Background
Late payment of invoices pose a significant financial impact on SMEs and this has been addressed in a number of ways by successive governments in the UK. Previous measures put in place to combat such financial impact include:
- enacting the Late Payment of Commercial Debts (Interest) Act 1998, which applies to business to business contracts for goods or services and implies a statutory right to interest, a fixed sum and reasonable recovery costs for the late payment;
- enacting the Reporting on Payment Practices and Performance Regulations 2017 (as amended), which stipulates reporting obligations on payment practices for qualifying companies and qualifying Limited Liability Partnerships;
- the creation of the Small Business Commissioner in 2017, to assist with resolving late payment complaints between SMEs and their larger customers; and
- the adoption of the Prompt Payment Code in 2008, which provided a mechanism for businesses to voluntarily pledge to pay 95% of invoices to SMEs within 30 days. The Fair Payment Code replaced the Prompt Payment Code in 2024, but its principles are the same and the new Code relies on a three-tier structure of Gold, Silver and Bronze to outline different options on fair payment for businesses. The 30-day target period for SMEs remains the same.
There are many benefits to working with and supporting SMEs such as encouraging competition and breaking large monopolies, more adaptable and agile solutions, and contributing to the local social value agenda by supporting greater localisation. By removing financial barriers through stricter payment terms, this should improve cash flow, resulting in SMEs having greater capacity to develop and succeed. SMEs employ 60% of the country’s workforce and generate £2.8 trillion in turnover so their impact on the economy is not to be underestimated.
On 30 July 2025, the UK Government launched a public consultation which can be found here > setting out further measures to tackle late payments and we set out the main elements subject to this consultation below.
What will the consultation cover?
Whilst the above measures do deal with late payment of invoices, which disproportionally affect SMEs, the UK Government asserts that more needs to be done to assist SMEs and lessen the financial impact on them.
As such, the UK Government announced its intention to consult on this issue as part of the Plan. The consultation covers eight proposed legislative measures, which aim to improve cash flow through supply chains and support SMEs with payment disputes.
The measures include:
- Audit committees and board-level scrutiny of large company payment practices – aims to foster greater scrutiny and discussion of payment performance within large companies.
- Long payment terms – remove the option to agree payment terms longer than 60 days, setting a clear limit to protect smaller suppliers.
- Deadline for disputing invoices – introduce a 30-day limit for raising invoice disputes.
- Mandatory statutory interest – introduce a mandatory statutory interest rate payment on qualifying late payments to the effect that the parties will be unable to agree a lower rate.
- Additional reporting on statutory interest – require qualifying companies to report the total statutory interest owed and paid to suppliers during each reporting period in order to enhance transparency and accountability in large companies' payment practices.
- Financial penalties for persistent late payers – grant the Small Business Commissioner enforcement powers to impose financial penalties on large companies that repeatedly pay suppliers late.
- Additional powers for Small Business Commissioner – expand the Commissioner's powers to better support SMEs and improve payment culture, including investigating unfair payment practices, verifying the accuracy of payment data submitted by large companies and conducting spot checks.
- Use of retention clauses in construction contracts –amend the Construction Act 1996 to either prohibit retention clauses or require protection of retained sums. The UK Government is aiming to prevent losses that are resulting from insolvency and improve payment reliability.
The UK Government is expected to publish its findings in relation to the consultation within 12 weeks of the closing date, which is 23 October 2025.
What does the Procurement Act 2023 say about late payments?
Similar measures have already been implemented into public contracts (that are above the relevant threshold), via the Procurement Act 2023 (the "PA23") which came into force on 24th February 2025.
Section 68 of PA23 addresses payment terms, although it implies the terms into public contracts rather than setting out a requirement to include such terms, as was the practice under the previous procurement regime. This implied term applies to every public contract that is not a concession contract or a contract awarded by a private utility or school, and outlines that payments are to be made by the contracting authority within 30 days of the day the invoice is received, or, if later, the day on which the payment becomes due in accordance with the invoice (provided the invoice is considered to be valid and undisputed).
Section 69 of PA23 includes an obligation on contracting authorities to publish a Payments Compliance Notice detailing the contracting authority's compliance with the requirement to pay invoices within a 30-day period, and section 70 includes an obligation to publish a Contract Payments Notice detailing payments under contracts over £30,000. Further, section 73 of the PA23 implies the aforementioned payment terms into any sub-contracts that are linked to public contracts, which aims to help suppliers maintain cash flow, manage their supply chains (which often include SMEs) and encourage further participation in public procurement.
In addition, specific requirements set out in section 12(4) and section 86 of the PA23 state that contracting authorities must have regard to the barriers to participation which SMEs face and whether these barriers could be removed or reduced for above threshold and regulated below threshold contracts, respectively. Given that the UK Government has incorporated such terms into public sector contracts, the Plan demonstrates a wider initiative to bring these provisions into private sector contracts.
Potential impact
If, following the consultation, the proposals become law, this would be a very significant overhaul of the UK's late payment regime and would help remove some of the barriers faced by SMEs in the commercial landscape. The result would be the UK having the toughest regime on late payments across the G7 countries.
Regardless of the outcome of the consultation, companies who contract with SMEs should consider reviewing their current payment practices as it would seem the trend in UK Government policy of supporting SMEs is not going to change.
Please contact our team if you would like further information or clarification on this topic.
