The UK’s Prompt Payment Code [PPC] will enhance signatories’ reporting requirements shortly after new UK regulations are enacted by Parliament and come into force on 6 April this year. Philip King (pictured), chief executive of the Chartered Institute of Credit Management – the organisation that administers the PPC on behalf of the UK government Department for Business, Energy and Industrial Strategy (BEIS) – says that the code will have “slimmed down” rules for signatory companies that are too small to have to report under the forthcoming government ‘duty to report’ regulations.
“The ‘duty to report’ regulations are about reporting what you actually do – and that could be good, bad or indifferent,” King told SCF Briefing. “It doesn’t matter as long as you’re reporting it accurately. The point of those regulations is that, over time, it will become apparent if you’re behaving well or not and that will have an influence on your behaviour.
“The Prompt Payment Code, on the other hand, is about giving a commitment about how you’re going to behave.”
Guidance about the forthcoming government regulations was recently issued by BEIS. “The guidance makes things a bit easier,” says King, “but there have been quite a few questions about it and it wouldn’t surprise me if the department doesn’t do some tweaking to that guidance between now and April 6 when the regulations come into force.”
Once the government regulations are in force, “we’ll then start looking seriously at what we’re going to require in the Prompt Payment Code,” King said. He expects that this will include a small number of the regulatory metrics, to be reported on once a year.
“It’s going to be quite complex”
Companies over a certain size will be required by the government regulations to report on their payment practices twice a year. The first such reports are expected in October. The regulatory requirements could turn out to be quite onerous for medium-sized companies, however. “It’s going to be quite complex for businesses to capture all the information they have to report in the way that the government wants it. Some will have it at their fingertips, others will have to do quite a lot of work to get it.”
The government regulations will apply to businesses that meet two out of three size criteria: annual turnover of £36m; a balance sheet of £18m; and 250 employees. They will, therefore, impact companies that are “not especially large”, he says. “I do wonder to what extent they’re aware of it.”
King says that medium-sized companies could also be “caught in the middle” in the sense of having to report relatively poor payment practices, but only because they are being squeezed by larger customers. “Once the media can get hold of [performance] comparisons then that will be quite powerful,” King said. “It’s all about transparency.”
Grey areas and SCF
King believes that the government guidance on the regulations has some “grey areas” with regard to how they apply to supply chain finance arrangements. The guidance says:
“If the supplier receives the full amount due, without having to pay a fee or having any amount deducted from the payment, then the date on which the supplier received the payment can be reported as the date of payment. If the supplier does not receive the full amount or has to bear the cost of any fee for the supply chain finance, then the date on which the payment is made by the qualifying company or qualifying LLP (generally to the finance provider) is the date of payment.”
It appears that for conventional reverse factoring arrangements, companies would have to report their payment terms as being the date on which they make payment to their bank (say for example day 60) because the supplier is having to bear the finance cost of taking early payment (on day 20, for example).
But for a dynamic discounting arrangement, it would appear that buyers can report their early payment date (day 20, say), even though agreed terms might be 60 days and the buyer is probably securing a price discount from the supplier.
Purchases made by procurement cards, where the supplier receives payment almost immediately but has to pay a merchant services fee, would probably be regarded as payment in full, King believes. “My reading of it is that the supplier gets payment at the point that the card is used, as if they were getting a cheque or a Bacs payment.”
Despite the grey areas, King is satisfied that things are moving in the right direction. “From my perspective, all of this contributes to driving better payments culture. If you look back ten years, there was no PPC, there was no Small Business Commissioner and we never discussed late payment. We are at least starting to make progress.”
The PPC currently has just over 1,900 signatories. Recent signatories include Atos IT Services, the Association of Accounting Technicians, CGI IT UK, Virgin Media, Arqiva, Southwest Highways, and Kellogg Brown & Root. The UK Cabinet Office has been urging strategic suppliers to the Crown Commercial Service to sign the code. “Most of those have now signed up,” King says.