UK Gets Tough On Late Payment

The UK Government is consulting on major changes to the law on late payment – including powers to fine businesses which fail to pay suppliers on time, restrictions on customers' ability to withhold payment in the event of a dispute and a new arbitration system. If implemented, these measures are likely to lead to a significantly tougher regulatory environment, particularly for larger businesses which regularly use SME suppliers.

Key proposals

• Small Business Commissioner to be able to fine businesses with poor payment records or which persistently fail to comply with late payment obligations
• Statutory interest rate on late payments of base + 8% to be made mandatory (i.e. no "contracting out", as at present)
• Prohibition of payment periods of more than 60 days (reducing to 45 days over 5 years)
• 30 day deadline for disputing invoices (if customer wishes to withhold payment)
• Binding arbitration scheme, administered by Small Business Commissioner, for payment disputes involving businesses with fewer than 50 staff
• Large companies and LLPs to be required to report on the amount of statutory interest owed and paid out
• Audit committees or company boards of large companies and LLPs to be required to make regular recommendations to improve payment practices

1 What does the current law say and why does the Government want to change it?

The key measures relating to late payment in the UK can be summarised as follows:

• Reporting regime for larger businesses: all "large" UK companies and LLPs are required to report twice yearly on their payment practices, with such information being made available on this website (see section 5 below for the definition of "large"). The main idea is that suppliers can use the information to decide if they wish to contract with a customer or not (based on its payment record). This measure also raises the prospect of that business being "named and shamed" for its conduct (see also third bullet below).
• Payment terms and remedies for late payment (all businesses): suppliers – whatever their size - have a statutory right to claim interest on late payments of 8% above the Bank of England base rate, together with a contribution towards debt recovery costs (which is typically modest). However, in practice, parties often agree a lower interest rate - and the current law permits this, provided it still amounts to a "substantial" remedy. Payment periods of longer than 60 days – though not prohibited - can also be challenged on the basis that they are "grossly unfair".
• Small Business Commissioner (SBC): businesses can sign up to the voluntary Fair Payment Code, which is administered by the SBC. Gold, Silver and Bronze awards are available, depending on how quickly suppliers typically get paid. Alongside this, the SBC provides advice to small businesses experiencing problems getting paid ("small" is defined as any business with fewer than 50 staff – there is no turnover threshold). In the past, the SBC has also sometimes "named and shamed" larger businesses that did not, in its view, pay their suppliers in a timely manner.
• Suppliers to the public sector: with effect from 1 October 2025, all suppliers bidding for public sector contracts worth over £5 million will be expected to demonstrate that they pay their suppliers within 45 days, on average. If they can't show this, they will normally be excluded from the tender process.

Why does the Government want to change the current law?

Although there has been some improvement in overall payment times, the Government estimates the cost to the UK economy of delayed payments as being £11 billion per year, affecting over 1.5 million businesses. It also cites research indicating that late payment contributes to the closure of 38 businesses per day. Alongside this, it's arguable that the current law does relatively little to deter customers from adopting a deliberate policy of paying late, with a view to easing pressure on their own cashflow, at the expense of their suppliers (these potential weaknesses are discussed in more detail below). The Government therefore appears to have decided that now is the time for a tougher approach.

2 Fines for failure to pay on time and other infringements

The problem: At present, there is no scope to impose sanctions on persistent late payers. In terms of deterrence, the existing law relies heavily on businesses being sufficiently concerned about reputational risk. Whilst fear of being sued for late payment interest may act as a deterrent in some cases, suppliers are often reluctant to bring such claims for fear of jeopardising future orders from the customer.

The proposed solution: It's against this background that the Government is proposing to give the Small Business Commissioner (SBC) the power to impose civil fines.

When could businesses be fined for late payment?

The consultation envisages the SBC having the power to fine businesses in two scenarios:

• First, if their statistics provided under the reporting regime (see section 5) are poor e.g. 25% of suppliers have been paid late. The scale of the penalty would be based on unpaid statutory interest (i.e. base + 8%), with the Government suggesting twice what was owed in the last reporting period. If a large number of suppliers have been paid late, this could be a substantial sum.
• Second, if there is a persistent "failure to meet certain legal obligations in relation to payments". The consultation does not go into detail on precisely which obligations the Government has in mind. An example might be where a business pays most of its larger suppliers on time (so its aggregate statistics by value might not suggest a problem), but regularly pays smaller suppliers late, effectively taking advantage of the imbalance in bargaining power between them.

It therefore seems clear that the Government does not envisage fining businesses for "one off" instances of late payment – but only where there is evidence of a more systemic problem. Only larger businesses, within the scope of the reporting regime (see section 5), would be at risk under the first bullet above.

Other potential fining scenarios

The consultation also proposes that the SBC could impose fines in the following circumstances:

• if a business refuses a request for information from the SBC; and/or
• if a business fails to comply with a legally binding order of the SBC to pay certain sums to a supplier (see section 4)

In support of the above, the consultation envisages giving the SBC new powers to launch investigations into businesses suspected of persistent late payment (or other relevant compliance failures) and to compel disclosure of information.

3 Changes to the law on payment terms and remedies

The problem: At present, if suppliers bring claims for interest on late payments, they are often unable to benefit from the relatively high statutory rate (of base + 8%). This is normally because - at the time of entering into the contract - the customer had the bargaining power to impose a significantly lower express rate of interest. Similarly, as regards payment terms, customers are often able to impose express periods longer than the 30-day default period provided for in the legislation. The relevant legislation permits longer periods to be agreed, save where the customer is a public sector body or the longer period is "grossly unfair". Some large customers have used this to impose payment periods of 90 or even 120 days and in practice, suppliers rarely challenge this.

