A new criminal offence for companies and directors kicked in on April 6 as the Reporting on Payment Practices and Performance Regulations 2017 came into effect.
Now, when a company fails to publish the required payment practices information, both the company and each individual director will face criminal prosecution and unlimited fines.
The Government has introduced the regulations in an effort to increase payment practise transparency in larger companies and cut down on the problems caused by the late payment of debt to suppliers.
This last point is key and the Government wants to reduce the impact of late payments owed to SMEs by larger corporates, with the level of debt owed to small businesses estimated to be around £26billion at the end of last year.
Under the new regulations big business have to report on their payment practises twice a year, as well as their policies and the average time taken to pay invoices.
The new transparency requirements carry criminal sanctions that could cost individual directors thousands of pounds. They can be enforced if a company fails to publish the required information within the relevant reporting period, leaving both the company and each individual director liable to an unlimited fine.
The new regulations also carry another offence for any person who publishes – or causes to be published – a statement that is misleading or false in their reports.
The Department for Business, Energy and Industrial Strategy (BEIS) is 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 offence and 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
As part of the Companies Act 2006, a company is no longer classed 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 these thresholds:
- 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, companies must publish information about their standard payment terms for contracts with suppliers and statistical information about their performance in the last reporting period.
Contracts for financial services do not fall within the remit of the Reporting Regulations.
Jo Walsh, senior associate at Kingsley Napley LLP, comments: “The Government is keen to be a champion of micro, small and medium sized businesses who can suffer crippling cash flow difficulties due to the payment models of their bigger customers.
“These new measures are also part of the Government’s wider effort to amend the way in which the criminal law can be brought to bear on corporate entities and those responsible for running them.
“Most bigger companies already keep payment reporting records but the accuracy and transparency of such will now be much more important and open to scrutiny.”
Johanna Walsh is a senior associate specialising in corporate crime at Kingsley Napley LLP.