What the UK late payment reform means for small business owners

What is changing about late payments?

• A cap on payment terms

  Maximum payment terms will be limited to 60 days, falling to 45 days after five years. This matters because large companies have historically used long payment terms (sometimes 90 or 120 days) to manage their own cash flow at the expense of smaller suppliers, and that practice will no longer be legal.

• Mandatory interest on late payments

  Mandatory interest on late payments will be introduced, requiring all commercial contracts to include statutory interest at 8% above the Bank of England base rate. Until now, businesses technically had the right to charge interest on overdue invoices under the 1998 Late Payment of Commercial Debts Act, but many were reluctant to exercise that right for fear of damaging their relationship with a client. Making it mandatory removes that awkwardness, and the interest is simply built in.

• A deadline for disputing invoices

  A strict 30-day invoice verification deadline has been introduced, and businesses must confirm or dispute invoices within a month. This closes a common loophole in which larger companies can drag out the process by sitting on an invoice without formally acknowledging or challenging it.

• A stronger Small Business Commissioner

  The Small Business Commissioner will be given sweeping new powers to investigate poor payment practices, adjudicate payment disputes, and fine the worst offenders, with fines potentially reaching tens of millions for firms that persistently pay late or fail to comply with the new laws.

  Previously, the Commissioner existed but had limits, and relatively few people had even heard of the Small Business Commissioner, let alone feared it. The new powers change that significantly, and crucially, if interest is unpaid, small businesses will be able to escalate to the Small Business Commissioner and resolve the matter through adjudication without having to go through the courts.

• Board-level accountability

  Large businesses will soon be legally required to establish audit committees to monitor their payment practices and publish results in annual reports. The intention is to make senior leadership directly responsible for how their companies treat suppliers, rather than leaving poor payment practices buried in the accounts department.

• Construction-specific changes

  The practice of deducting and withholding retention payments under the terms of a construction contract is also proposed to be banned, to prevent loss through insolvency, late and non-payment. If you work in the construction sector, this is particularly worth watching.