Minister for Small Business, Stuart Nash, recently confirmed that the Business Payment Practices disclosure scheme will help bring transparency to business-to-business payment practices. Under this scheme, firms with revenues exceeding $33 million a year would be required to report on their payment practices every six months. This threshold for what identifies a large business was set based on criteria from the Financial Report Act 2013.
The reports would need to also include late payments and the length of time taken between receiving invoices and making full payments. The scheme is similar to other payment regimes already instituted in Australia and the UK. According to a report by accounting software firm Xero, about 8% of payments for invoices from small businesses were more than a month overdue, resulting in costs to the sector amounting to an estimated $456 million.
With 97% of all businesses in New Zealand being small businesses, this scheme is expected to help address the vulnerability that the sector often suffers as a result of having to do business with larger enterprises. The small business segment was found to be especially impacted by late and overdue payments that could harm them. Many suppliers were found to often have no choice in the matter when it came to extended payment terms, as they were compelled to ‘take it or leave it’.
Nash noted that small businesses were less resilient to poor payment practices as they lacked the resources to cope and that there were flow-on effects created in the wider economy as a result. He added that small businesses were reluctant to push on the issue of payment due to the risk it could damage business relationships.
According to Nash, the government remains committed to ensuring large businesses, government departments and agencies publicly report on how they make payments on invoices. The scheme is expected to help small businesses improve their cashflows by encouraging prompt payment by large businesses that will want to manage their reputational risk. Small businesses will also be able to utilise this scheme in deciding what businesses they want to supply goods and services to, based on data on their promptness of payment.
Administration of the scheme will be handled by the Ministry of Business, Innovation and Employment (MBIE), which is expected to work with Inland Revenue in identifying which businesses are large enough to fall under the scheme and be required to make these disclosures.
Nash clarified that though the government had considered setting time frames within which invoices should be paid, they had instead opted for increasing transparency that would encourage prompt payment. He however said that more heavy-handed regulations were not out of the question just yet.
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