Government launches consultation to tackle poor payment practices

On 30th July 2025, the government launched a consultation setting out its latest proposals to tackle poor payment practices. The government estimates that late payments affect over 1.5 million businesses each year, cost the UK economy £11 billion annually, and cause on average 38 UK businesses to close down every day. Whilst SMEs are more exposed than larger corporates, a healthy and predictable cash flow is important for all businesses. 

The consultation follows the introduction in December 2024 of the Fair Payment Code. Overseen by the Small Business Commissioner (SBC), this voluntary code establishes a tiered system to recognise good payment practices and enable smaller businesses to identify reliable business partners. A list of businesses subscribed to the code and their status is publicly available.

The measures proposed in the consultation, if implemented, would amount to the most significant legislation to tackle late payments in over 25 years. The consultation closes on 23rd October 2025 and the government will aim to publish its response and announce next steps within twelve weeks of its conclusion.

The proposed measures include: 

1. Legislating on audit committees and other board level responsibilities to improve payment practices of large companies. 

2. Amending the Late Payment of Commercial Debts (Interest) Act 1998 to:  

• Provide that the payment term in B2B contracts cannot exceed 60 days, with a proposal to reduce this to 45 days after 5 years of the legislation entering into force.
• Limit a party’s right to dispute an invoice to 30 days, after which the invoice become automatically payable in accordance with the terms originally agreed. 
• Make the statutory interest rate payable on late payments (currently 8% above the Bank of England’s base rate) mandatory. Parties will not be able to agree any lower than this. 

3. Extending current reporting obligations on statutory interest. The Reporting on Payment Practices and Performance Regulations 2017 (Regs) already require large businesses to publish payment performance information including average time to pay and the percentage of payments paid late. The consultation proposes adding requirements to report on the total statutory interest the company owes to and has paid out to its suppliers.

4. Granting additional powers to the SBC. This may include authority to investigate:

• companies that report late payments in excess of a new legislative threshold and, if appropriate, issue a financial penalty. 
• the accuracy of data under the Regs and to compel disclosure of evidence to ensure that data submitted is accurate. 

5. Amending legislation relating payment retention clauses in construction contracts, to either prohibit the use of retention clauses entirely or to require the protection of retention sums (e.g. through a separate bank account, insurance or surety bond).  

The proposals send a clear signal from the government that payment practices are a priority matter and prompt payment should become the norm. If introduced, the measures should go some way to try and address the power imbalance in UK supply chains, particularly between SMEs and larger businesses. The government’s hope is that SMEs will benefit from improved cash flow due to prompt payments, freeing up vital resource to focus on innovation and growth. 

While we await the outcome of the consultation, businesses may want to review existing payment practices and processes, negotiating positions and contract terms in anticipation of possible legislative changes in the near future. This includes internal systems which can hamper the supplier’s ability successfully to submit an invoice, such as purchase order requirements, approvals processes or procurement platforms, which may inadvertently fall foul of new regulations.

SMEs may find it useful to have reference to the proposals when negotiating new contracts and contract renewals over the coming months. At the other end of the scale, larger corporates may wish to start reviewing their practices to ensure payment and interest terms comply, or risk facing increased scrutiny at board level and possible reputational risk or financial penalty. 

How we help

If you would like any assistance with reviewing your own payment terms or processes, or support in negotiating payment models with your customers or suppliers, please get in touch with our Commercial and Technology lawyers at [email protected].