UK Late Payment Reform: What Does It Mean For Business?

The UK Government is consulting on major changes to the law on late payment. These range from powers to fine businesses which fail to pay their suppliers on time through to measures which would prohibit credit periods of more than 60 days and restrict customers' ability to withhold payment. In this briefing, we look at how these proposals would impact businesses in practice.

What are the key proposals?

Our previous briefing explains the proposals in detail but the key measures are:

• Prohibition of payment periods of more than 60 days (reducing to 45 days over 5 years)
• Statutory interest rate on late payments of base + 8% to be made mandatory (i.e. no "contracting out", as at present)
• 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
• Small Business Commissioner to be able to fine businesses with poor payment records or which persistently fail to comply with late payment obligations
• 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

The impact on customers

Partner Rich Offord commented:

"Although the most eye-catching proposal is arguably the prospect of fines, the more immediate impact for businesses in their capacity as customers is likely to be on payment terms, disputes with suppliers and cashflow. Let's say you've got some form of cost-based pricing, for which the supplier presents a monthly invoice. Customers will have to pay that invoice within 60 days of receipt – so if you've been used to having longer to pay, this may have implications for cashflow, especially if the monthly sums being invoiced are quite substantial.

And if there's something you're not happy with on the invoice and you want to be able to withhold payment, you'll only have 30 days in which to raise a dispute. So if you've been used to taking longer to check invoices to ensure that you're not being over-charged – particularly on the cost-based elements - you may no longer have that luxury.

Lastly, if you pay late without justification, the supplier will be able to claim interest on overdue amounts of base plus 8%. At present, most contracts substitute a significantly lower interest rate – but if these proposals are implemented, it won't be possible to 'contract out' any more."

NOTE: According to an FT report in late 2025, UK retailers have raised concerns about the maximum 60 day payment period, owing to the long lead times for importing goods from Asia. However, even if the UK Government accepts that such concerns are justified, it is difficult to see how they would also apply to contracts where long lead times are less of an issue. It would therefore be premature to assume that the proposal to impose maximum payment periods will be abandoned – although it's possible it could be modified to take account of the concerns of particular sectors.

The impact on suppliers

Partner Rich Offord commented:

"Looking at the proposals from the supplier perspective, you might think there's nothing to worry about here – after all, what's not to like about being paid on time? But most businesses will rely to at least some degree on other suppliers and subcontractors – where they'll face the same issues as their customers when it comes to payment terms and disputes.

Meanwhile, businesses which rely on significant numbers of smaller sub-contractors with fewer than 50 staff will also need to contend with a significantly beefed up Small Business Commissioner acting on their behalf."

Who's afraid of the Small Business Commissioner?

The answer at present is probably that relatively few people have even heard of the Small Business Commissioner (SBC), let alone are afraid of it. But if the late payment proposals are implemented, that could well change. Among other things, the SBC would get new powers to investigate businesses which are viewed as systematically paying their customers late. The Government's key concern here is that some larger businesses may be paying larger suppliers on time, whilst making smaller suppliers wait, with a view to easing their own cashflow position. Smaller suppliers may be singled out in this way because they are considered unlikely to complain or bring court proceedings for late payment. The proposal for a "beefed up" SBC is designed to help level the playing field in their favour.

In addition to new investigatory and fining powers, it's proposed that the SBC will also administer an arbitration scheme for payment disputes involving smaller businesses (currently defined as those with fewer than 50 staff – there is no turnover threshold). This is intended to provide a quicker, cheaper and easier mechanism for resolving payment disputes than going to court.

Impact of changes to the late payment reporting regime

Businesses meeting certain financial thresholds are already required to submit reports on late payment. These obligations apply to any company or LLP meeting at least 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.

One of the key proposed changes is that the SBC will also be charged with reviewing the statistics provided under this regime and considering whether to impose fines on any companies or LLPs which have paid a significant proportion (e.g. 25%) of their suppliers late. This contrasts with the current position, where the main downside of the reporting regime is reputational damage. As the statistics are made public, this is certainly a risk – for example, it would not be difficult for a journalist to "name and shame" high profile businesses with a poor payment record. However, additional scrutiny from the SBC and the prospect of financial penalties is likely to raise the stakes.

What happens next?

The Government has been consulting on the proposals and has said that it will provide its response by early 2026. Our view is that at least some of these measures (if not the whole reform package) are likely to be taken forward - not least because taking tough action on late payment was a Labour Manifesto commitment.

NOTE: This is a modified version of an article that originally appeared in Outsourcing Spotlight (Autumn/Winter 2025)

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.