The UK Government has unveiled a major Business Plan, proposing new legislation to support small and medium-sized enterprises (SMEs). One of the proposed changes is to reform the rules around the length of time that invoices raised by SMEs must be paid.
This strategy seeks to tackle chronic late payments to SMEs, which the UK Government says costs the economy approximately £11 billion per year and contributing to the closure of around 38 small UK businesses each day.
As part of this plan, the government has launched a new consultation proposing its most ambitious reforms on late business-to-business payments in over two decades. The proposed measures set out in the consultation aim to reshape payment culture, improve transparency, and ensure that SMEs are paid promptly for the services and products they deliver.
Although these proposals are not yet law, they mark a significant policy direction and could result in major legislative and regulatory changes in the near future.
In this blog, we summarise the consultation’s key proposals, assess their potential impact on UK businesses, and outline what organisations should start considering now.
Key proposals from the Government consultation
1. A statutory maximum payment term
The Government proposes introducing a mandatory 60-day maximum payment term for business-to-business transactions. Currently parties to a contract are free to agree on payment terms beyond 60 days provided such terms are not “grossly unfair”.
This change would remove the ability for parties to agree to contract out of the 60-day limit, addressing the imbalance between small and large businesses where small suppliers often feel pressured into accepting extended terms. The reform aims to provide clarity, improve SME cash flow and reduce incentives for larger firms to delay payment intentionally.
The Government also proposes reducing the maximum term to 45 days within the next 5 years, subject to further consultation.
2. Automatic interest and compensation for late payments
The consultation proposes strengthening the existing statutory regime under the Late Payment of Commercial Debts (Interest) Act 1998. While current law entitles businesses to claim interest on late payments, this is rarely enforced by the businesses themselves.
Moreover, larger businesses sometimes set out standard terms which include payment of interest at a low percentage rate.
To increase the incentive to pay invoices on time, the Government’s proposal requires the payment of interest after the agreed payment term has passed without exception and parties will not be able to offer an alternative remedy.
The proposed reform would make it mandatory for businesses to pay the statutory interest rate set at 8% above the Bank of England base rate on their late payments.
It would not be possible to negotiate a different compensation rate for such late payments.
3. Fixed deadline to raise invoice disputes
Under the proposal, businesses would be required to raise any dispute over an invoice within a fixed period of 30 days of receiving the invoice. After this, the invoice would be deemed accepted and payable.
This measure is designed to prevent “dispute delay tactics” often used to justify payment extensions and increase transparency over payment behaviours.
4. Financial penalties for persistent late payers
There are existing UK laws in place to promote payment practice transparency amongst large companies – such as the Reporting on Payment Practices and Performance Regulations 2017. But the law does not provide for any regulatory penalties for companies that often pay supplier invoices late.
To address this, the Government proposes giving the Small Business Commissioner (an existing public body) new powers to impose financial penalties on large businesses that consistently fall short of prompt payment standards.
Payment data already reported could be used to identify repeat offenders.
A trigger threshold (for example, where more than 25% of invoices are paid late) would allow the Small Business Commissioner to investigate whether enforcement is justified.
Any investigation would take into account mitigating factors, past behaviour, and evidence of improvements. Where penalties are imposed, they would be linked to statutory interest liabilities, for instance, twice the value of unpaid statutory interest during the most recent reporting period.
5. Expanding the role of the Small Business Commissioner
The Small Business Commissioner would be given new statutory powers, including:
- Ability to initiate investigations into unfair payment practices, even when triggered by anonymous tips or public information, where there is evidence of non-compliance with legal payment obligations
- Ability to compel companies to disclose information during investigations and payment-related disputes
- Ability to impose financial penalties on companies that refuse to provide information
- Power to audit and investigate payment data under the Reporting on Payment Practices and Performance Regulations 2017, ensuring accuracy and compliance
6. Board-level accountability for large companies
Large companies (typically those with over 250 employees) would be subject to additional corporate governance requirements, such as:
- Including payment practice information in annual reports
- Assigning board-level oversight of supplier payment policies
- Disclosing performance data, including average time taken to pay SME suppliers
This proposal aims to elevate supplier payment practices to a matter of strategic importance at senior leadership level.
What does this mean for organisations?
For large businesses and buyers
If implemented, the reforms will require many large companies to reassess their payment processes and governance arrangements. Contractual arrangements with longer payment cycles will no longer be viable, and greater transparency and accountability will be expected from boards and audit committees.
Organisations should begin reviewing:
- Standard payment terms across contracts and frameworks
- Invoice dispute mechanisms and documentation
- Governance reporting lines relating to finance, audit and procurement
- Payment performance data readiness for public reporting
For SMEs and suppliers
While the measures are aimed at large payers, SMEs stand to benefit significantly.
Suppliers can prepare by reviewing their customers’ payment practices and commercial contracts to see how the Government’s proposed reforms might benefit them. Increased awareness now will pay off if the measures become law.
Next Steps and timelines
The consultation remains open until 23 October 2025, and all businesses, particularly those involved in supply chains, are encouraged to respond. After this, the Government is expected to publish its analysis and set out a legislative path forward, potentially in 2026.
Conclusion
Although still at consultation stage, the tone and scope of the proposals indicate that legislative change is on the horizon. Given the Government’s emphasis on bringing substantive reform to late payment related laws, we expect that most of the Government’s key proposals will become law.
At EM Law, we help businesses of all sizes understand and comply with legal obligations around contract payment terms, supplier engagement and commercial governance.
If you would like assistance preparing for the late payment reforms, responding to the consultation, or reviewing your commercial contracts, please contact Neil Williamson or Colin Lambertus, or get in touch here to speak with one of our commercial law specialists.
