The benefits of the UK’s new Payment Transparency Regulation

Payment Transparency

The benefits of the UK’s new Payment Transparency Regulation

On 6th April 2017 a long-awaited new law came into effect. The Payment Transparency Regulation forces larger businesses to report on their payment practices and performance. It aims to improve the payment culture by effectively naming and shaming the late payers. We’re looking forward to this initiative which will help to reverse the culture of late payment that has dogged the growth of SMEs in recent years. Here’s all you need to know about the new regulations.

What is the Payment Transparency Regulation?

 The Payment Transparency Regulation, introduced under Section 3 of the Small Business, Enterprise and Employment Act is a new law designed to force late paying businesses to own up to and improve upon their payment performance.

Companies and LLPs who fit the threshold criteria will have to publicly divulge every six months their payment practices, policies and performance for financial years beginning on or after 6 April 2017. The information made available includes important and useful details such as the average time taken to pay supplier invoices. This information will be extremely useful for SMEs when deciding which companies they want to do business with and should encourage larger companies to provide better terms to their suppliers. Since the data is made available to the public online, this is a big step towards combating the problem of late payments.

Why has it been introduced?

There’s no doubt that late payment is a huge and entrenched problem for UK SMEs. An incredible £26.3b is currently owed to SMEs in late payments. The average late payment debt now stands at £32,185. When businesses experience late payments from multiple customers across large amounts, it can prove fatal. And it’s a widespread issue. Large, household name companies have been recently brought to bear for their poor payment practices.

The idea of this initiative is to make these practices public knowledge. This transparency will force those late paying companies to improve their payment processes and performance, or lose business to those that do.

Who has to comply with the regulation?

The new regulation applies to any Company or Limited Liability Partnerships (LLPs) which exceeds at least two of any of the following thresholds:

  • £36 million annual turnover
  • £18 million balance sheet total
  • 250 employees

 

The Government have released a useful guidance document for those businesses who will need to report their payment practice and performance information.

What information will be made transparent?

Businesses that meet the above criteria are obliged to submit the following information about their payment practices and performance. 

Descriptions of their:

  • standard payment terms
  • standard payment period
  • maximum payment period
  • changes to payment terms and how suppliers have been notified of consulted on these changes
  • processes for dispute resolution related to payments

 

Statements on:

  • whether suppliers are offered e-invoicing
  • whether supply chain finance is available
  • if their practices and policies cover deducting sums from payments as a
    charge for remaining on a supplier’s list, and whether they have done this in the reporting period
  • whether the business is a member of a payment code, and list the name of the code

 

Statistics on:

  • cases where supply chain finance is used
  • cases where an invoice is not present
  • average number of days taken to pay invoices (from the date of receipt of invoice)
  • percentage of invoices that were paid within the reporting period
  • proportion of invoices due within the reporting period which were not paid within the agreed period

 

All the above information has to be reported on twice a year and be approved by a named director (companies) or a designated member (LLP). 

What happens if businesses don’t comply?

Once the regulation comes into force, it will be a criminal offence to not publish the necessary information within the 30-day filing period. Business won’t be able to get away with submitting any misleading, false or deceptive information unless they want to end up paying a hefty fine.

Is it going to help the issue of late payment to suppliers?

We often see the direct effect of late payments and how it resonates through the supply chains of many different industries. There is a culture of late payment in the UK and it is seriously hampering the growth of UK SMEs. So as active champions of UK SME growth we absolutely support the new laws.

The idea behind the new regulation is to effectively ‘name and shame’ those large businesses who indulge in nefarious payment practices. It will force late payers to be transparent about how they pay, and through that transparency SMEs will be able to make informed decisions about which companies they wish to do business with. 

However, according to BACS, at the end of 2016, 71 per cent of SMEs said they were unaware of the imminent government plans to force large and listed companies to disclose payment practice details. But it’s early days and awareness should increase. It’s something we are actively telling our customers about.

Awareness and buy-in amongst SME businesses, and cooperation from larger companies is key to the initiative’s success. This will only improve as time goes on.

Once the initiative gains traction, awareness and cooperation will increase. This new regulation stands as a step in the right direction towards improved payment performance and supported SME growth.

How will SMEs benefit?

The regulation should force larger businesses to improve upon their payment performance. The laws of competition dictate that less and less businesses will want to work with those who perform poorly when it comes to supplier payment. It may be a slow process, but once the culture begins to to reverse, payment performance should begin to improve.

Improve your supply chain

When a business isn’t paid, it becomes difficult for them to pay their own suppliers. In fact just under a third of SMEs impacted by late payments admit they’re forced in turn to pay their own suppliers late.

This ‘domino effect’ causes strain throughout the entire supply chain, resulting in increased cash flow pressure, and unfavourable terms. When your larger customers pay you on time, you in turn can afford to pay your own suppliers. Relationships improve, supply chains strengthen, and businesses flourish.

Improve your efficiency

42 per cent of SMEs experiencing late payments spend up to four hours a week chasing late payments. ​18 per cent of SMEs spend up to £500 a month chasing late payments. If you can choose which customers to do businesses with according to their payment performance, you’ll be able to improve the efficiency of your business.

Improve your trading terms

The Payment Transparency Regulation will not only improve promptness of payment. This regulation will shine a light on other unethical payment practices. Methods such as deducting sums from payments as a charge for remaining on a supplier’s list, or unilateral deductions from money owed for goods supplied will be brought to bear. Once practices such as these have been made public, trading terms for SMEs should improve.

Playing the advantage with Pay4

Almost a third of SME business owners rely on overdrafts to make up for cash-flow shortfalls due to being paid late. While one in five of SME directors say they make personal salary sacrifices to keep cash inside their businesses.

You can put your business in a better financial position by using working capital finance facilities such as Pay4 to increase available working capital and smooth out variable cash flow cycles caused by late payments.

With more available working capital, your business is less exposed to late payment effects, and more able to respond to opportunity. Crucially, you can also be less dependent on customers that try to push their payment terms to the limit.

This allows you to make full use of the information that will become available through the Payment Transparency Regulation. And make informed, smarter decisions about precisely which customers you do business with. 

Payment Transparency Regulation