Proposed Changes to Tackle Late Payments and What They Mean for Businesses

Late payment of invoices remains a persistent challenge for many businesses, particularly small businesses and the self‑employed, where delayed payments can have a direct impact on cash flow, growth and day‑to‑day operations.

The UK government is intending to adopt new legislation to tackle business-to-business (B2B) late payments. These reforms are expected to be the most significant legislative change in this field in over 25 years.

The government’s aim is to ensure that businesses—especially small businesses and the self‑employed—are paid on time for the goods and services they deliver, so that they can focus on their core business activities rather than chasing or disputing unpaid invoices.

The proposals follow a government consultation on Late payments: tackling poor payment practices, which ran from 31 July 2025 to 23 October 2025. It received a high volume of responses, which led to delays in publishing the results of the consultation within the initial 12week timeframe indicated. As a result, the government’s response to the consultation was finally published on 24 March 2026.

Its intention to introduce the bill in the next parliamentary session was announced in the King’s speech on 13th May 2026

Why the government is proposing changes to late payment rules

Late payment has long been recognised as a structural issue within certain sectors and supply chains. Smaller suppliers are often reluctant to challenge late payment or unfavourable terms for fear of damaging commercial relationships, whilst larger organisations may use extended payment cycles to manage their own cash flow.

The government’s view, reflected in its consultation response, is that existing legislation does not go far enough to change behaviour in practice. In particular, it considers that a lack of enforcement, limited senior‑level accountability and widespread avoidance of statutory interest have reduced the effectiveness of the current framework.

Summary of the proposed legislative changes

The government has outlined a series of reforms intended to strengthen payment discipline, improve transparency and introduce meaningful consequences for poor payment practices.

In this blog we have summarised the proposed legislative changes ,the current position, and the specific issues that each of the changes aims to address.

1. Board-level scrutiny of large company payment practices

What is the issue?

It is believed that the lack of senior-level attention of late payment practices hinders improvements to payment behaviour.

2. Maximum payment terms

What is the issue?

The government has observed that the ‘not grossly unfair’ exemption is not being upheld in practice. Larger businesses make use of the exemption to impose longer payment terms even where these are grossly unfair, while smaller businesses do not challenge such terms for fear of losing contracts.

3. A statutory deadline for disputing invoices

What is the issue?

The government has observed that companies may choose to dispute an invoice just before the payment deadline to extend their own cash flow cycle at the expense of their suppliers. By limiting the time within which disputes can be raised, it is hoped that this practice will either cease or result in disputes being raised and resolved earlier.

4. Mandatory statutory interest on late payments

What is the issue?

For fear of losing business, small businesses do not charge late‑payment interest or agree to such low interest rates that provide little deterrent to late payment.

5. Additional reporting requirements for large businesses

What is the issue?

The change will enable the government to monitor whether businesses comply with the requirement to pay statutory interest on all late payments.

6. Financial penalties for persistent late payers.

What is the issue?

Absent any substantial consequences from late‑payments (beyond potential reputational damage), it is questionable whether there are sufficient incentives for companies that persistently pay late to change their practices.

7. Expanded powers for the Small Business Commissioner, including assurance of payment reporting data

What is the issue?

SBC’s performance review revealed that many stakeholders considered the role to have limited impact on improving business payment practices due to insufficient power.

8. Prohibition of retention clauses in construction contracts.

What is the issue?

This change is specific to the construction industry. Because of the tight profit margins and poor payment practices in the sector, retention clauses often lead to small businesses suffering cumulatively significant financial loss.

What the changes could mean for businesses

If implemented as proposed, in terms of contract negotiations and payment practices, businesses will need to reconsider their strategies—particularly where long payment terms or routine invoice disputes have been used to manage cash flow. Furthermore, failure to pay on time may now carry genuine financial consequences, rather than merely reputational ones.

The proposed changes relating to retention clauses in construction contracts have also raised concerns as smaller businesses may be required to provide alternative forms of assurance in order to secure construction work.

The government recognises these challenges and has committed to consult further with interested parties on its implementation.

What businesses should be doing now

Although the proposals will only take effect once legislation is passed, they provide a useful opportunity for businesses to review existing practices and identify potential areas of risk.

In practical terms, businesses may wish to start by considering how their current arrangements would operate if the proposed changes are introduced in their current form. This may include:

• Reviewing standard payment terms: assessing whether payment periods exceed 60 days and understanding where proposed exemptions may, or may not, apply.
• Assessing invoice dispute processes: considering how and when invoices are reviewed and disputed, and whether disputes are raised promptly and consistently rather than close to payment deadlines.
• Auditing exposure to late payment interest: understanding how often payments are made late, whether statutory interest is charged or paid, and the potential impact if interest becomes mandatory.
• Considering governance and reporting arrangements: for larger businesses, reviewing how payment performance is monitored internally and whether existing oversight would meet proposed board‑level scrutiny and reporting requirements.
• Reviewing sector‑specific impacts: particularly for construction businesses, considering how current use of retention clauses could be affected and what alternative protections may be required.

Taking these steps early can help reduce the risk of non‑compliance and avoid the need for rushed changes once the final form of the legislation becomes clear.

Reflecting on the proposed reforms and next steps for businesses

Looking at the changes as a whole, it is clear that practices long considered standard for many businesses will soon need to be revisited. Delaying or disputing payments to manage cash flow, negotiating extended payment terms, avoiding interest on late payments or agreeing interest rates below the statutory minimum will no longer be permissible.

Crucially, businesses that fail to comply with the relevant provisions may face fines and reputational damage.

The government’s response to the consultation, and the announcement in the King’s speech, leaves no doubt that tackling late payments is a renewed priority demanding greater transparency, tighter payment discipline and more robust governance around supplier relationships. Therefore, businesses should start considering how they will adapt—because change, in one form or another, is certainly on the horizon.

Although the detail and timing will continue to evolve, the direction of travel is clear. Businesses that would like to discuss how the proposed reforms could affect their payment practices, contracts or internal processes may wish to speak with a member of our team for early, practical guidance as the legal framework develops.