst the regulations came into force in April last year, the reporting obligation is linked to each company’s financial year, so not every company within scope was required to take action immediately. It’s also not entirely clear that every company with a duty to report is fully aware of that fact, as I wouldn’t say the regulations have been particularly widely publicised,” says Oliver Kidd, Senior Associate, Stevens & Bolton.

The recent collapse of Carillion highlights the size of the task at hand. The company’s Supplier Payment Guide says that it is “committed to paying our suppliers in accordance with agreed payment terms. In order to avoid unnecessary delays and any processing difficulties, it is essential that processes are followed and consideration should also given to some of the tools we have to help improve payment performance.”

There then, somewhat predictably, follows a long list of processes. Rumours had been swirling for some time that Carillion was a late payer of bills. Worse still, creditors of the company could now end up with less than a penny in the pound, official court documents revealed.

A High Court witness statement submitted by the interim Chief Executive, Keith Cochrane, on the company’s liquidation notes the “insolvency recovery for creditors in the event of a group-wide liquidation would be an average of between 0.8p in the pound and 6.6p in the pound”.

Federation of Small Businesses National Chairman Mike Cherry, said: “It is vital that Carillion’s small business suppliers are paid what they are owed, or some of those firms could themselves be put in jeopardy, putting even more jobs at risk besides those of Carillion’s own employees.”

He added that these unpaid bills may well go back several months. “I wrote to Carillion back in July last year to express concern after hearing from FSB members that the company was making small suppliers wait 120 days to be paid. Sadly, these kind of poor payment practices are all too common among some big corporates. Perhaps if they weren’t it would be easier to spot the warning signs of a huge company in financial trouble.”

What are the public findings so far?

As previously mentioned, there are still a number of businesses subject to the new legislation who are yet to publish their first reports. Their first reporting date is not due until later in 2018, depending on when their financial year started.

Nonetheless, the data is starting to build up and there are currently around 350 companies with published information on a centralised portal. The quality of the data appears varied at this stage, with some entries incomplete and others containing inconsistencies.

“What isn’t clear is whether there is any procedure in place for the data to be reviewed centrally before it is published. There are currently some 30 plus companies on the list appearing to have reported only their company details and nothing at all about payment performance,” Oliver Kidd comments.

“There are also three companies with stated payment terms of 1,000 days, so we shouldn’t be surprised to see that they have been able to report that they pay 100% of their suppliers within agreed terms. This, of course, isn’t in the spirit of the legislation and we wonder whether it has raised any eyebrows with the regulators.”

How late are companies paying?

It depends on which metrics are used, notes Oliver Kidd. The information is presented under 24 headings, so is fairly detailed. Taking standard payment terms, for example, whilst most companies are within a range of 30 to 60 days, there are some with standard payment terms of 120 days and even higher.

Another useful metric for suppliers might be the percentage of invoices not paid within agreed terms; the range here is currently from 0% up to 97%. “One would hope that those with the lengthier payment terms would perform better at paying suppliers within agreed terms, however that is not necessarily the case with several entries we reviewed,” he says.

“Suppliers will no doubt be hoping that reporting companies are not prepared to simply report poor payment performance, rather than actually change their approach. Another recent development in this area has seen the Small Business Commissioner establish an impartial, independent and free-to-use service aimed at helping small businesses resolve payment disputes with larger organisations. This development should also be welcomed by smaller suppliers.”

So is Duty to Report gaining traction or falling flat?

“To date the feedback that I have been receiving from SMEs is that the new legislation is welcome and shows that there is an attempt to understand the challenges faced by SMEs and find solutions,” says Mark Greatholder, Senior Associate at Foot Anstey.

“However, only time will tell whether the new legislation has a meaningful impact on SMEs. To some extent it will depend on whether the large organisations who are subject to the legislation see enough benefit to their businesses (or enough adverse impact to their businesses resulting from their duty to report) to invest the time and effort it takes to improve their payment practices.”

Unfortunately, many SMEs do not consider themselves to be in the position to be able to choose the large organisations they work with or turn down good business opportunities for reason of poor payment terms.

Equally, whilst SMEs are becoming increasingly alive to the need to include a robust set of payment terms in their contracts, it is clear that large organisations hold an equal level of bargaining power. Many SMEs are reluctant to enforce such terms when larger organisations fail to comply with them because they don’t want to lose out on the business.

Sadly for suppliers, adds Oliver Kidd, the regulators stopped short of prescribing maximum payment terms or criminalising the act of persistent late payment by way of fines or other sanctions. Instead, the reporting duty intends to provide transparency in the supply chain and promote a ‘culture’ of better payment practices.

“It seems this softer approach is likely to require more time and buy-in from the business community before we begin to see a significant shift in behaviour. The regulations have at least put the issue of late payment on the agenda at boardroom level. Failing to report when required or reporting misleading information attracts criminal liability and potentially hefty fines, so the regulations should not be ignored,” he concludes.