Late payment remains a significant issue for many UK businesses, particularly those operating within complex supply chains. The Commercial Payments Bill proposes a series of reforms designed to address payment practices, strengthen protections for suppliers and introduce new enforcement measures.
If enacted, the legislation could have important implications for payment terms, procurement processes and commercial contracts. This article examines the key proposals in the Bill, when they could take effect and the practical considerations for businesses.
Key proposals in the Commercial Payments Bill
The Commercial Payments Bill, introduced to the House of Lords in May 2026, proposes the most significant reform of UK payment law in a generation. If enacted as expected in early 2027, the Bill will affect virtually every commercial contract by:
- capping payment periods at 60 days (30 days for the public sector), with no ability to contract out;
- making statutory interest of 8% above the Bank of England base rate mandatory and non-excludable; and
- introducing penalties for late invoice disputes, banning retentions in construction contracts, and giving the Small Business Commissioner new enforcement powers.
The Bill will not apply retrospectively to existing contracts, but from a date to be confirmed all future contracts will need to comply. Businesses should begin assessing the impact on cash flow, standard terms and procurement processes now.
The current law on payment terms and late payment
The principal legislation governing payment terms in commercial contracts is the Late Payment of Commercial Debts (Interest) Act 1998 ("1998 Act"). The 1998 Act applies to contracts for the supply of goods and services (excluding credit and finance agreements) that have a significant connection with the UK. It provides for a default statutory interest rate of 8% above the Bank of England base rate on payments exceeding 60 days (30 days for the public sector), together with fixed-sum compensation.
Why is the Government changing UK payment law?
In practice, the 1998 Act has proven largely ineffective. Payment periods can be extended by agreement provided they are not "grossly unfair", and interest rates can be varied so long as the supplier retains a "substantial" remedy. There is very little case law on either test, and there is no regulatory enforcement mechanism. No supplier wishes to sue its own customer for interest, with the result that the statutory protections are routinely side stepped or ignored.
The consequence is that standard purchase terms routinely stipulate payment periods of 60, 90 or even 120 days, and set contractual interest rates of 2-4% above base. Retentions in construction contracts - where a construction client withholds a percentage of the contract price until a defects period expires - are standard practice. This means suppliers to some extent fund their customers' cash flow, and the burden falls disproportionately on small businesses at the end of the supply chain.
Successive governments have pursued incremental reforms - including mandatory payment reporting by large companies (introduced in 2017), a voluntary Fair Payment Code and the potential disqualification of late-paying suppliers from public sector tenders - but these measures have had limited impact.
The Government's 2025 consultation highlighted that late payment costs the UK economy an estimated £11 billion per year, that businesses spend an average of 86 hours chasing late payments, and that 38 businesses close each day in part due to late payment.
When will the new Commercial Payments law come into force?
The Commercial Payments Bill was introduced to the House of Lords in May 2026 (completing the report stage on 16 September 2027). Royal Assent is anticipated in early 2027. The transition period has not yet been confirmed, but we expect the new provisions to take effect by mid-to-late 2027.
Will the new law apply to existing contracts?
No, the new law will not apply retrospectively to existing contracts. The commencement and transition arrangements for the new law are not yet clear but the Government has indicated that the new law will not apply to contracts entered into before a certain date.
Purchasers should bear in mind that this could get complex with framework contracts entered into before the new law comes into force, but with call offs entered into after that date. The technical interpretation of whether that call off is a new contract or not will be important.
Key changes proposed by the Commercial Payments Bill
The key changes are as follows:
Payment periods
Payment periods in commercial contracts will be capped at a mandatory maximum of 60 days (30 days for the public sector). This is the single most significant change in the Bill. Any contractual term that purports to extend the payment period beyond 60 days will be void.
There are limited exceptions. The cap does not apply in broad terms where:
- the purchaser is a small or medium-sized enterprise ("SME");
- both parties are "large" companies (as will be defined in regulations); or
- the contract falls within a category excluded by regulation (none are currently specified, although import/export contracts may be excluded).
The effect is that the mandatory cap will principally apply where the supplier is an SME.
In practice, large purchasers will need to decide whether to cap payment periods at 60 days for all suppliers (avoiding the administrative burden of checking supplier size) or to segregate their supply base between SMEs (subject to the cap) and large companies (not subject to the cap). Organisations operating across Europe that already differentiate by supplier size for compliance with certain local payment laws may extend that approach to the UK.
Note that the House of Lords has proposed that the Government has the power to reduce payment periods in the future. It remains to be seen if that proposal makes it through to the final version.
Interest rate
The statutory interest rate of 8% above the Bank of England base rate will become mandatory and non-excludable. Any contractual term that purports to exclude, reduce or vary the statutory rate will be void. This represents a significant uplift from the 2–4% above base that is standard in most commercial contracts. Late-payment interest clauses may become redundant, although businesses may wish to retain a reference to the statutory rate as a practical reminder within their terms.
