Summary
- The government’s Small Business Plan proposes the most significant late payment legislation in 25 years, aiming for the toughest laws in the G7.
- Maximum payment terms will cap at 60 days initially, reducing to 45 days, with a mandatory 30-day invoice verification period.
- The Small Business Commissioner gains enforcement powers to levy multi-million pound fines against persistent late payers.
- Audit committees must legally scrutinise payment practices at board level, with mandatory interest charges for late payment.
- A public consultation runs until 23 October 2025, with implementation expected across 2025-2026.
Every morning, 38 small businesses in England and Wales close forever. Not because their products failed, their services disappointed, or their markets collapsed. They close because someone who owes them money hasn’t paid.
The government announced on 30 July 2025 that late payments cost the UK economy £11 billion annually. After a generation of ineffective measures, the new Small Business Plan promises the toughest crackdown on late payment in the G7. For SMEs drowning in unpaid invoices, the question isn’t whether these reforms matter; it’s how quickly they can leverage them.
What are the proposed late payment reforms?
The Small Business Plan attacks late payment from multiple angles simultaneously. Previous reforms relied on voluntary codes and moral pressure; this package deploys legal force and financial penalties.
Maximum Payment Terms
The reforms propose maximum payment terms of 60 days, reducing to 45 days after a transition period (likely to be five years). Large corporations will not be able to insert 90 or 120-day payment terms into supplier contracts.
The reduction to 45 days matters enormously. Many SMEs operate on thin margins with limited reserves. The difference between 90-day and 45-day payment cycles can determine whether a business survives or collapses. Halving payment periods doubles working capital availability.
30-Day Invoice Verification
The Small Business Commissioner will enforce a 30-day invoice verification period to speed up dispute resolutions. Customers must confirm or dispute invoices within 30 days. After that window closes, they cannot raise spurious queries to delay payment indefinitely.
This provision eliminates a common stalling tactic. SMEs report that large customers often respond to invoices with vague queries about scope, quality, or documentation. These queries trigger internal review processes that stretch for months whilst the supplier waits unpaid. The 30-day rule forces customers to raise legitimate disputes quickly or accept the invoice as valid.
Small Business Commissioner Enforcement Powers
The Small Business Commissioner will gain the power to impose financial penalties on large companies that persistently pay suppliers late, potentially worth millions of pounds. Previous iterations of the Commissioner’s role focused on mediation and naming-and-shaming; this reform provides genuine enforcement teeth.
The Commissioner will also be able to conduct spot checks, investigate unfair payment practices, verify the accuracy of payment data submitted by large companies, and compel disclosure of information. Companies reporting high percentages of late payments, for example 25% or more, could trigger investigations. Persistent offenders face substantial fines that hit profit and loss statements hard enough to change behaviour.
Board-Level Accountability
Audit committees will be legally required to scrutinise payment practices at board level. Directors must review supplier payment performance, understand why delays occur, and take responsibility for improving practices. This shifts payment culture from a procurement department problem to a boardroom priority.
Mandatory Interest Charges
Mandatory interest charges for late payment will become standard. The Late Payment of Commercial Debts (Interest) Act 1998 already allows 8% above base rate, but few SMEs claim it. Making interest automatic removes the negotiation burden and ensures late payers face genuine costs.
Why is the Government cracking down on late payments?
Late payment has plagued UK businesses for decades. Why does this government believe it can succeed where others failed?
- First, political consensus exists across parties that the current arrangements don’t work. The Federation of Small Businesses and other trade bodies have campaigned relentlessly for stronger measures. Public consultation revealed overwhelming support for tougher enforcement.
- Second, SMEs employ 60% of the UK workforce and generate £2.8 trillion in turnover. Supporting SMEs supports growth, employment, and productivity.
- Third, enforcement mechanisms finally match the problem’s scale. Previous reforms lacked teeth; companies could ignore voluntary codes without consequence. Significant fines and board-level accountability create genuine deterrents.
- Fourth, technology enables better monitoring. Payment reporting systems track performance in real-time. The Commissioner can identify persistent offenders through data analysis rather than relying on individual complaints. Spot checks verify that reported data matches reality.
Small Business Plan Debt Recovery: Practical Implications
Understanding what the reforms mean in theory matters less than knowing how to use them in practice. SMEs need actionable strategies, not policy analysis.
