The recent Jaguar Land Rover crisis has really shone a light on the critical importance of cash flow to businesses. It illustrates that having limited cash reserves is a common feature of small and medium-sized enterprises (SMEs), and delays in payment by creditors can pose an existential threat to otherwise viable businesses. This is a particularly acute issue for those which lack easy or affordable access to finance.
The UK government’s proposed overhaul of late payment legislation, which we outline in this article, should therefore be welcome news to many SMEs. If implemented, it will represent a very significant change in the law for businesses of all sizes, with potentially significant commercial consequences.
What's happening?
On 30 July 2025, the government published its plan to support SME’s, 'Backing your business: our plan for small and medium sized businesses'. Amongst other, the plan proposes significant changes to late payment legislation designed to strengthen protections for SMEs and tackle the persistent issue of late payment. The government is currently consulting on the proposals and the consultation remains open until 23 October 2025. Click here to view the consultation.
Current position
Over the years, various initiatives have sought to address the issue of late payment, including:
- The Late Payment of Commercial Debts (Interest) Act 1998 and accompanying Regulations which, where they apply, grant suppliers a statutory right to interest on overdue invoices.
- The Prompt Payment Code, replaced in 2024 by the Fair Payment Code, encouraging businesses to pay suppliers on time – but importantly, compliance is voluntary rather than mandatory.
- The Small Business Commissioner, established in 2017 to support smaller suppliers in resolving payment disputes.
But late payment remains a widespread problem, with limited practical recourse when it happens.
Under the current framework, there is no statutory limit on maximum payment terms for private sector businesses (different rules apply to public sector contracting), and the statutory interest rate of 8% above the Bank of England base rate can be replaced by a lower rate. However, smaller suppliers often lack the bargaining power to challenge longer payment terms or reduced interest provisions. Disputes over invoices can also be used strategically to delay payment, without meaningful consequence.
The government is now proposing tougher measures to tackle the problem.
Key proposals for reform
The consultation outlines several reforms designed to enhance transparency, accountability and fairness in business-to-business payments and seeks feedback from business on the proposals. Some of the key proposed reforms are set out below:
- Limiting payment terms to 60 days: introducing a statutory maximum payment term for private sector businesses of 60 days, potentially reducing over time to 45 days. This proposed reform seeks to create a clear, enforceable standard and protect smaller suppliers from being pressured into accepting excessively long payment terms. Businesses entering into long-term commercial agreements may wish to get ahead of the game and future proof their contracts.
- Mandatory statutory interest: making statutory interest mandatory, by removing the ability for parties to contract out of the statutory rate of 8% above the Bank of England base rate. This would ensure all qualifying late payments accrue interest at the statutory rate, strengthening incentives for timely payment.
- 30-day deadline for disputing invoices: to reduce the scope for invoice disputes being used to justify payment delays, businesses would have a maximum of 30 days from receipt of an invoice to raise any dispute. After that, the invoice would be deemed undisputed and interest would start accruing on the debt from the agreed payment date. It remains unclear whether this will have any meaningful effect in practice.
- Financial penalties for persistent late payers: giving the Small Business Commissioner the power to issue fines, based on unpaid statutory interest liability, to businesses who persistently pay their suppliers late.
- Enhanced reporting regime on payment practices – large companies and limited liability partnerships (LLPs): enhancing the reporting scheme first introduced in 2017 for large companies and LLPs on their payment practices. Proposals include requiring audit committees to make recommendations on payment practice to the board and requiring such organisations to report on their payment practices in their annual report, rather than just submitting data to the government website. This would include reporting on how much statutory interest they have had to pay. Because failure to report or inaccurate reporting may lead to sanctions for directors, the government hopes the reforms will bring greater board-level scrutiny to payment practices than is currently the case.
How will it affect you and your business?
If implemented, these reforms would represent the most significant update to the UK’s late payment regime in nearly 30 years. The government is expected to publish the outcome of the consultation within 12 weeks of its closure, meaning a response should be available by January at the latest. Businesses, particularly large organisations with extensive supply chains, should start preparing now.
We recommend:
- Reviewing standard terms and supplier agreements to identify any clauses inconsistent with the proposed reforms.
- Auditing internal processes for approving and disputing invoices to ensure timely compliance.
- Engaging with the consultation before 23 October 2025 to make your voice heard.
If you’d like advice on how these changes might affect your business, or to review your payment terms in light of the proposals, contact our commercial team. We can help ensure your contracts are future-proofed and aligned with emerging best practice.
