Businesses with registered U.K. companies and LLPs are now required to report on payment practices and performance metrics for financial years beginning after 6 April 2017. Excessive payment terms and late payments can be serious issues for companies, impacting cash flow and sometimes limiting a firm’s ability to operate effectively. In worst-case scenarios, late payments can lead to going concern pressures and even insolvency. The “Duty to Report on Payment Practices and Performance” aims to reduce this risk by improving transparency of payment performance amongst U.K. businesses, particularly with regard to small-to-medium enterprises (SMEs).
It is the most stringent action taken by the U.K. to date to address the issue, and it follows a series of voluntary codes, directives and consultations, most notably the “Prompt Payment Code”. Working capital management is becoming ever more sophisticated, and the push for a sustainable cash culture throughout Europe is strong. Official legislation was inevitable, and as the cost of capital potentially rises, so will scrutiny around payment practices and consequences for poor performance.