Review Your Contracts
Examine existing supplier agreements, particularly with large corporate customers. Identify payment terms exceeding 60 days. If the proposed reforms become law, those terms become unenforceable for the excess period.
Template contracts will need updating. Once the law changes, payment clauses should reference the new maximum terms, specify the 30-day verification period, and include automatic interest charges.
Document Everything Meticulously
The 30-day verification rule works only if your invoices withstand scrutiny. Ensure invoices contain precise descriptions, reference numbers, agreed rates, and delivery confirmations. Ambiguity gives customers grounds to dispute; clarity removes excuses.
Maintain correspondence files showing when invoices were sent, received, and acknowledged. If customers claim they never received invoices or weren’t given the opportunity to query them, concurrent records prove otherwise.
Understand Your Statutory Rights
The Late Payment of Commercial Debts (Interest) Act 1998 entitles you to interest at 8% above the Bank of England base rate, plus compensation, plus reasonable costs (which are not covered by the compensation). With the base rate currently at 4.0% (as of October 16th, 2025) statutory interest runs at 12.0% annually.
You should include these figures in demand letters. Customers who ignore polite reminders often respond when shown accumulating charges with daily interest calculations. Make late payment expensive and visible.
Use the Small Business Commissioner
When the new powers take effect, report persistent late payers to the Commissioner. Your individual complaint contributes to building cases against serial offenders. The Commissioner’s investigation powers mean your report might trigger spot checks that uncover systematic problems.
Don’t view the Commissioner as a last resort after exhausting other options. Report problems early; patterns matter more than individual incidents. Companies that pay you late probably pay others late, too. Your report helps build the evidence base for enforcement action.
The Consultation Process and Timeline
The public consultation closes on 23 October 2025, with the government expected to publish findings within 12 weeks. Implementation will occur across 2025 and 2026, though specific dates remain unclear.
The consultation covers eight proposed legislative measures aimed at improving cash flow through supply chains and supporting SMEs with payment disputes. Interested parties can submit views on the proposals, including practical concerns about implementation, unintended consequences, and suggested improvements.
Broad political and industry consensus suggests the proposals will become law, though details may change following consultation feedback. The consultation isn’t questioning whether to act, but how to implement reforms most effectively.
Concluding comments
The Small Business Plan represents a genuine attempt to fix a generation-old problem. Whether it succeeds depends on enforcement commitment and SME willingness to use new tools.
Your invoices shouldn’t require chasing. Work completed deserves payment on agreed terms. The new legislation makes late payment expensive, visible, and unacceptable.
FAQs
When will the new late payment reforms come into force?
The public consultation closes on 23 October 2025, with findings expected within 12 weeks. Implementation will occur across 2025-2026, though specific dates remain unconfirmed. The government refers to working with SMEs during 2025, 2026 and beyond, suggesting phased introduction. Key provisions like maximum payment terms and Commissioner enforcement powers will likely take effect in late 2026, though the consultation may influence timing.
Will these reforms apply to existing contracts or only to new ones?
Once maximum payment terms become law, existing contracts exceeding those limits become unenforceable for the excess period. You cannot contract out of statutory maximum payment periods. However, proactive renegotiation before implementation makes more commercial sense than waiting for automatic changes that may damage customer relationships. Review and update contracts now to avoid disputes when legislation takes effect.
How do I report a persistent late payer to the Small Business Commissioner?
Once the new powers take effect, visit the Small Business Commissioner’s website to file complaints. You’ll need documentation of payment terms, invoices, payment history, and evidence of late payment patterns. The Commissioner uses reports to identify persistent offenders for investigation, spot checks, and potential fines. Your individual complaint contributes to building cases against serial late payers, even if your specific situation doesn’t trigger immediate investigation.
Can large customers avoid these rules by challenging invoice validity more aggressively?
The 30-day invoice verification period prevents indefinite disputes. Customers must confirm or challenge invoices within 30 days; after that, they cannot raise queries to delay payment. Ensure invoices contain clear descriptions, reference numbers, delivery confirmations, and agreed rates to withstand scrutiny. Document everything and maintain correspondence files proving when invoices were sent and received. Clear invoicing plus the 30-day rule prevents spurious challenges.
What happens if my customer is overseas and not subject to UK law?
UK late payment legislation applies to UK-registered companies and transactions governed by English law. Overseas customers operating outside the UK jurisdiction may not be bound by maximum payment terms or Commissioner enforcement. However, if contracts specify English law as governing law, the reforms may apply even to overseas parties.
