Late payment for goods and services is a longstanding issue, creating significant cashflow pressure and uncertainty for many suppliers across the country, particularly small and medium-sized enterprises (SMEs).
To address this and as part of its plan to support SMEs, the government launched a consultation on major reforms to the current rules relating to late payments between businesses. You can find out more about the original proposals in our previous article.
The government’s response to the consultation has now been published, confirming a number of important changes. Although no implementation dates have been announced, businesses need to be aware of these upcoming reforms so that they can begin preparing for the significant changes ahead.
This update explains which reforms have been confirmed, which proposals have changed, and what these reforms will mean for businesses over the coming years.
At present, payment terms may be set by contract; there is no statutory cap on how long private sector businesses have to pay suppliers. This means that larger businesses often insist on extended payment periods, which can place considerable strain on smaller suppliers’ cashflow.
To address this, a 60-day limit on payment terms will be introduced for most business-to-business transactions, in line with the proposals announced in July 2025. While this measure will not take effect until 2027 at the earliest, and a transition period will apply, businesses should begin considering whether a maximum payment term of 60 days may necessitate changes to their standard terms and invoice approval cycles.
The government’s response outlines some important exemptions to the 60-day cap. These include payment terms for contracts between two large companies, contracts where the buyer is the smaller party and contracts dealing with the import and export of goods. Further details of the exemptions are to be confirmed.
Finally, while the proposal for a 60-day cap on payment terms is moving forward, the plan to reduce the cap to 45 days after 5 years has been dropped.
Another very significant change is that interest on late payments at the statutory rate of 8% above the Bank of England base rate will become compulsory in commercial contracts. This will have a significant impact on all late payers.
Although this rate already applies by default where commercial contracts are silent on interest terms, businesses are currently able to agree a lower rate. Typically, this will be 3 or 4 %. This will no longer be permitted once the reforms take effect.
Another significant development for large companies is that reporting requirements on their payment practices will be extended to require reporting on how much statutory interest on late payments they owe, and how much they have paid. This measure aims to increase transparency and accountability around payment behaviour. The government will publish further guidance on the new reporting requirements when it introduces these measures.
Currently, there is no set statutory timeframe for raising disputes about invoices. This allows some purchasers to delay payment by disputing invoices shortly before the agreed payment date. To counteract this, the government proposed a 30-day limit for raising invoice disputes. However, although the government response confirmed that a statutory time limit for raising invoice disputes will be introduced and that interest will accrue on late payments if disputes are raised after that deadline, it did not confirm whether it will be 30 days, or some other period.
The response also confirms that separate measures, aligned with existing payment notice requirements, will be introduced specifically for construction contracts.
Businesses should ensure invoices are reviewed promptly when received and invoice disputes should be raised without delay. They should also be raised within any statutory timescale later set by the government.
The government first suggested that audit committees in all large companies should review payment practices and report these practices in annual reports. This has now been scaled back. The requirements to be implemented will apply only to large businesses who have made a significant proportion of their payments late. Those businesses will be required to:
Large businesses should therefore begin monitoring their payment data more closely to identify whether their practices could place them within the 'persistent late payer' category once implementation begins.
The SBC will be granted significant new powers, including to:
The initial proposal set a clear 'trigger point' for SBC action. For example, SBC could step in if a business pays 25% or more invoices late. However, no such threshold has been confirmed.
Businesses should note that the SBC will have stronger powers to enforce payment rules - it will be able to fine large companies that persistently pay late and those that break late payment laws.
The consultation considered two options for reforming retention payments in the construction sector:
The government has now confirmed its intention to ban retention payments in the construction sector. Further consultation will determine how this will be implemented in practice, and detailed guidance will follow from our specialist construction team.
The confirmed reforms will significantly reshape the UK’s late payment landscape.
Businesses should consider:
If you’d like advice on how these changes might affect your business, or to review your payment terms in light of the proposals, please contact our commercial team.
We produce a range of insights and publications to help keep our clients up-to-date with legal and sector developments.
Sign up
