As part of a package of measures detailed in its Small Business Plan released today the UK government has announced plans to tackle late payments to small and medium sized businesses (SMEs) in the UK with the most significant legislative reforms in over 25 years aimed at introducing the toughest laws on late payment in the G7 [Backing your business: our plan for small and medium sized businesses – GOV.UK].
At present the key legislation in the UK is the Late Payment of Commercial Debts (Interest) Act 1998 which provides all businesses with the option to charge interest at 8% over the Bank of England base rate on overdue payments owed by other businesses or public bodies unless an alternative “substantial remedy” for late payment has been agreed. In addition, payment terms in excess of 60 days are open to challenge on the grounds of unfairness with public bodies obliged to offer payment terms not exceeding 30 days.
In practice though these rights are rarely enforced on a day to day trading basis with the Prime Minister noting today that “too many hardworking people are being forced to spend precious hours chasing payments instead of … growing their businesses” withthe Small Business Minister going on to note that it is completely unacceptable that “too many small firms go under each year because they aren’t paid on time”.
Whilst today’s announcement is somewhat lacking in specific detail as it is not accompanied by detailed draft legislation, the government has announced plans to bring forward new legislation that includes:
- stricter maximum payment terms (with indications that 30 days will be the default unless otherwise agreed and in any event a maximum of 45 days is being considered);
- stronger powers for the Small Business Commissioner potentially including the right to: levy significant fines against the biggest firms who persistently pay suppliers late; carry out spot checks; and enforce a 30 day invoice verification period to speed up resolutions to invoice disputes;
- mandatory payment of interest on late invoices;
- options to reform or ban cash retentions in construction contracts; and
- increasing discussion and scrutiny of large companies’ payment practices at board level, including by exploring potential roles for audit committees or company boards in providing commentary or recommendations regarding payment performance to company directors before payment performance data is submitted to government and included in the company’s annual report.
In addition the government has announced that from October this year it will take further steps to improve public sector payment practices including spot checks across supply chains and tightening rules to exclude suppliers who fail to pay promptly from large contracts.
The timetable for the introduction of any legislative changes is also somewhat vague at this stage with the outline next steps published today merely referring to the government “working with SMEs” on late payments legislation during 2025, 2026 and “beyond”. However, we would expect that policy papers and consultations will follow in due course providing interested stakeholders with the opportunity to comment on and influence any new legislation.