What the UK's tough new rules on late payment mean for your business

The UK Government is making major changes to the law on late payment – including fines for businesses which fail to pay suppliers on time, a prohibition on payment periods over 60 days and a new adjudication system for certain payment disputes. These measures are likely to lead to a significantly tougher regulatory environment, particularly for larger businesses which regularly use SME suppliers. Whilst the exact timing is unclear, the reforms could be brought into force as early as 2027.

        
            Key changes
        
Small Business Commissioner to be able to fine businesses with poor payment records or which persistently fail to comply with late payment obligations
Statutory interest rate on late payments of base + 8% to be made mandatory (i.e. no "contracting out", as at present)
Prohibition of payment periods of more than 60 days
Right for suppliers to claim a fixed sum (of up to 1% of the disputed amount) if an invoice is disputed late by a customer
Binding adjudication scheme, administered by Small Business Commissioner, for payment disputes involving businesses with fewer than 50 staff (paid for by larger businesses)
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

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What does the current law say and why does the Government want to change it?

Under the current law, the key measures relating to late payment in the UK can be summarised as follows:

Reporting regime for larger businesses: all "large" UK companies and LLPs are required to report twice yearly on their payment practices, with such information being made available on this website (see section 5 below for the definition of "large"). The main idea is that suppliers can use the information to decide if they wish to contract with a customer or not (based on its payment record). This measure also raises the prospect of that business being "named and shamed" for its conduct (see also third bullet below).
Payment terms and remedies for late payment (all businesses): suppliers – whatever their size – have a statutory right to claim interest on late payments of 8% above the Bank of England base rate, together with a contribution towards debt recovery costs (which is typically modest). However, in practice, parties often agree a lower interest rate and the current law permits this, provided it still amounts to a "substantial" remedy. Payment periods of longer than 60 days – though not prohibited – can also be challenged on the basis that they are "grossly unfair".
Small Business Commissioner (SBC): businesses can sign up to the voluntary Fair Payment Code, which is administered by the SBC. Gold, Silver and Bronze awards are available, depending on how quickly suppliers typically get paid. Alongside this, the SBC provides advice to small businesses experiencing problems getting paid ("small" is defined as any business with fewer than 50 staff – there is no turnover threshold). In the past, the SBC has also sometimes "named and shamed" larger businesses that did not, in its view, pay their suppliers in a timely manner.
Suppliers to the public sector: all suppliers bidding for public sector contracts worth over £5 million are expected to demonstrate that they pay their own suppliers within 45 days, on average. If they can't show this, they can be excluded from the tender process.

Why does the Government want to change the current law?

Although there has been some improvement in overall payment times, the Government estimates the cost to the UK economy of delayed payments as being £11 billion per year, affecting over 1.5 million businesses. It also cites research indicating that late payment contributes to the closure of 38 businesses per day. Alongside this, it's arguable that the current law does relatively little to deter some customers from adopting a deliberate policy of paying late, with a view to easing pressure on their own cashflow, at the expense of their suppliers (these potential weaknesses are discussed in more detail below).

Following a consultation in 2025, the Government announced in April 2026 that it would be proceeding with a significant suite of reforms, intended to give the UK "the strongest laws in the G7". These will be implemented through the Commercial Payments Bill (currently before Parliament) and secondary legislation.

Government rhetoric on reform proposals isn't always justified – but in this case, it's no exaggeration to describe these measures as "the most ambitious legislation to tackle late payments in over 25 years" and "the strongest legal framework in the G7".

Fines for failure to pay on time and other infringements

The problem: At present, there is no scope to impose sanctions on persistent late payers. In terms of deterrence, the existing law relies heavily on businesses being sufficiently concerned about reputational risk. Whilst fear of being sued for late payment interest may act as a deterrent in some cases, suppliers are often reluctant to bring such claims for fear of jeopardising future orders from the customer.

The Government's solution: It's against this background that the Government is legislating to give the Small Business Commissioner (SBC) the power to impose civil fines of up to 1% of a business' annual UK turnover, and to direct businesses to change their behaviour in future.

When could businesses be fined for late payment?

The Bill envisages the SBC having the power to fine a business if it "persistently engages in poor payment practices." This would include regularly paying smaller suppliers late or continuing to use terms which have effectively been prohibited by the Bill, such as payment periods longer than 60 days. The SBC will be able to impose a fine on any business that is not a small business (i.e. any business with more than 50 employees). It is not yet clear how fines will be calculated – this is expected to be set out in secondary legislation and guidance.

