Late-paid supplier commercial invoices and other unpaid invoices can strain cash flow, damage trading relationships and raise doubts about how well your business is managed.
Auditing Payment Practices before you approve the annual directors’ report helps you test agreed payment terms, check record reliability and assess the creditor side of the ledger. You need clear evidence for reported figures, including evidence relevant to UK Late Payment Legislation. This article focuses on auditing payment practices, not providing definitive legal advice.
Key Takeaways
- Review payment practices before approving the directors’ report, checking contractual terms, invoice records, payment dates and supporting evidence.
- Confirm whether payment-practices reporting duties apply to your company, and check current GOV.UK guidance, deadlines and disclosure requirements.
- Keep a clear audit trail for sampled invoices, material exceptions, disputed payments and corrective actions, with directors reviewing unresolved issues before approval.
- Use review findings to improve supplier payment controls while maintaining sensible fraud prevention and approval procedures.
- Monitor unpaid invoices with accurate debtor records, clear recovery triggers and proportionate escalation, including alternative dispute resolution or Commercial Debt Recovery support where appropriate.
Auditing Payment Practices and Late Payment Legislation: Preparing Annual Directors’ Reports in the UK
A statutory audit is a formal independent examination of your financial statements, where one is required. An internal payment practices review is different. It focuses on how your business pays suppliers, manages disputes and records payment performance.
You should examine whether agreed payment terms are clear, whether staff follow them and whether the underlying records support statements in the directors’ report. The report should give a consistent account of your company’s performance, principal risks and financial position. Your financial statements must also give a true and fair view.
Late Payment Legislation and payment-practices reporting duties are related, but they are not identical. Reporting duties may apply to qualifying large companies and LLPs. The existing regime generally applies where an organisation meets two of three size thresholds, covering turnover, balance sheet total and employee numbers. However, group structure, exemptions, statutory legislation and reporting periods can affect the result. Check the current GOV.UK payment practices reporting guidance before deciding what you must file.
What payment information should you check?
Start with the transaction trail, rather than relying on a dashboard total. Compare commercial invoices against purchase orders, contracts, payment terms, credit notes, dispute logs, payment dates, creditor records and bank records.
For each sampled invoice, identify the invoice date, contractual due date and date the supplier received payment. Then compare those facts with the payment days reported internally or externally. Averages can conceal a small group of suppliers waiting far longer than the rest.
Common faults include invoices held in approval queues, incomplete purchase orders, duplicated records and payments posted to the wrong supplier account. You may also find that staff used a default term, although the contract required a different date. Record each discrepancy, rather than correcting the spreadsheet without noting why it happened.
When do payment practices become a reporting risk?
Repeated late payments are an obvious warning sign. So are unexplained movements in average payment days, a high number of disputed invoices and missing documentation for delays.
Pressure on finance staff to postpone payments can distort financial forecasts and affect supplier confidence. In serious cases, it may also influence going-concern assessments, particularly where suppliers restrict credit or demand payment in advance.
A payment delay is not only an operational issue when the reason cannot be evidenced. It can become a reporting issue when directors cannot explain its scale, cause or likely effect.
For every material issue, log the reason, the accountable owner and the planned correction. This creates a record for directors and stops the same failure appearing again at the next year-end.
## How to complete a reliable payment practices review before filing
Set the review period first. It may cover the financial year, the last six months, or both where separate payment practices returns apply. Use a broad enough sample to include high-value invoices, late payments, credit notes, disputed items and several creditor populations.
Assign the testing to someone who understands the records but can challenge routine assumptions. Your finance team may perform the work, while external auditors or advisers can test parts of it. Yet directors remain responsible for approving the directors’ report and deciding whether its disclosures are complete.
Use a short review plan:
- Confirm the company size, legal structure, reporting period and creditor populations in scope.
- Select transactions using set criteria, then retain the list so you can repeat the method next year.
- Trace each item through agreement, approval, accounting entry, payment and bank reconciliation.
- Summarise exceptions, assess whether they are isolated or recurring, and give directors clear actions to approve.
