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New Payment Practices Regulations – so what does this mean for franchising in the UK?

New payment practices regulations have arrived in the UK. In this piece we examine what impact this could have for large businesses that franchise here.

The Payment Practices and Performance Regulations 2017 require, as of financial years beginning on or after 6 April 2017, large UK businesses to report publicly twice yearly on their payment practices and performance, including the average time taken to pay supplier invoices. The reports must be published on an online service set up by the government and available to the public. Failure to publish may result in fines and/or criminal liability for directors.

The aim of the new reporting requirement is to increase transparency and public scrutiny of large businesses’ payment practices and to give small business suppliers better information to make informed decisions about who to trade with, negotiate fairer terms, and challenge late payments.

There is no franchise specific regulation in the UK and so, unlike their contemporaries in the US, Canada and Australia, for example, UK franchise businesses are not used to mandatory public disclosure regarding business practices. Where a large UK franchisor acts as a supplier of goods or services to its franchise network, it will now have to comply with this new ongoing compliance regime. It may even require large UK franchisors to disclose information on certain terms in their licence or franchise agreements.

For franchise businesses which fall below the reporting threshold but whose supply chains rely on large suppliers, these regulations are good news as they are designed to improve and promote transparency and fairness in supply chain management, which is often seen to be an unfair playing field.

Equally, these regulations are good news for franchisees or prospective franchisees, as it will inevitable result in more information being placed into the pubic domain which might inform a prospective franchisee's decision to invest in a franchise system and/or encourage franchisors to operate in a more transparent and fair way towards their franchisees.

Which businesses are required to report?

UK registered companies will be subject to the new reporting requirement if they qualify as medium-sized or above for accounting purposes, that is, they exceeded two or all of the following thresholds on both of their last two balance sheet dates:

  • Over £36 million annual turnover 

  • Over £18 million balance sheet total

  • Over 250 employees

Smaller businesses will not be caught, whether or not their shares are traded on any stock exchange.

Parent companies will be caught if their group qualifies as medium-sized or above for accounting purposes and they also meet the definition above in their own right. Each group business which meets the definition will be required to publish its own individual and non-consolidated report.

Independent franchisees (i.e. where there is no franchisor shareholding) will not form part of a franchisor's group for the purposes of these thresholds.

What must be reported?

The reporting obligation applies to payment practices in relation to business to business contracts for goods, services or intangible assets (including intellectual property). Business to consumer contracts are not covered and contracts for financial services are also excluded. Contracts will also have to have a significant connection with the UK to be covered by the duty to report.

To discourage stalling tactics, disputed invoices will not be excluded.

The report must include narrative descriptions of:

  • the business's payment terms, including: standard contractual length of time for payment of invoices, maximum contractual payment periods and any changes to standard payment terms and whether suppliers have been notified or consulted on these changes; and

  • the business's process for dispute resolution related to payment.

It must also include statistics on:

  • the average time taken to pay invoices;

  • the percentage of invoices paid within the reporting period which were paid in 30 days or fewer, between 31 and 60 days, and over 60 days; and

  • the proportion of invoices due within the reporting period which were not paid within agreed terms.

There must also be tick-box statements about:

  • whether the business offers e-invoicing;

  • whether the business offers supply chain finance;

  • whether the business deducts sums from payments as a charge for remaining on a list of preferred suppliers, and whether it has done this in the reporting period; and

  • whether the business is a signatory to a code of practice or standards on payment practices, and the name of the code.

A company director should be responsible for signing off the report.

When must reports be published?

The first report will be due 30 days after the end of the first six months of a business's financial year, and the second report will be due 30 days after the end of the financial year. Where a business changes its year end and has a financial year of or below nine months, it will be required to report only once after the end of that financial year.  If a change to the year end results in a financial year of over 15 months, the business will be required to report after each of the first and second six months of the financial year and in respect of the remainder of the financial year.

Sanctions

It is hoped that publicity, public pressure and good payment behaviour by responsible companies leading the way will encourage compliance with the new reporting requirement and lead to improvement in payment practices. In addition, failure to publish a report is a criminal offence, with the company and directors liable to a fine on summary conviction. It is also an offence to publish false or misleading information and a company or individual who does so will also be liable on summary conviction to a fine. Guidance to help businesses understand and comply with the new reporting requirement has been published.

Conclusion

For large UK franchise businesses, it will be critical to undertake a review of contracts and payment performance metrics to ensure that these obligations, and such reporting requirements, where applicable, are complied with.

Even though pre-contractual disclosure is not a legal requirement for franchisors in the UK, it is required of members of the British Franchise Association under the Code of Ethics and it is seen as industry best practice. Large UK franchisors should therefore consider embracing this trend towards greater transparency by getting ahead of the competition and turning this type of disclosure into a force for good, which can mitigate the risks of supply chain disputes and increase engagement with and investment in their systems.

With thanks to Jonathan Brooks and Danielle Harris of the Corporate department at Fieldfisher for their assistance with this article.

 

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