Tackling late payment in the United Kingdom: the duty to report on payment practices

Categories: Business Law
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Tags: payment

The UK has implemented Directive 2011/7/EU of the European Parliament and of the Council of 16 February 2011 on combating late payment in commercial transactions on time, even if at the last minute (Late Payment Commercial Debts Regulation 2013 which came into force on 16th March 2013). This country is doing quite well in terms of average payment duration. According to 2014 statistics (Intrum Justitia’s European Payment Index 2014, http://intrum.crmplatform.nl/documents/IJ_EPI-2014_ENG_Sec.pdf, p. 54), the average payment duration was 35 days in B2C, 42 days in B2B and 40 days in dealings with public authorities, with a reasonable payment term of, respectively, 20 days, 25 days and 25 days. The average payment delay was therefore 15 days in B2C, 17 in B2B and 15 days in dealings with public authorities. This contrasts very positively with other European countries such as Spain (where the average payment duration in transactions with public authorities reached 154 days, with a delay of 79 days given the average payment term of 75 days, see Intrum Justitia’s study at 50). However, there is still room for improvement, both in relative and absolute terms. A comparison with Finland, where the average payment duration is 24 days in dealings with public authorities (Intrum Justitia’s study at 31), shows that progress is possible. In absolute terms, late payment currently stands at the impressive figure of 41.5 billion pounds, knowing that “small businesses shoulder the vast majority of this burden” (written statement to Parliament by the Government, “Prompt payment: implementing the duty on large companies to report on payment practices and policies”, 20 March 2015). The figure is obviously damaging to the economy. Late payment ruins the efforts of well-managed companies and may even force them to borrow money in order to meet their immediate commitments, perhaps exposing them to bankruptcies (with potential follow-on bankruptcies downward the chain).

There is at root a lack of voluntary enforcement of the existing implementing legislation by the debtor, a problem which is compounded by the reluctance of small and medium companies to enforce their rights as creditors, for example by charging interest on late payments as they are allowed to do by the Directive. The reason is simple enough: the fear of losing future business by causing long-term damage to their relationship with their debtor. In effect, the debtor benefits from an interest-free loan forced upon the creditor.

In order to tackle this issue, the UK recently introduced a legal requirement for big businesses to publish information about their payment practices and performance, exposing themselves to a fine if they do not and to shame (and perhaps losing business) if their figures do not meet the Directive standards (30 day terms the norm and 60 days the maximum). This duty may be found in Section 3 of the Small Business, Enterprise and Employment Act 2015, which received Royal Assent on 26 March 2015. Only big businesses are affected. A big company is defined negatively in the Act: it is a company which does not qualifies as a micro-entity or a small or medium-sized company (Section 3 subsection (3)). The information provided will have to be approved by a person yet to be identified (Section 3 subsection (5)), probably an accountant. It will cover in particular the standard and non-standard payment terms of the company, the processing and payment of invoices, disputes relating to the payment of invoices, including any dispute resolution mechanism that the company uses, and payments owed or paid by the company due to late payment of invoices, whether in respect of interest or otherwise (Section 3 subsection (4)).

The Act only lays down the general principles. Regulations are expected to elaborate on them in the near future. However, the government previously announced its intentions. It stated that the new duty will only cover “large quoted companies” (we underline) and that it will involve reporting on a half-yearly basis starting April 2016, the date being fed in a single central digital location (written statement to Parliament by the Government, “Prompt payment: implementing the duty on large companies to report on payment practices and policies”, 20 March 2015). It also provided more detail on the required information: “standard payment terms, including any changes to these in the last reporting period […]; average time taken to pay; proportion of invoices paid beyond agreed terms; proportion of invoices paid in 30 days or less; paid between 31 to 60 days; and paid beyond 60 days; amount of late payment interest owed and paid; whether financial incentives were required to join or remain on supplier lists; dispute resolution processes; the availability of: e-invoicing; supply chain finance; preferred supplier lists; membership of a Payment Code”.

(Altalex, 10 August 2015. Article by Emmanuel Guinchard)

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