Recent regulations have brought supplier payment data closer to annual-report disclosures for certain businesses. The BDO summary of directors’ report payment data requirements is a useful prompt to check whether newer obligations affect your next reporting cycle.
Build a clear audit trail from invoice to payment
Trace a sample from the original contract or purchase order through to payment. Confirm that the commercial invoices match the agreed goods or services, then check the date they entered your system and who approved them.
Next, compare the payment terms and contractual due date with the actual payment date and method. If payment was late, keep the documented reason. A valid quality dispute needs different evidence from a simple delay caused by an absent approver.
Your working papers do not need to be complicated. Keep a concise sample record that shows:
- The invoice reference, supplier, value, invoice date and contractual payment term.
- Evidence of receipt, approval, posting, payment and bank reconciliation.
- Any exception found, the supporting document and management’s response.
- The person responsible for fixing recurring problems and the target date.
This record allows you to show how the conclusion was reached. It also prevents last-minute searches for emails, bank entries and approval evidence after the report has gone to directors.
### Check statutory reporting duties, deadlines and approvals
Confirm your company size, legal form and accounting reference period before treating any requirement as applicable. Payment practices reporting can require separate reports every six months for qualifying businesses. It should not sit untouched until annual report preparation begins.
Late Payment Legislation can affect reporting expectations, so check Companies House and GOV.UK guidance for filing dates, required information and changes applying to your period. The PwC update on supplier payment disclosures highlights why you should revisit obligations rather than rely on last year’s approach.
Before approval, directors should receive the review findings, unresolved exceptions and proposed creditor-facing disclosures. Where the position is unclear, ask your accountant or solicitor for advice before filing.
Use findings to improve supplier payments
A sound review should lead to practical changes. Clear purchase orders reduce disputes about price and authority. A single invoice mailbox reduces the risk of invoices sitting in individual inboxes.
Set approval time limits and escalate invoices that approach their due date without a decision. For disputed invoices, assign an owner and require updates until the matter is resolved. Regular aged creditor reports then show whether changes are working.
You do not need to weaken fraud checks to pay suppliers on time. Proper segregation of duties, approved supplier records and payment authorisation can remain in place. The aim is to remove avoidable waiting, not remove sensible controls.
What unpaid invoices reveal about your payment control process
Your payment review should also look in the other direction, at money owed to your business. For unpaid invoices, retain the relevant commercial invoices and supporting records. A commercial debt can quickly affect cash flow when receipts arrive late, especially for a creditor relying on regular customer payments.
Keep a debtor record for each overdue invoice. Include the contract, order, delivery evidence, invoice, correspondence, dispute details and every promised payment date. Accurate records help you decide whether friendly contact remains appropriate or whether the debtor needs a more formal recovery process.
Businesses handling overdue business to business debts can explore Commercial Debt Recovery to find suitable support. A debt collection agency may be appropriate in some cases, but providers differ in authority, approach and experience. Check whether the proposed debt recovery service suits the debt age, value, location and evidence before making a decision.
Separate genuine disputes from avoidable late payment
Classify each overdue account by its real cause. It may be an administrative error, customer cash-flow delay, credit dispute, quality complaint or deliberate non-payment. Treating every commercial debt as the same problem weakens credit control and leads to poor follow-up.
Gather the commercial invoices, contract, delivery confirmation, purchase order and relevant correspondence before pressing for payment. Check the agreed payment terms and identify whether the debtor challenges delivery, quality or liability. A creditor should investigate a genuine dispute before escalation, including through alternative dispute resolution where suitable.
Where applicable, Late Payment Legislation may support contractual or statutory rights, but current requirements should be checked before relying on them. Keep contact fair and respectful while the dispute is investigated. Your records should show what the debtor challenged, how you responded and whether the dispute remains live.
Set recovery triggers and protect your cash flow
Use clear credit control triggers so overdue debts do not fade into an ageing report. Send a polite reminder before the due date, then make structured contact soon after it passes. Record each step in the recovery process, including promised dates and broken commitments.
A debt collection agency or other external provider may help with suitable cases. However, businesses should check the provider’s authority, methods and suitability rather than treating all debt collectors as interchangeable. Ask how the recovery process will be managed and whether contact remains proportionate.