Invoice dispute compensation
The Bill targets the practice where purchasers dispute invoices in order to create delay. Under the proposed regime, if a purchaser disputes an invoice less than eight days before the payment date, a penalty will be payable to the supplier of 1% of the disputed amount (or £40, whichever is higher). This is designed to incentivise prompt and genuine invoice queries.
Acceptance periods
Where payment is conditional on an acceptance or inspection period, the maximum acceptance period will be 30 days, unless the purchaser can demonstrate that a longer agreed period is "fair and reasonable". Businesses that tie payment to acceptance of goods, software testing or similar processes will need to review those provisions to ensure compliance.
Retentions in construction contracts
The Bill will effectively ban retentions in construction contracts, with a two-year transition period. A penalty will be payable for any unauthorised deduction of a retention. This is a very significant change for the construction industry, and further detail is expected in secondary legislation and guidance.
Please see our specialist briefing notes on the impact of the changes on construction contracts.
Enforcement
A central weakness of the current regime is the absence of any enforcement mechanism. The Bill addresses this by giving the Small Business Commissioner significant new powers:
- Adjudication: The Small Business Commissioner will be able to adjudicate payment disputes where the supplier has fewer than 50 employees, issuing binding interim decisions (although disputes under construction contracts which fall under the Housing Grants, Construction and Regeneration Act 1996 are excluded from its scope).
- Investigation and fines: The Commissioner will have power to investigate payment practices and to impose fines of up to 1% of turnover.
- Payment reporting enforcement: The Commissioner will also be responsible for enforcing compliance with payment reporting obligations, which are currently subject to limited oversight.
How effective these enforcement measures are will depend on how active the Small Business Commissioner will be, which in turn will depend on the funding and priorities of the Small Business Commissioner.
Reporting requirements
Large companies will be required to report on the amount of late-payment interest paid. In addition, audit committees (or company boards) of large companies will be required to make recommendations to improve payment practices, placing the issue on the board agenda.
For these purposes, a "large" company is one meeting at least two of the following criteria: turnover exceeding £54 million; balance sheet exceeding £27 million; and more than 250 employees.
Can you ignore the changes to late payment law?
This will very much depend on how effective the Small Business Commissioner is in its enforcement action. If the Small Business Commissioner takes limited action then its likely that little will change.
Therefore some businesses may decide to do nothing and wait and see how effective the Small Business Commissioner is. But given the investigation and fining powers the Small Business Commissioner will have, and the potential damage to reputation, that is a significant risk.
What do the changes mean for commercial contracts?
The Bill has been drafted to make it difficult to circumvent. Unlike the 1998 Act, the new mandatory provisions cannot be contracted out of, and attempts to do so will be void. The practical implications for standard commercial terms include:
- Payment periods: Any payment period exceeding 60 days will need to be reduced. Contracts that are silent on payment period are likely to attract an implied 30-day term.
- Interest clauses: Bespoke late-payment interest clauses specifying rates below 8% above base will be overridden by statute. Businesses may choose to retain a clause referencing the statutory rate, or simply remove the provision entirely.
- Invoice dispute mechanisms: Contractual processes for disputing invoices will need to be reviewed to ensure disputes are raised before the eighth day before the payment date.
- Acceptance periods: Where payment is linked to an acceptance or testing period, the acceptance period will need to be reviewed to comply with the 30-day cap.
- Retentions: Retention provisions in construction contracts will need to be phased out during a transition period.
Practical steps businesses can take now
Although the Bill has not yet received Royal Assent and the transition period remains unclear, businesses should begin preparing now. We recommend the following steps:
- Brief your finance team. Ensure your Finance Director and Finance team are aware that UK payment periods are changing. If your organisation is routinely paying beyond 60 days, this will have a direct impact on working capital and cash flow.
- Assess the cash flow impact. Review your current payment data (which should be available from existing reporting obligations) to understand the financial effect of moving to a maximum 60-day payment cycle.
- Review your standard terms. Audit your standard purchase terms and conditions to identify clauses that will need to change, including payment periods, interest rates, invoice dispute mechanisms and acceptance periods.
- Establish processes for prompt invoice disputes. Consider how your organisation handles invoice queries and ensure that disputes are raised well before the eight-day deadline to avoid incurring penalties.
- Decide on your approach to supplier categorisation. Determine whether you will apply the 60-day cap to all suppliers uniformly, or invest in identifying which suppliers are SMEs and which are large companies.
- Construction contracts. If your business is involved in construction, the ban on retentions will require particular attention. Seek specialist advice on the impact of the new provisions on your construction contracts.
- Monitor the legislation. The Bill is still progressing through Parliament and important details - including the transition period, the definition of "large" company for the purposes of the exceptions, and any excluded contract categories - are yet to be confirmed. We will issue further updates as the position becomes clearer.
While key details of the legislation remain subject to Parliamentary scrutiny, the Commercial Payments Bill could require many businesses to review their payment practices, contractual terms and internal processes.
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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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