Government unveils new late payments legislation

The Government has announced new legislation which is designed to protect small businesses and aims to ensure that companies pay suppliers within 60 days, with late payments potentially triggering fines. Boards must also detail payment terms in their audit reports.

Under the new plans, the Small Business Commissioner will be given sweeping new powers to investigate poor payment practices, adjudicate payment disputes, and fine the worst offenders, with fines worth tens of millions for firms that persistently pay late or fail to comply with the new laws.

The measures will tackle a problem costing the UK economy £11 billion every year and ease the cost of living for entrepreneurs and SME owners who are often forced to wait months – or even years – to receive money they have already earned and having to chase endlessly to receive it. Some 38 businesses shut their doors every single day because they are not paid on time – the equivalent of 266 a week, and well over a thousand in any given month.

Every small business owner, including tradespeople, freelancers, family firms and the self-employed, has to waste time and money chasing unpaid invoices when they could be growing their business.

The Government says that these measures, which will be the toughest in the G7, build upon and strengthen legislation on late payments, first laid out in the 1998 Late Payment of Commercial Debt Act, over 25 years ago. They go further than any previous government and will boost the economy and give small businesses better cash flow.

The changes will include a new 60-day cap on payment terms for all large firms when paying smaller suppliers. New mandatory interest on late payments will also be introduced, with a requirement for all commercial contracts to include statutory interest set at 8% above the Bank of England base rate.

For example, if a small business is owed £10,000 by one of its customers and is paid 60 days later than the agreed payment date, it will be owed £10,293.15, including mandatory interest (£10,000 plus £193.15 interest plus £100 compensation).

The measures also propose to ban the withholding of retention payments under the terms of construction contracts, consulting on its implementation. This will prevent small firms from losing retentions to insolvency or non-payment.

Business Secretary Peter Kyle said “Far too many businesses are forced to shut down because they have not been paid – that is simply unacceptable. We are unveiling the strongest, most robust changes to payment laws in over a generation – laws that will transform the fortunes of small businesses for years to come and make their day-to-day lives much easier.

“After working closely with the Federation of Small Businesses, boards or audit committees of persistently late-paying large companies will be required to publish explanations for poor payment performance and the actions they are taking to address it.”

FSB Policy Chair Tina McKenzie said “Late payments are a blight on our economy, so FSB is pleased to have worked in partnership with the Government to deliver the toughest legislation in the G7.  The new laws will finally bring a stop to big businesses using their small suppliers as sources of free credit.

“For the first time, audit committees and boards will question and challenge poor payment performance, publish it in annual reports for all to see, and put it right.  Paying in 60 days is not prompt – but strengthening that as the absolute maximum cap after years of dithering is a good step towards encouraging payments in 30 days across all supply chains.  Improving the Small Business Commissioner’s powers will also help, mandating CEO’s of Britain’s poor payers to take the phone call. This is real progress, and we’ll keep working with the Government to make sure new laws are brought in as soon as possible.”

Minister for Small Business and Economic Transformation, Blair McDougall said “I know first-hand how difficult late payments can be, forcing you to decide if you can afford to keep a business running, pay employees or even buy Christmas presents for your children. That is why I’m proud to be leading the charge on tackling a problem that has been left untouched for far too long.

“These are genuinely game-changing measures that will ensure no business, no employer, no family has to endure the immense strain of being left strapped for cash they have already earnt.”

Emma Jones CBE, Small Business Commissioner, said “We are on a mission to make life easier for small firms by getting money moving faster through the economy by tackling late payments. The measures the Government has announced today will strengthen the role of my office in taking on the worst payers, alongside ensuring small businesses have a stronger voice on payment terms and late payment interest.

“These reforms will reduce the hours spent chasing debt, allowing small businesses to focus on more productive and enjoyable growth.”

Liz Barclay, IoD Special Advisor for Small Business and Entrepreneurship and former Small Business Commissioner, said “We welcome today’s announcements. New measures to crack down on late payments are a positive and important step in tackling this long-standing issue, which continues to place a significant burden on small suppliers across the UK.

“Too many small firms face delayed payments, either because payments are overdue or because long payment terms have been imposed in contracts by more powerful customers. Poor payment practices undermine cashflow, limit growth, and in some cases, threaten supplier survival. Stronger action from government, including enhanced powers for the Small Business Commissioner and clearer rules around maximum payment terms and transparency of payment performance, reflects a meaningful shift towards greater accountability and the ending of our poor payment culture

“However, so far, this is an outline. The detail that will sit behind the proposals is crucial and implementation is urgent. Real change will also depend on robust enforcement – ensuring there are no loopholes that allow poor payment behaviour to continue unchecked through exemptions or weak compliance.

“We look forward to continued engagement as these proposals are developed to ensure they deliver lasting and effective change.”