Select Committee indecision throws doubt on payment practices disclosure regime
In New Zealand, small businesses make up over 97% of all businesses, but can face challenges when it comes to getting paid on time. Their vulnerability stems from a lack of leverage and the risk of potentially damaging existing relationships with large businesses.
In this FYI we take a look at the Select Committee’s report on the Business Payment Practices Bill and why businesses should review their business payment practices - in spite of the fact that the Committee couldn’t reach agreement.
In November 2022, the Government introduced the Business Payment Practices Bill to help small businesses get paid faster, using reputational risk to encourage larger businesses to improve their business payment practices. However, the Select Committee, reporting back on 26 April 2023, was unable to agree whether the Bill should pass, casting doubt over whether the Bill will pass this term, or at all.
Why do businesses still need to prepare?
With the election fast approaching, the Government may not prioritise passing this Bill amidst other pressing issues, such as Three Waters, replacing the RMA, and the demands of an election campaign. However, the Government has been vocal about the need to improve business-to-business payment practices and the Bill was introduced following recommendations by the Small Business Council. Regardless of the current uncertainty, the issue is likely to remain on the agenda of any Labour-led Government.
Preparation will be crucial. If the Bill passes, affected businesses will only have six months until the Act comes into force. By understanding the requirements in advance, businesses can avoid being caught off guard and can proactively address any potential issues.
Businesses affected by the Bill
The Bill requires “large entities” to disclose their payment practices information every six months. An entity is large if it (and any subsidiaries) had at least $66 million in assets or $33 million in revenue, and expenditure of at least $10 million (excluding salary, wages, and goods and services supplied by related entities) in each of the last two accounting periods. If the entity has subsidiaries, it must disclose payment practices information for the group and for the entity alone if it meets the size criteria independently.
To make this information easily accessible, the Registrar will establish the Business Payment Practices Register to store information about payment practices information and to help small businesses make informed choices about whether to do business with reporting entities.
What information will large entities need to disclose?
Payment practices information includes:
- Information about invoices received or paid (in full or in part) by the entity or a subsidiary of the entity during the disclosure period;
- Information about invoices issued by the entity or a subsidiary of the entity during the period; and
- Any other information specified by the regulations about the entity’s payment practices during that period.
It does not include intra-group transactions, salary or wages, tax or rates payments, rent or lease payments, or utility payments.
The Ministry of Business, Innovation, and Employment (MBIE) is still working on the finer details of what businesses should have to disclose. Some of the proposed options include:
- Average number of days to pay supplier invoices
- Percentage of invoices paid in full/within the agreed payment period/unpaid after 61 days
- Average late payment time.
Reporting entities may also have to disclose information about invoices paid to them, including:
- Average number of days for receipt of payment
- Percentage of invoices received on time
- Standard payment terms offered to suppliers.
Effectiveness of payment practice disclosure regimes overseas
One of the reasons for the National Party members of the Select Committee opposing the Bill was that similar payment practice disclosure regimes in Australia and the United Kingdom had not led to a discernible improvement in payment. The United Kingdom introduced business payment practice reporting in 2017, making failure to report a criminal offence. However, recent research by the UK Small Business Commissioner found that overdue invoices was not the biggest payment problem for small businesses. The real problem was accepting long payment terms in order to secure work, leading to payments terms of up to 150 days. In 2022, the UK Government introduced new procurement rules requiring businesses to pay 90% of invoices within 60 days or risk being excluded from public contracts.
Australia launched the Payment Times Reporting (PTR) Scheme in 2021, requiring businesses with over AU$100 million annual turnover to publish information on their small business payment times and practices, with daily penalties of up to $66,600 for non-compliance. The Australian Government is currently reviewing the PTR Scheme’s effectiveness and considering possible adjustments. If the New Zealand Government does not pass the Bill this term, any future Labour-led Government is likely to take a strong interest in the outcome of the review.
Do businesses need to prepare?
We will be monitoring the Government's response to the Select Committee's report and providing updates on whether the Government decides to proceed with the Bill. Despite the Select Committee's indecision, affected businesses should still understand the potential implications of the Bill and may want to consider:
- Reviewing current payment practices to identify areas where disclosure could be an issue.
- Monitoring and tracking payment practices, including invoice issuance, payment times, and outstanding balances.
The Business Payment Practices Bill aims to enhance transparency in business-to business payment practices. However, based on international experience, even if the Government passes the Bill, it’s unclear whether reputational risk alone will be enough to encourage larger businesses to change their business payment practices.