A guide to the Commercial Payments Bill and how it aims to tackle late payments

What SME leaders need to know about new rules designed to tackle late payments and protect cash flow

Strong cash flow is critical to the growth and survival of small businesses. If invoices are paid late or payment terms from customers are too long, cash flow can be disrupted. This can lead to the business struggling to pay its bills and, in the worst cases, collapsing. 

Late payments, particularly small businesses being paid late by their larger clients, have been a persistent issue in the UK for many years. Government commissioned research shows late payments cost the economy an estimated £11 billion per year, with over 1.5 million businesses affected annually. 

Businesses are owed an estimated £26 billion in overdue invoices at any given time, and 14,000 businesses close each year as a result of late payments. This is the equivalent to 38 every day. 

How the Commercial Payments Bill aims to tackle late payments 

Describing it as the ‘largest crackdown on late payments in over 25 years’, the government has introduced the Commercial Payments Bill to ‘tackle late payments between businesses and improve the flow of cash through supply chains, facilitating a more productive economy’. 

Subject to debates as the Bill makes its progress through Parliament, the measures include: 

60-day payment terms 

There will be a new 60-day cap on payment terms. The exemptions to this are where: 

• both parties are large companies. 
• the purchaser is the smaller party. 
• the goods or services are either imported or exported. 

A consultation ahead of the Bill being introduced proposed that the maximum payment terms may be reduced to 45 days over time. However, the government said it does ‘not intend to take this forward now but may revisit it in the future’.  

Mandatory interest 

All commercial contracts will contain a mandatory right to interest on late payments at 8% above the Bank of England base rate. Parties will no longer be able to agree an alternative remedy to statutory interest.   

Businesses can currently impose interest, but speaking in the House of Lords as the Commercial Payments Bill received its second reading, Lord Leong said: ‘At present, many suppliers are reluctant to enforce those rights because they fear damaging valuable commercial relationships. Consequently, the law often exists only on paper.  

‘The Bill will remove the ability for contracts to substitute weaker remedies in place of a statutory interest at 8% above the Bank of England base rate. That will create a stronger deterrent against late payments and reinforce the principle that delaying payments should carry consequences.’  

Additional powers for the Small Business Commissioner 

The role of the Small Business Commissioner will be strengthened with new powers to:  

• investigate larger businesses engaging in poor payment practices based on a wider range of evidence, including from anonymous sources. 
• compel companies to provide information to support investigations. 
• undertake compliance checks on the requirement for large businesses to report on their payment performance.  
• adjudicate payment disputes between small and larger businesses, with small businesses able to refer a payment dispute with a larger business to the Small Business Commissioner for adjudication, and the Small Business Commissioner having the power to make adjudication awards. 
• take enforcement action against large businesses for breaches of payment legislation. 
• impose ‘significant’ financial penalties on persistently late paying large businesses. 

Deadline for disputing invoices

The Bill will introduce a deadline for disputing invoices: at least eight days before payment falls due or by the day the payment is due when the payment terms are 14 days or less. 

If a dispute is raised after the deadline or the information provided is insufficient for the supplier to understand what the dispute is about, automatic compensation will be owed to the supplier. That sum will be the higher of £40 or 1% of the contract price. Where only part of the contract price is disputed, it will be 1% of the disputed amount. 

Lord Leong said, ‘Too many businesses have encountered situations where objections are raised at the eleventh hour, not because there is a genuine dispute but because delaying payment benefits the purchaser’s cash flow. That practice is unfair, damaging and totally unacceptable.’ 

Board-level scrutiny of payment practices 

Boards or audit committees of a persistently late-paying large company will be required to publish commentary on why payment performance is poor and what actions they are taking to fix it. 

Additional reporting on mandatory interest 

Large companies will be required to report on interest payments, including the value of interest it is liable to pay and the value of interest that has actually been paid. 

Lord Leong commented, ‘This can be used to identify persistent poor behaviour from a large company and trigger a Small Business Commissioner investigation into their practices, with potential fines linked to the scale of unpaid interest.’ 

Prohibition of retention payments 

The practice of deducting and withholding retention payments under the terms of a construction contract will be banned. A two-year transition period will apply before the ban is fully enforced.  

Lord Leong said, ‘The Construction Leadership Council estimates that approximately £223 million in retention payments is lost annually due to insolvency, while around £4 billion to £6 billion in retentions is held across the industry at any given time. That is an extraordinary amount of capital being withheld from productive businesses. Therefore, the Bill bans retention clauses in construction contracts and introduces a fixed sum payable for any unauthorised deduction from a retention payment.’  

When will the Commercial Payment Bill be law?

The Commercial Payment Bill is expected to receive Royal Assent in 2027. The government has said there will be a transition period to allow businesses to prepare for the new rules.  

You can follow the progress of the Bill here. 

Advice on tackling late payment 

• Webinar: Strategies to combat late payments 
• How to deal with late business payments 
• Getting business leaders thinking about late payments 

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