Aged or high-value commercial invoices may justify Commercial Debt Recovery support or legal advice. Compare likely debt recovery costs with the amount recoverable, the quality of the evidence and the debtor’s financial position. A fixed fee quotation can improve clarity, but confirm what work and disbursements it includes.
For a suitable commercial debt, the usual escalation may involve a Letter Before Action after an evidence review. The debtor should have a fair opportunity to respond, settle or agree an alternative route before a legal claim is considered. Take advice before legal proceedings or court proceedings, as a County Court Judgment is not guaranteed to result in payment.
Debt recovery solicitors can explain whether a legal claim is proportionate and what debt recovery costs may arise. If using debt collectors, request clear terms and a transparent recovery process. A second fixed fee quotation may be useful, but clarify whether enforcement, correspondence and any additional debt recovery costs are included.
Regular debtor reviews sit well alongside supplier payment reviews. Together, they give directors a more accurate picture of working capital and expose the habits that create cash pressure. This wider Commercial Debt Recovery approach can strengthen credit control without assuming that every commercial debt requires court action.
Frequently Asked Questions
Do payment practices rules apply to every UK company?
No. The reporting duty generally applies to qualifying large companies and LLPs. It depends on detailed thresholds, group structures and accounting periods. Check the current Late Payment Legislation, statutory legislation and GOV.UK guidance before deciding whether you must report.
Can directors rely on a finance team’s figures?
Directors can rely on properly prepared information, but they should challenge unusual or unsupported figures. Approval should follow a review of the evidence, exceptions and proposed actions.
How long should you keep payment review evidence?
Keep it in line with your wider accounting, tax and document retention policies. Retain enough material to support reported data and explain exceptions. It should also help you answer questions from auditors, suppliers or advisers.
Does a supplier dispute justify withholding all payment?
Only withhold amounts where the contract or law provides a genuine basis. For disputed commercial invoices, the debtor and creditor should identify the issue clearly. If part of an invoice is undisputed, consider paying that amount while investigating the balance.
Can alternative dispute resolution help with a business to business dispute?
Yes. Mediation or another form of alternative dispute resolution may resolve a genuine disagreement without immediate court involvement. Check the contract and preserve relevant records before choosing an approach.
How does Late Payment Legislation affect late commercial payments?
Late Payment Legislation may provide statutory rights for qualifying business to business transactions. Those rights should not be confused with contractual terms, which may set different procedures or remedies. Check the agreement and current guidance before relying on either.
When should you seek Commercial Debt Recovery help?
Consider it when reminders fail, promises to pay are repeatedly broken, or unpaid invoices are significant. A debt recovery service may start with direct contact, while a debt collection agency or debt collectors may use a different approach. Debt recovery solicitors can explain the staged recovery process and its likely risks.
Ask how the recovery process will be managed and whether debt recovery costs are recoverable. A fixed fee quote should define the scope, VAT, court fees and other disbursements. Confirm which further debt recovery costs could arise if the matter escalates.
When might a Letter Before Action be appropriate?
A Letter Before Action may be suitable when the evidence is organised and informal efforts have failed. Consider a legal claim only after checking the contract, limitation issues and the debtor’s position. Legal proceedings can include steps before a hearing, while court proceedings usually refer to a claim in court. A County Court Judgment is a possible outcome, not a guaranteed remedy. Obtain proportionate advice before issuing anything.
What should you do if a debtor raises a complex dispute?
Ask the debtor to set out the alleged defects, dates and supporting documents. The creditor should assess the evidence and consider alternative dispute resolution before starting formal action. This can help clarify whether the dispute concerns liability, value or performance.
Conclusion
A useful annual review starts with the facts. Confirm which reporting duties apply under Late Payment Legislation, reconcile payment data for commercial invoices and preserve an audit trail.
Director approval should follow a clear assessment of recurring delays. Record the creditor’s evidence for every material exception, alongside its owner and remedy. Good records support responsible reporting and prompt action on unpaid invoices, giving a clearer view of working capital, commercial debt and the relevant debtor.
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