How the UK Government is Cracking Down on Late Payments

The era of large corporations using small suppliers as an informal source of free credit is facing its final curtain. In what is being described as the most significant overhaul of payment legislation in over a generation, the UK government has announced a suite of game-changing measures designed to protect small and medium-sized enterprises (SMEs) from the crippling effects of delayed settlements.

For the UK’s procurement and finance leaders, the message is clear: payment performance is no longer a back-office administrative metric. It is now a matter of board-level accountability, regulatory compliance and significant financial risk.

A multibillion-pound drag on British growth

The scale of the late payment crisis is difficult to overstate. According to government data, late payments cost the UK economy an estimated £11bn (US$14.5bn) every year. The human and commercial cost is equally stark: roughly 38 businesses close their doors every single day because they are not paid on time, amounting to 266 failures a week and well over a thousand in any given month.

Every small business owner, from tradespeople and freelancers to family firms and the self-employed, is currently forced to waste time and capital chasing money they have already earned. 

Business Secretary Peter Kyle explains: "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."

These measures build upon the 1998 Late Payment of Commercial Debt Act, which was laid out over 25 years ago. However, the government argues that previous attempts have dithered, whereas this new interventionist approach aims to boost the economy by ensuring small businesses maintain healthier cashflow and resilience against global shocks.

Sweeping powers: Fines and mandatory interest

At the heart of the reform is a significantly empowered Small Business Commissioner. The office will be granted sweeping new authority to investigate poor payment practices, adjudicate payment disputes and levy fines against the worst offenders. For firms that persistently fail to comply or ignore the new laws, these fines could reach into the tens of millions of pounds.

To illustrate the financial impact of the new interest rules: if a small business is owed £10,000 (US$13,238) and is paid 60 days later than the agreed date, they will now be legally owed £10,293.15 (US$13,630.19). This figure includes the principal sum plus £193.15 (US$255.77) in mandatory interest and £100 (US$132.42) in compensation.

Minister for Small Business and Economic Transformation, Blair McDougall, noted the personal toll of these delays: “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.”

The legislation introduces several "hard" caps and requirements that will fundamentally alter commercial contracting:

• A 60-day maximum payment cap: All large firms will be legally barred from exceeding 60-day terms when paying smaller suppliers.
• Mandatory interest on all contracts: All commercial contracts must include statutory interest, set at 8% above the Bank of England base rate.
• The ban on retentions: In the construction sector, the government is consulting on banning the withholding of retention payments. This is designed to prevent small firms from losing earned income due to upstream insolvency or non-payment.

Moving accountability to the boardroom

Perhaps the most significant cultural shift in the legislation is the requirement for board-level transparency. Working closely with the Federation of Small Businesses (FSB), the government will mandate that boards or audit committees of persistently late-paying large companies publish explanations for poor performance and the specific actions they are taking to address it.

FSB Policy Chair, Tina McKenzie, argues that this will force a fundamental change in corporate behaviour: “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.”

Small Business Commissioner, Emma Jones CBE, whose office recovered three times more overdue invoices in 2025 than in 2024, added that the reforms will "reduce the hours spent chasing debt", allowing firms to focus on more productive growth. 

This focus on stability is echoed by small business owners like Debbie Williams, Co-Founder of John Williams Heating Services: “As a family-run business that has served our community for more than 20 years, we see first-hand the strain that late payments place on small companies. Cashflow pressures don’t just affect the balance sheet, they impact our ability to take on apprentices, invest in training and continue providing reliable service to local families.  

“We welcome the Government’s focus on tackling late payments, as timely and fair payment practices are essential for the stability and growth of businesses like ours.”

Strategic supply chain resilience

From a procurement perspective, the reforms signal a move toward more resilient, less cost-driven networks. Sapna Amlani, Supply Chains Industry Practice Lead at Moody’s Analytics, suggests that enforced limits will prevent viable suppliers from failing due to liquidity strain rather than underlying demand weakness.

“Late payment represents a material financial risk within UK supply chains,” Sapna says.

“When large buyers delay settlement, liquidity pressure is transferred to smaller suppliers that typically have limited cash buffers, allowing stress to accumulate and spread through supplier networks. 

“Enforced payment limits, such as a 60‑day cap, would be expected to reduce short‑term credit stress and lower the risk of otherwise viable suppliers failing due to liquidity strain rather than underlying demand weakness. By easing financial pressure at the SME tier, faster payment practices also reduce the likelihood of supply‑chain disruption driven by supplier distress rather than operational or geopolitical shocks.”

Her colleague, Vitaliano Tobruk, Supply Chains Industry Practice Lead at Moody's Analytics, added that while large firms may experience near-term working-capital adjustments, the long-term benefits outweigh this: “Mandatory payment rules represent a significant shift in how supply chains operate. Faster and more predictable payment practices are expected to ease cash‑flow pressure on smaller suppliers, which typically operate on thin margins and are most exposed to liquidity risk, supporting greater overall resilience. 

“While larger firms may experience some near‑term working‑capital adjustment, the longer‑term benefit is a more stable and sustainable supplier base. Adapting to this environment is likely to require changes in supplier financing and procurement practices, particularly as payment behaviour faces increasing scrutiny from boards and investors. 

“Over time, this points to a move away from purely cost‑driven supply chains toward greater emphasis on reliability, transparency and long‑term supplier health.”

However, regulation is only one side of the coin. Patrick Bermingham, CEO of business payment specialist Adflex, warns that late payments are often infused with how sectors operate.

He says: "Late payments are not just a matter of poor visibility; they are embedded in how sectors - like construction for example - operate. Long, complex supply chains and uneven bargaining power mean that cash flow risk is routinely pushed onto smaller suppliers. When payments are delayed at the top, the impact cascades and in many cases, late payment becomes an informal financing mechanism. 

"Stronger penalties for late payments will help expose these practices, but it won’t fix the structural challenges driving them, from liquidity pressures to contractual complexity. Without broader change, there is a risk that reforms become a compliance exercise rather than a catalyst for real progress. 

"Ultimately, changing the rules is one thing - changing behaviours is another. If the Government is serious about tackling late payments, it needs to go further in supporting businesses to invest in the infrastructure that will drive real change. This means enabling the adoption of technologies that make prompt payment by default, not the exception. Whilst we welcome the regulation, technology would be a more effective lever.”

A macro-level investment in SMEs

These reforms do not exist in a vacuum. They follow the launch of the Prime Minister’s Small Business Plan, which included the Business Growth Service and a massive £4bn (US$5.3bn) finance boost to increase access to capital for SMEs.

By combining legislative sticks, such as the 60-day cap and multi-million-pound fines, with the carrots of better growth support and financing, the government intends to make the UK economy more resilient to global shocks and help control inflation.

For the procurement and finance professional, the era of treating small suppliers as a source of liquidity is over. The focus must now shift toward reliability, transparency and the proactive adoption of payment infrastructure that ensures the survival of the UK’s essential SME tier.