On Thursday 31st July 2025, Government unveiled proposals for new legislation which will impose financial penalties in big businesses that are late in paying small business…. which, let’s face it happens all too often! A huge potential change for retention clauses in commercial contracts is also proposed.
Emma Jones, CBE has been appointed as the Small Business Commissioner (“SBC”) In this role she will be given new powers to carry out spot checks and enforce a 30 day invoice verification period to speed up resolutions to disputes. The Small Business Commissioner will also write to larger companies to remind them of their obligations under the new Fair Payment Code (revised from December 2024’s code).
Government is seeking to ensure that audit committees or company boards, where companies have them, provide commentary and make recommendations regarding payment performance to company directors before the data is submitted to Government and included in the director’s report. This would include data provided as part of the Reporting on Payment Practices and Performance Regulations 2017, and any interest on late payment liabilities.
The upcoming legislation seeks to amend The Late Payment of Commercial Debts (Interest) Act 1998, removing the exemption that allows businesses to agree to payment terms of longer than 60 days if considered not ‘grossly unfair’. This will effectively limit payment terms between UK businesses to 60 days. Subject to further consultation, this policy may subsequently reduce this limit from 60 days to 45 days after 5 years.
An amendment is also proposed to the Late Payment of Commercial Debts (Interest) Act 1998, introducing a 30-day invoice verification period. Businesses who wish to raise a dispute will need to do so within 30 days of receiving an invoice, otherwise they will be liable to pay the invoice in full within the agreed payment terms, alongside any statutory interest or debt recovery costs if the invoice is paid late.
The Late Payment of Commercial Debts (Interest) Act 1998, will be amended to make the statutory interest rate payable on late payments mandatory. This will remove the ability to negotiate compensation rates lower than the statutory rate with the intention of increasing existing financial incentives to pay invoices on time. The current Statutory Interest Rate is 8 per cent plus the Bank of England base rate for business to business transactions. In support of this, larger companies will also be required to report on any statutory interest liabilities which could prove embarrassing for some larger companies to have to point that out in their annual report.
New legislation is also proposed, which gives the SBC powers to issue fines to businesses who persistently pay their suppliers late. The policy will use payment behaviour data submitted by businesses under The Reporting on Payment Practices and Performance Regulations (2017) to identify and issue financial penalties to persistently late-paying businesses, with penalties based on businesses’ unpaid statutory interest liability.
The Enterprise Act 2016 will be amended to give additional powers to the SBC which would improve the SBC’s ability to conduct investigations into poor B2B payment behaviour (beyond its current complaints scheme), allow it to provide legally binding arbitration in disputes, and impose financial penalties or make arbitration awards after an investigation or arbitration process.
The policy will also enable the SBC to investigate the accuracy of the payment reporting data that large businesses provide under The Reporting on Payment Practices and Performance Regulations 2017. This will improve the quality of reporting data and support the reporting regulations original objectives of improving transparency around B2B payment behaviour.
One of the most significant changes that is proposed is in relation to construction contracts. Government has proposed an amendment to Part 2 of the Housing Grants, Construction and Regeneration Act (1996), to either prohibit the use of retentions or to introduce requirements to protect retention funds deducted and withheld from insolvency and late or non-payment. This could be huge for the construction sector.
The above is clearly going to be popular with smaller businesses if implemented. The consultation process has started for business to feed in their thoughts as to how they think the proposals should be implemented. We can see how, from a governance framework perspective, the proposals could work but, as ever, the detail matters as does the enforcement. Only if the SBC is properly resourced and given a mandate to really push for change, will these proposals provide any respite to the circa 50,000 businesses that go bust every year because they run out of cash.
