Late payment has long been a persistent challenge facing UK businesses. For SMEs especially, delayed payments create cash flow pressures that can restrict growth, limit investment and, in some cases, threaten long-term viability.
The government’s proposed Commercial Payments Bill represents the most significant legislative intervention in this area for more than 25 years. Developed following extensive consultation with businesses across the UK, the Bill seeks to improve payment practices, providing greater protection for smaller businesses dealing with larger customers.
While much of the attention has focused on the impact for SMEs, the Bill also introduces new obligations and scrutiny for larger organisations. Businesses of all sizes should therefore begin considering how these reforms may affect their commercial arrangements and internal processes.
Moving towards mandatory payment standards
One of the most significant changes proposed by the Bill is the introduction of maximum payment terms of 60 days for most business-to-business transactions, with 30-day terms applying where the purchaser is a public authority. It also allows for specified exemptions, including certain contracts between businesses of different sizes and contracts between large businesses, with further detail to be set out in regulations.
Historically, payment terms have been a matter of commercial negotiation, but the new regime shifts away from that approach by imposing statutory limits designed to prevent excessive delays.
Alongside this, interest on late payments would become mandatory at 8% above the Bank of England base rate. This removes much of the discretion that currently exists around whether suppliers choose to pursue late payment interest and creates a stronger incentive for prompt payment. Contractual terms seeking to exclude or reduce the statutory right to interest would be void.
The Bill also seeks to address disputes raised late in the payment cycle. A supplier may become entitled to a fixed sum where a purchaser raises a dispute too late or fails to provide sufficient information. That sum would be the higher of £40 or 1% of the contract price, or 1% of the disputed amount where only part of the payment is challenged.
Taken together, these measures are intended to improve cash flow throughout supply chains and create greater certainty for businesses relying on timely payment.
Increased scrutiny of larger businesses
The Bill also introduces greater transparency and accountability for larger organisations.
The UK’s largest companies and limited liability partnerships are already required to report on their payment practices and performance. Under the new framework, additional reporting obligations would require businesses to disclose the amount of late payment interest they have paid and the amount they continue to owe.
Persistent late payers could face further scrutiny. Boards or audit committees of businesses with poor payment performance would be required to publish commentary explaining the reasons for that performance and the steps being taken to improve it.
These requirements elevate payment performance from an operational issue to a board-level governance consideration. Businesses may need to review internal approval processes, supplier management procedures and payment systems to ensure that reporting remains accurate and that payment practices withstand increased public scrutiny.
Stronger powers for the Small Business Commissioner
Another notable feature of the Bill is the expansion of the powers available to the Small Business Commissioner (SBC).
The SBC would be given authority to investigate larger businesses suspected of persistently engaging in poor payment practices and breaching payment legislation. Where appropriate, the Commissioner will be able to issue directions, make recommendations and impose financial penalties. Under the amended Bill, a financial penalty could be as high as 1% of the larger business’s annual UK turnover.
The SBC would also be empowered to adjudicate certain contractual payment disputes between smaller and larger businesses outside the court process. Its decisions would be binding unless and until the dispute is determined through legal proceedings or arbitration, or the parties agree an alternative outcome in writing.
These enhanced powers intend to encourage good payment practices without requiring businesses to engage in costly and time-consuming litigation. For organisations that regularly contract with SMEs, the increased regulatory oversight may significantly alter the risk profile associated with payment disputes.
Reviewing commercial arrangements now
Although the Bill is currently progressing through Parliament and its principal provisions will not take effect immediately, businesses should not wait to begin preparations.
Many organisations will need to review standard terms and conditions, supplier agreements, dispute resolution procedures and internal payment approval processes. Businesses operating lengthy payment cycles may need to assess whether existing arrangements will remain compliant under the proposed regime.
For larger businesses in particular, reporting obligations and potential regulatory scrutiny mean that payment practices will need to be considered alongside wider governance and compliance frameworks.
Preparing for change
The Commercial Payments Bill should enable faster payment, greater transparency and stronger enforcement. While these reforms are intended to support smaller businesses and improve the flow of cash through supply chains, they will also require businesses across the economy to reconsider how they manage contractual payment obligations.
Colman Coyle advises businesses on a wide range of commercial and corporate matters. As the Commercial Payments Bill progresses, early review of existing commercial practices can help businesses identify potential risks and prepare for the changes ahead.
To discuss how these reforms may affect your business, contact Rana Chatterjee atrana.chatterjee@colmancoyle.com
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.
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