Late Payment Reforms for SMEs
The UK Government has introduced the Commercial Payments Bill (also referred to as the Small Business Protections Bill), representing the most significant overhaul of late payment legislation in more than 25 years. The reforms are designed primarily to improve cash flow for SMEs, reduce the burden of chasing debts, and deter large organisations from using small suppliers as a source of informal working capital.
Why the reforms are being introduced
The Government estimates that late payments cost the UK economy around £11 billion annually and contribute to the closure of approximately 38 businesses every day. The reforms are intended to create a stronger payment culture throughout UK supply chains.
Key Changes
1. Mandatory Late Payment Interest
Current Position
Under the existing Late Payment of Commercial Debts legislation, suppliers can normally charge:
- Statutory interest of 8% above the Bank of England base rate.
- Alternatively, parties can agree different contractual interest provisions.
In practice, many smaller suppliers either waive these rights or sign contracts containing lower rates.
Proposed Change
The new legislation will make statutory late payment interest mandatory.
- Interest will remain 8% above the Bank of England base rate.
- Businesses will no longer be able to contract out of the statutory minimum or agree a lower rate.
Benefit for Small Businesses
This removes a common imbalance in negotiating power, ensuring that smaller suppliers automatically receive meaningful compensation whenever payments are late.
2. 60-Day Maximum Payment Terms
Current Position
Long payment terms can currently extend well beyond 60 days in many sectors.
Proposed Change
A statutory maximum payment term of 60 days will be imposed on most contracts where a larger business purchases from a smaller supplier. Limited exemptions will apply.
Benefit for Small Businesses
This should:
- Accelerate cash collection.
- Improve working capital.
- Reduce overdraft and financing costs.
- Limit the ability of large companies to impose excessive payment terms.
3. Stronger Powers for the Small Business Commissioner
The Small Business Commissioner will be given significantly expanded powers, including the ability to:
- Investigate persistent late payers.
- Adjudicate disputes.
- Direct corrective action.
- Impose financial penalties on organisations that repeatedly breach the rules.
Benefit for Small Businesses
Rather than relying solely on costly legal action, SMEs will have access to a stronger regulatory route for resolving payment disputes.
4. Fixed Sum Late Payment Compensation
Current Position
The existing fixed compensation regime remains:
| Debt Value | Compensation |
|---|---|
| Up to £999.99 | £40 |
| £1,000 – £9,999.99 | £70 |
| £10,000+ | £100 |
The Government has confirmed that suppliers will continue to have a right to a fixed sum in specified circumstances. However, the current legislative proposals focus primarily on mandatory interest and late-dispute protections, and there has been no confirmed increase to the statutory compensation amounts announced to date.
Additional Change
The Bill introduces a right to a fixed sum where a purchaser raises a dispute late or without sufficient information, preventing payment delays through tactical invoice challenges.
Benefit for Small Businesses
This should discourage buyers from withholding payment by manufacturing or delaying disputes.
5. Restrictions on Delaying Invoice Disputes
The reforms propose defined time limits for raising invoice disputes, reducing the scope for large customers to delay payment by questioning invoices months after receipt.
Benefit for Small Businesses
Greater certainty that agreed invoices will be paid promptly.
6. Construction Sector Reforms
The Bill proposes banning the retention payment practice in construction contracts. Retentions can leave subcontractors exposed when larger parties become insolvent.
Benefit for Small Businesses
Improved cash flow and reduced insolvency risk for subcontractors.
When Will the Changes Come Into Force?
Current Status
The Bill was introduced to Parliament on 19 May 2026 and is still progressing through the legislative process.
Implementation Date
The Government has stated that it will consult further on timing for implementation, and no commencement date has yet been formally announced.
Most legal commentators currently expect implementation no earlier than April 2027, depending on Parliamentary progress and secondary legislation.
Practical Impact on Small Businesses
The reforms should provide several tangible benefits:
✅ Faster payment of invoices
✅ Reduction in excessively long payment terms
✅ Automatic and unavoidable late payment interest
✅ Better enforcement against serial late payers
✅ Enhanced protection against payment disputes being used as delaying tactics
✅ Improved cash flow certainty
✅ Less management time spent chasing debts
✅ Reduced reliance on overdrafts and external finance
For many SMEs, the most important change will be the combination of the 60-day payment cap and mandatory 8% + base rate interest, which substantially increases the cost of late payment for larger customers.