The proposed solution: The Government proposes to completely remove the ability for parties to (i) opt out of the statutory late payment interest of 8% above base; and (ii) agree payment terms longer than 60 days. It also proposes that the maximum payment period should in due course be brought down to 45 days (this would be phased in over 5 years).

What would this mean in practice?

In broad terms, the combined effect of these changes would be that the majority of contracts for the supply of goods or services governed by English law and/or having some significant connection with the UK would:

• require suppliers to be paid within 60 days at the most (reducing to 45 days within 5 years); and
• allow suppliers to claim interest on late payment of 8% above the Bank of England base rate.

The relevant legislation only contains limited carve-outs. These include consumer credit agreements and "contracts intended to operate by way of mortgage, pledge, charge or other security".

Retention clauses in construction contracts

The construction sector already has a specific framework designed to promote prompt payment. Whilst it does not appear that the Government envisages making significant changes to this regime, it is proposing to either prohibit the use of retention clauses in construction contracts or impose requirements to protect the withheld amount.

4 Changes to the law on invoicing/payment disputes

A deadline for disputing invoices

The problem: One of the ways in which a customer can delay payment is to query the invoice, since contracts often allow the customer to withhold payment in the event of a genuine dispute. There will, of course, be many cases where such queries/disputes are entirely legitimate – but the Government is concerned that some businesses wait until just before payment is due to raise any concerns, thus making a delay in payment inevitable.

The proposed solution: The Government proposes a deadline of 30 days from receipt of invoice for a dispute to be raised. Businesses could still raise a dispute after that - but it would have to be on a "pay first, argue later" basis.

A new arbitration scheme for disputes

The problem: Smaller businesses often don't have the resources to pursue larger customers for non-payment and even if they do, litigation can often be a slow process. Whilst they are able to seek assistance (free of charge) from the Small Business Commissioner (SBC), the latter has limited resources and no power to force customers to engage with it or make binding awards.

The proposed solution: The Government proposes to give the SBC powers to arbitrate disputes and make binding arbitration awards (subject to an appeal to an appropriate body). This would presumably be low-cost or free to smaller businesses and would probably aim to resolve disputes more quickly than litigation. Unlike the invoicing deadline outlined above, only businesses with fewer than 50 staff would be able to benefit from this – and it would be limited to disputes with "larger businesses" (presumably those meeting the thresholds under the reporting regime – see section 5 below)

A lack of clarity?

The consultation document provides very little detail on the proposed arbitration scheme. For example, will arbitration be mandatory for disputes between businesses falling within the scope of the proposed scheme (as is the case with adjudication in relation to certain disputes in the construction sector)? If not, it is difficult to see how smaller suppliers will be better off. And who will pay for it? This is crucial because the scheme would require a substantial increase in staff and budget for the SBC – on top of the significant increase likely to be required for it to exercise the powers discussed in section 2 above.

5 Changes to the reporting regime and new requirements for audit committees and company boards

Changes to the reporting regime

At present, the Payment Practices and Performance Regulations 2017 (PPRs) require all "large" UK companies and LLPs to report twice yearly on their payment practices, with such information being made publicly available on this website. "Large" in this context applies to companies and LLPs which satisfy two of the following criteria on the business' last two balance sheet dates:

• turnover of more than £54 million;
• balance sheet total of more than £28 million; and
• more than 250 employees.

As an additional transparency measure, the Government proposes to require large companies and LLPs to report the total statutory late payment interest owed to their suppliers, together with total of such interest which has actually been paid out.

New requirements for audit committees and company boards

The Government has already committed to require audit committees or company boards, where companies have them, to "provide commentary and make recommendations regarding payment performance to company directors before the data is submitted to Government and included in the Directors' report". It therefore appears that this will only apply to entities caught by the PPRs (see above). As we have commented previously, the aim is to promote scrutiny of payment practices at senior level, encouraging businesses to treat it as an ESG issue.

The wider picture

These proposals come at a time when large companies' behaviour towards smaller suppliers is increasingly being recognised as a sustainability-related issue. Though currently under revision, payment practices is a topic under the EU's reporting standards under the EU's Corporate Sustainability Reporting Directive.

6 What happens next and will these changes become law?

The deadline for responding to the consultation is 23 October 2025. The Government expects to publish a response by early 2026. It would then need to legislate to implement the proposals.

Isn't this just more red tape for businesses in their capacity as customers?

Although the proposed measures will impose certain regulatory costs on businesses, the Government would probably argue that this will be more than justified if the effect is to reduce late payments – because if suppliers get paid more quickly, money will circulate faster around the economy, leading to faster growth. This "pro-growth" rationale may make it more difficult for businesses to argue against the proposals.

Didn't the previous Government back away from similar reforms?

It's true that the previous administration promised to give the SBC fining powers only to back away from it. This may be because the reforms would have required the Government at the time to fund a significant increase in the SBC's budget (since the SBC currently has fewer than 10 staff). Given the current state of the public finances, it can't be ruled out that these latest proposals will suffer a similar fate. However, the current Government made a manifesto commitment to take action on late payment – and whilst it has already made some changes, it has so far only taken relatively limited steps in that direction. Our view is therefore that the Government will look to implement at least some of the proposals.

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