In practice, large businesses within the scope of the reporting regime may well be more exposed to fines – if their statistics show that a significant number of suppliers are being paid late, this could prompt the SBC to investigate.

How might the SBC direct businesses to change their behaviour following an investigation?

As well as imposing fines, the SBC will also have power to direct businesses to change their behaviour in future. This could include ordering them to change their contracts, appoint an independent person to review and make recommendations about its payment practices and provide training to staff. That said, it won't be able to order businesses to make payments to suppliers who may be out of pocket – although it will be able to require them to provide information to those suppliers, presumably with a view to encouraging the latter to take action to recover any sums that may be due (such as late payment interest).

Other potential fining scenarios

When investigating (or deciding whether to investigate), the SBC may issue information notices compelling the production of specified information. Failure to comply with an information notice or knowingly providing false information will be criminal offences. Both carry liability on summary conviction to a fine and, on conviction on indictment, to an unlimited fine. Where the SBC issues an enforcement direction and the business fails to comply without reasonable excuse, a further financial penalty of up to 1% of annual UK turnover may be imposed.

Changes to the law on payment terms and remedies for late payment

The problem: At present, if suppliers bring claims for interest on late payments, they are often unable to benefit from the relatively high statutory rate (of base + 8%). This is normally because, at the time of entering into the contract, the customer had the bargaining power to impose a significantly lower express rate of interest. Similarly, as regards payment terms, customers are often able to impose express periods longer than the 30-day default period provided for in the legislation. The relevant legislation permits longer periods to be agreed, save where the customer is a public sector body or the longer period is "grossly unfair". Some large customers have used this to impose payment periods of 90 or even 120 days and in practice, suppliers rarely challenge this.

The Government's solution: The Government is changing the law to remove or significantly constrain the ability of parties to: (i) opt out of the statutory late payment interest of 8% above base; and (ii) agree payment terms longer than 60 days (although there will be a number of important exemptions where payment terms longer than 60 days will continue to be permitted – see below). These changes will not affect contracts already in existence at the time the new regime comes into force and the Government has said that the 60-day payment period will not come into effect any earlier than 2027 (and will also be subject to "an appropriate transition period"). An earlier proposal that, over the longer term, the maximum payment period should be brought down to 45 days, is not being taken forward (but the Government has said that it may "revisit it in future").

The new maximum payment period: what are the exemptions?

Provided the contract does not involve a public sector body, it will be possible to continue using payment terms longer than 60 days where:

the purchaser is the smaller party; or
both parties are "large undertakings" (expected to be defined in secondary legislation).

The Government will also be able to specify further exempt categories of contract. For example, in its response to consultation, it stated that an exemption would also be created for contracts relating to imported or exported goods or services (and we assume this is still the intention). This particular carve-out appears to have been announced in response to concerns from retailers about losing the benefit of longer payment terms in their contracts with overseas suppliers, particularly in China and the Far East (their argument being that longer payment periods were justified given the time taken to transport goods to the UK and get them into stores).

However, none of these exemptions will be automatic; the contract will have to state exactly which provision of the legislation is being relied upon to take it outside the usual prohibition on the use

Will these reforms affect acceptance testing or verification procedures?

In some contexts (e.g. supply of bespoke software), contracts may provide that payment is not due until the customer is satisfied that the goods or services are in conformity with the contract. The Bill will allow such clauses to continue to be used, subject to an implied term that the acceptance testing or verification process is completed within 30 days (commencing on "the day on which the obligation of the supplier to which the payment in question relates is performed"). Customers will only be permitted to use longer periods where they can show that this was fair and reasonable having regard to the factors set out in the Unfair Contract Terms Act 1977 (which the courts are well used to considering in relation to exclusions or limitations of liability).

What about advance payments?

Advance payments will not be subject to the new regime on payment terms, which is only intended to apply where a supplier has already performed an obligation and is seeking payment in return for doing so.

Retention clauses in construction contracts

The construction sector already has a specific framework designed to promote prompt payment. Whilst the Government does not envisage making significant changes to this regime, it is legislating to prohibit the use of retention clauses in construction contracts (allowing customers to retain a portion of the contract price). These changes will be subject to a 2 year transition period.

Changes to the law on disputing invoices and a new adjudication scheme for payment disputes

Disputing invoices

The problem: One of the ways in which a customer can delay payment is to query the invoice, since contracts often allow the customer to withhold payment in the event of a genuine dispute. There will, of course, be many cases where such queries/disputes are entirely legitimate – but the Government is concerned that some businesses wait until just before payment is due to raise any concerns, thus making a delay in payment inevitable.

