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In an attempt to increase transparency and encourage improved payment practices the Reporting on Payment Practices and Performance (Amendment) (No. 2) Regulations 2024 are set to come into force on 1 March 2025. These new regulations will apply to financial years beginning on or after 1 April 2025.
These regulations amend previous reporting regulations and will require ‘qualifying’ companies and LLPs to disclose specific information around how they operate including their practice and polices in relation to retention clauses in ‘qualifying’ contracts with their suppliers.
What is a qualifying company?
A company cannot be considered a qualifying company if it is in its first financial year but is a company that meets the criteria of a ‘qualifying company’ under the 2017 regulations. To meet the criteria a company must have at least two of the below:
- a turnover of more than £36,000,000 (from 6 April 2025, this increases to £54,000,000);
- a balance sheet of more than £18,000,000 (from 6 April 2025, this increases to £27,000,000); and
- more than 250 employees.
Parent companies are subject to adjusted thresholds and it is important to note that if a parent and a subsidiary company meet the relevant thresholds, they both have an obligation to report separately under the regulations.
Developers, contractors and other entities that procure construction works and meet the thresholds set out above will be caught by these reporting obligations.
What is a qualifying contract?
A contract will be considered as a ‘qualifying contract’ if it is one for the carrying out of ‘construction operations’, as defined in the Housing Grants, Construction, and Regeneration Act 1996. In short, these are contracts which attract the statutory right to adjudicate and are subject the statutory requirements on payments.
Construction contacts with residential occupiers and those which fall into excluded sectors such as oil and gas are not subject to the new reporting obligations under the regulations.
What is a retention clause?
This is a provision in a ‘qualifying contract’ which allows for any party to that contract to retain and/or deduct money until a condition in the contract for release or partial release of the money is met. The type of sums which are usually withheld under a retention clause are:
- a percentage of an amount due to another party for goods, services or works under the contract;
- an interim payment which has fallen due; or
- the contract sum.
Retention clauses are a very common practice in construction contracts usually allowing the employer to withhold a percentage of the value of the work performed until rectification of defects or completion.
What information needs to be provided under the new reporting requirement?
If a qualifying company wishes to include a retention clause within a qualifying contract with their suppliers, the company must report on the following information:
- whether including retention clauses is standard practice for all or only some of that company’s construction contracts;
- whether the company has a maximum contract value under which no retention clause in included in their construction contracts. They must also specify what this maximum contract value is;
- what the standard percentage rate is in the company’s retention clauses in their construction contracts;
- whether the common practice of the company when using retention clauses is to use retention clauses that are no more onerous than those in qualifying construction contracts between the qualifying company or LLP and its own client in that supply chain;
- what the mechanism or process is for release of retention monies;
- what the percentage ratio of the amount of retention withheld from the business is compared to the amount of retention that the business withholds from suppliers; and
- what the percentage ratio of the amount that the business withheld from gross payments made to its suppliers compared with the gross amount that the company paid to its suppliers during the reporting period.
When providing the above information, the company must provide the name of the director who has approved the information. The report including all of the above information for the reporting period must be published no later than 30 days after the end of the reporting period.
What are the consequences of non-compliance?
If a company fails to report this information, it will be subject to sanctions which are in line with the wider general reporting requirement sanctions. However, it must be noted that the Department for Business and Trade has indicated that encouragement of compliance will be exercised before seeking prosecution.
It is important for developers, contractors and consultants which are subject to these new requirements to understand the nature of the reporting regulations and ensure that they are prepared and able to comply as of 1 March 2025.
Should you wish to discuss any of the issues raised in this article, please contact Ashley Pigott or Chloe Orledge.
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