Ambitious proposals to deal with ‘scourge’ of late payments
Late payments are costing the UK economy £11bn each year and leads to 38 UK businesses closing every day, according to official data. Many business owners – particularly SMEs - have experienced the financial stress and lost hours caused by chasing late payments.
So it’s reassuring that the Government says it is “determined to tackle the scourge of late payments” with “ambitious’ legislation.
What’s the background?
Directors of large companies and LLPs are already required to comply with requirements under the Reporting on Payment Practices and Performance Regulations 2017; and risk criminal prosecutions and unlimited fines if they fail to report their payment practices.
But the persistent culture of late payments for SMEs led to the Summer 2025 appointment of the Small Business Commissioner (SBC), with a specific remit to tackle late payments and unfair payment practices.
Shortly afterwards, the Government launched a policy paper setting out its strategy for supporting SMEs, including tackling late payments with “the most significant legislative reforms in over 25 years”. The Department of Business and Trade said it will result in “the strongest legal framework on late payments in the G7”.
A consultation on the proposals ran from July to October 2025, with a large number of formal responses (850). The government has now responded – noting that this is not simply a problem that is bad for business, but it is also a moral problem.
What’s next?
It has been confirmed that the following measures will be brought forward:
· Empowering the SBC - The SBC will be handed greater powers – including the power to investigate businesses suspected of poor payment practices or inaccurately reporting payment performance; adjudication powers; and the power to fine businesses.
· Board-level scrutiny - Boards or audit committees of persistently late-paying large companies will be required to publicly explain their poor payment performance and actions they are taking to fix this.
· Maximum payment terms - Maximum payment terms of 60 days will be imposed (subject to strictly limited exemptions). This could be reduced to 45 days in future.
· Deadline for disputing invoices – There will be a statutory time limit for raising disputes. If disputes are not raised within the time limit, compensation will be payable to their supplier.
· Mandatory interest on late payments: All commercial contracts will be required to contain a right to statutory interest at 8% above the Bank of England base rate.
· Retention payments in construction contracts: There will be a ban on deductions and
withholding retention payments under the terms of a construction contract
Draft legislation will follow when Parliamentary time allows, but there is no further update on timing.
What does this mean?
The proposed changes are highly significant and will be welcomed by SMEs, contractors, freelancers and consultants who are frequently disadvantaged by unjustified delays in payments.
Many large firms, for example, impose unreasonably lengthy payment terms of 90 or 120 days (or even longer), making cashflow for suppliers particularly challenging. Combined with a limited time period within which disputes can be brought, bigger companies will no longer be able to delay payments without good reason.
Big businesses should be reviewing their existing payment culture and prepare for the impact of the expected reforms. It is important for all businesses to take specialist advice from commercial solicitors to ensure their financial interests are properly protected, and what steps they should take.
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