The Government's solution: The original proposal was that customers would have a 30-day deadline from receipt of invoice to raise a dispute. However, this has now been dropped in favour of a right for suppliers to claim a fixed sum if an invoice is disputed late. The amount suppliers can claim will be the higher of £40 or 1% of the disputed amount. If customers want to avoid paying this, they need to raise any queries at least 8 days before the payment is due. The aim of this is to act as a deterrent to disputing invoices late (e.g. in the week before they are due for payment).

In many cases, the amount that suppliers will be able to claim when a customer disputes an invoice late in the day is likely to be relatively low – so we're sceptical that this will act as much of a deterrent in practice. Even where a larger sum could be claimed, many suppliers – especially smaller companies – may be reluctant to demand it for fear of undermining the wider commercial relationship.

A new adjudication scheme for disputes

The problem: Smaller businesses often don't have the resources to pursue larger customers for non-payment and even if they do, litigation can often be a slow process. Whilst they are able to seek assistance (free of charge) from the SBC, the SBC has limited resources and no power to force customers to engage with it or make binding awards.

The Government's solution: The Government is legislating to give the SBC new powers to adjudicate payment disputes between small suppliers and larger businesses. The SBC will be able to make binding awards, including as to costs. It appears that, in most circumstances, small businesses will not be charged, even if they are unsuccessful. This is because the Bill, as currently drafted, prevents the SBC from recovering costs from small businesses, unless their conduct is "frivolous or vexatious" (which would be relatively unusual). As such, it is likely that most of the costs will fall on larger businesses. It is unclear what these costs might be. In the construction sector, where adjudication is compulsory, research suggests that costs typically involve low five-figure sums, but can be higher depending on the complexity of the case. Unlike the invoicing deadline outlined above, only businesses with fewer than 50 staff would be able to seek adjudication – and only when in dispute with a larger business (i.e. with 50 staff or more).

Where small business suppliers feel that their relationship with a customer has broken down, they will have little to lose from lodging a claim under the new adjudication scheme – whereas under the current system, many are put off by the cost of litigation. Meanwhile, larger customers should note that they will probably have to pay the costs of most adjudications, even if the supplier's claim fails.

Changes to the reporting regime and new requirements for audit committees and company boards

Changes to the reporting regime

At present, the Payment Practices and Performance Regulations 2017 (PPRs) require all "large" UK companies and LLPs to report twice yearly on their payment practices, with such information being made publicly available on this website. "Large" in this context applies to companies and LLPs which satisfy 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 £27 million (i.e. gross value of all assets shown on the entity's balance sheet); and
more than 250 employees.

As an additional transparency measure, the Government plans to require large companies and LLPs to report the total statutory late payment interest owed to their suppliers, together with total of such interest which has actually been paid out. However, an earlier proposal to reduce reporting from twice yearly to annually will not be taken forward, so the current reporting frequency will remain.

New requirements for audit committees and company boards

The Government also plans to impose new requirements on boards or audit committees - where companies have them - to publish commentary on their late payment performance. In particular, if a significant proportion of a business' total payments to suppliers have been made late, its board (or its audit committee, if relevant) would be required to publish an explanation and set out what it intends to do about it. It would also have to explain what actions from any previous commentary have not been implemented and why. As we have commented previously, the aim is to promote scrutiny of payment practices at senior level, encouraging businesses to treat it as an ESG issue.

These changes come at a time when large companies' behaviour towards smaller suppliers is increasingly being recognised as a sustainability-related issue – and not just in the UK. Though currently under revision, payment practices are also a topic under the reporting standards in the EU's Corporate Sustainability Reporting Directive.

What happens next and when will these changes become law?

Most of the changes are being made through the Commercial Payments Bill, which is currently before Parliament. However, the changes outlined in section 5 above (relating to the reporting regime and board-level scrutiny) will be made through secondary legislation.

Whilst the exact timing is unclear, the Government is treating late payment reform as a priority (it was a Labour Manifesto commitment) and some of the measures could be brought into force as early as 2027.

How we can help

Late payment requires a holistic approach, involving specialists from across different practice areas. That's why, at Travers Smith, we ensure that our advice in this area is based on close cooperation between our top tier Technology & Commercial Transactions and Operational Risk teams. If this is an area we can assist your business with, please get in touch with any of the contacts listed below.

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