CPD articles

CPD: Late payment

7 September 2017 | By Neal Hooks

The government is getting tough on late payers and from next month larger construction companies will have to submit payment times to be published online. Neal Hooks, business development manager at payapps.com, explains how it all works.

Late payment can cause real problems for many smaller businesses, contractors and subcontractors that rely on prompt payment and a regular cycle of cashflow to be able to pay their own bills.

From October 2017, qualifying companies must report their payment practices through an online service provided by the government, and these will be available to the public.

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The Department for Business, Energy & Industrial Strategy introduced a new duty for qualifying businesses to report on their payment practices in its white paper Duty to Report on Payment Practices and Performance, published in January this year. 

This is in recognition that late payment is a key issue for business, especially smaller businesses. It can impose severe administrative and financial burdens, adversely affecting cash flow and jeopardising ability to trade.

Regulations made under Section 3 of the Small Business, Enterprise and Employment Act 2015 (and under the Limited Liability Partnerships Act 2000) introduce a duty on the UK’s largest companies and limited liability partnerships (LLPs) to report – on a half-yearly basis – their payment practices, policies and performance for financial years beginning on or after 6 April 2017. 

The legislation will inevitably affect the vast majority of the UK’s supply chains, but nowhere more so than in the construction sector – which accounts for 31% of late payments across all sectors. From an administrative perspective, large principal contractors will take the biggest hit.

For more information, the Department for Business, Energy & Industrial Strategy white paper, Duty to Report on Payment Practices and Performance, can be accessed here

Payapps.com is a cloud-based software designed specifically for the processing of conforming applications for payment and payment notices between main contractor and subcontractor.

Full transparency of payment practices stands to benefit smaller businesses, which are fully dependent on fair and timely payment from their clients. On average, subcontractors wait 107 days to receive payment, with only 5% receiving payment within 30 days. 

This CPD will explain what the new criteria for companies are and what construction companies and contractors should know ahead of the October deadline.  

Qualifying criteria

All registered companies, whether public or private, and LLPs must comply if they qualify with the criteria as set out below. This includes a company or LLP registered under the Companies Act 2006 or the Limited Liability Partnerships Act 2000 respectively. Information must be provided at individual company level: group level is not sufficient.  

A company or LLP will be required to submit information for a financial year if its last two balance sheets exceed two or more of the thresholds for qualifying as a medium-sized company. These are: 

The thresholds will be periodically reviewed and updated so companies should always check to see whether they still fall within the reporting criteria. If the Companies Act thresholds have been updated for that financial year, the updated thresholds should be applied retrospectively to preceding years for the purpose of the reporting requirement size tests.

No company is required to report in its first financial year. Companies in their second financial year should refer to their first year figures only. They will be required to report if their first-year balance sheet exceeded two or all of the thresholds.

New companies or LLPs created as a result of a merger or takeover will be excluded from reporting in their first financial year if they are newly registered.

Companies involved in mergers, takeovers or acquisitions that continue with the same registration number will be required to report if they exceed the size thresholds. Joint venture vehicles incorporated as a company or LLP will also need to report if they exceed the size test. 

There are separate criteria for parent companies (or LLPs) and groups. If a group or part of a group exceeds the qualifying criteria below, it must submit a group report as well as individual reports for qualifying companies within the group. The group criteria are: 

International companies with a UK- registered subsidiary that meets the criteria must submit for that subsidiary, but not the overall company.

Qualifying contracts

Businesses are only required to publish information about contracts that satisfy all of the following criteria:

Meeting submission criteria

To comply with the requirements, there are certain criteria that the submission must meet: submissions must be made twice yearly, aligned to the company’s financial year; and the first report is due within 30 days of the end of the reporting period.

Submission requirements:

Companies must also answer yes or no to the following questions: 

Non-compliance

The regulations are intended to force behavioural change among businesses, rather than impose strict punishments or fines. However, failure to report is a criminal act under the Companies Act 2006, for both the organisation and its directors. Publishing a report that contains information that is materially misleading, false or deceptive is also classed as a criminal offence. Companies and directors that breach the reporting requirement face prosecution and a fine.

The new regulations also hold other implications for businesses, such as:

This CPD article has been sponsored by Payapps.com

Comments

It has been a long-standing issue, payment terms, and too little is done to pay on time. Reform in the construction industry is needed urgently. A process of contractual payment terms, that is say month end should be commonplace, the client should pay the contractor at month end, with payments to subcontractors being made on the same day. This should ensure a good working relationship between all parties and could potentially reduce costs, as the subcontractors will not need to inflate prices to cover for the periods of non payment. It is all about fairness. Fingers crossed things will change at a significant pace.

Nick Parry, 12 September 2017

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