On 30 July 2025, the Department for Business and Trade launched a consultation setting out eight proposed new legislative measures aimed at tackling poor payment practices in the UK economy.
The Government estimates that late payments cost the UK economy £11 billion annually and result in the closure of 38 businesses per day. If passed, the proposed reforms would be the most significant legislative overhaul of the UK's late payment regime in over 25 years. They are aimed at improving business-to-business (B2B) payment behaviour, and thus improve cash flow, reduce administrative burdens, and enhance transparency and accountability across supply chains.
Of particular interest to the construction sector are the proposed measures to either prohibit the use of retention payments in construction contracts entirely, or to require protection of retained sums by placing them in a separate bank account or protecting the sums through an instrument of guarantee (insurance or surety bond).
Whilst currently only at consultation stage, this is a strong indication of the Government's intention to tackle both poor payment behaviour generally, and to put an end to the long-running debate around retention payments in the construction sector. However, whilst late payment reform has long been a concern in UK business policy, various governments have had difficulty introducing significant changes, whilst allowing businesses the freedom to contract. We've taken a closer look at the UK Government's late payments consultation and distilled the key takeaways for UK businesses and contract managers- highlighting what the proposed reforms mean for payment practices, retentions and compliance.
Proposed changes to UK payment practices
The consultation paper notes that poor B2B payment behaviour can significantly disrupt cash flow and undermine investment and growth, with a net negative impact on the wider economy.
This particularly affects small and medium-sized enterprises (SMEs) which often have less cash in reserve to act as a buffer.
The consultation therefore seeks views from industry on a package of eight proposed legislative measures intended to tackle such behaviour. One of these measures relates to retentions (which we examine in more detail below); the other seven are:
- Board-level scrutiny of large company payment practices: proposals to increase discussion and scrutiny of large company payment practices at board level;
- Maximum payment terms: the proposal put forward is to amend The Late Payment of Commercial Debts (Interest) Act 1998 (the Late Payment Act) to limit payment terms between UK businesses to 60 days, initially, and to reduce this further to 45 days after five years. The consultation also proposes to make the payment period a mandatory requirement by removing the "not grossly unfair" exemption. Historically, this exemption has allowed UK businesses to ignore the late payment legislation, and therefore removing it is a major change. The options assessment recognises that businesses would need time to prepare for changes that would impact their day-to-day workings. It also observes that this proposal would align with public procurement policy, which requires businesses to demonstrate good payment performance as part of bidding for public sector contracts;
- A deadline for disputing invoices: further amendments to The Late Payment Act introducing a 30-day invoice verification period. This will require businesses who wish to raise a dispute to do so within 30 days of receiving an invoice, otherwise they will be liable to pay the invoice in full within the agreed payment terms, alongside any statutory interest or debt recovery costs if the invoice is paid late. It is unclear from the consultation if a failure by a business to object within 30 days will have the effect of waiving all rights. It will be particularly important to understand, if this proposal is passed, how it will align with the statutory payment rules in the Housing Grants, Construction and Regeneration Act 1996 (the Construction Act) which apply to construction contracts. We will be tracking this, and further analysing how the proposals interact with the Construction Act, in due course;
- Mandatory statutory interest: further amendments to The Late Payment Act which would make the statutory interest rate payable on late payments mandatory, by removing the ability to negotiate compensation rates lower than the statutory rate. This is a substantial change as it is routine in contracts to use an interest rate lower than the statutory rate;
- Additional reporting on statutory interest: proposed amendments to The Reporting on Payment Practices and Performance Regulations 2017 would include new reporting requirements around statutory interest liabilities. Organisations may need to assess the potential implications for their existing business systems and processes;
- Financial penalties for persistent late payers: introduction of new legislation, which gives the Small Business Commissioner (SBC) powers to issue financial penalties to businesses who persistently pay their suppliers late; and
- Additional powers for the SBC: legislative measures to give additional powers to the SBC, improving its ability to conduct investigations into poor B2B payment behaviour (beyond its current complaints scheme), allow it to provide legally binding arbitration in disputes, and impose financial penalties or make arbitration awards after an investigation or arbitration process.
Retentions in construction; a turning point?
As explained in our previous insight, insolvency and pressures on cash flow in the supply chain are a recurring problem in the UK construction industry, and sit behind the continued debate about the practice of cash retentions and its impact on the wider supply chain.
Despite calls from parts of the industry, including Build UK and the Construction Leadership Council (CLC), to end the use of retention payments, they remain common practice in construction contracts – with most building contracts entitling the payor to withhold a percentage of the value of the work performed, usually between 2-5%, until completion or rectification of defects.
However, retained sums can often be paid late (or not at all, for example, in cases of upstream insolvency), requiring the payee to expend time and money chasing payment and putting them at risk of insolvency themselves.
The current proposals for retentions – which are perhaps the most transformative for the construction industry – will amend Part 2 of the Construction Act, to either:
- prohibit the use of retentions outright – which is the Government's preferred option, according to the options statement published alongside the consultation; or
- introduce requirements to protect retention funds deducted and withheld from insolvency and late or non-payment.
Next steps for UK businesses
These proposals represent a potential major overhaul of payment practices in England. Many businesses routinely pay later than 60 days, and payment of interest outside of litigated debt collection is rare. Therefore, if the law is changed as proposed in the consultation, it is likely to impact the cashflows of large businesses and thus needs to be balanced against the benefit to business of being paid quickly.
For the construction industry in particular, it will result in the need to consider alternative approaches to the use and protection of retentions.
Given the potential impact, organisations impacted may wish to consider reviewing the consultation paper and sharing their perspectives – this is likely to be a key concern for trade associations.
Read the original article on GowlingWLG.com
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