Government Unveils Small Business Plan to Support SMEs by Tackling Late Payments

On 30 July 2025, the UK government announced a package of legislative proposals to tackle late payments and ensure businesses, particularly SMEs (Small and Medium-sized Enterprises), are paid on time. 

The government has also launched a public consultation to gather feedback on the proposed measures – this closes on 23 October 2025. 

Background

The Late Payment of Commercial Debts (Interest) Act 1998 (Late Payment Act) is the main legislative provision concerning late payment. The Act provides a statutory right to interest at 8% above the Bank of England Bank Rate, a fixed sum, and reasonable recovery costs for late payments. Its scope is limited to business-to-business contracts for goods or services, and there are frequently questions about whether specific contracts or payments fall within its remit. Contracting out of the Late Payment Act is permitted but only if the contract offers an alternative substantial contractual remedy for late payments.  

There is cross-party political consensus that the current protections for SMEs against late payments are inadequate and pose a barrier to the growth of SMEs. 

• The Starmer Government seeks to strengthen the protections against late payments by taking eight key legislative steps to introduce “the toughest laws on late payments in the G7”.
• The Department of Business and Trade (DBT) state that “Small and medium sized firms employ 60% of the country’s workforce and generate £2.8 trillion in turnover. However, for too long, the odds have been stacked against small businesses”. 
• Leader of the Opposition, Kemi Badenoch, while in Rishi Sunak’s Government as Secretary of State for Business and Trade, also held the position that there was a need to strengthen these protections – stating that: “SMEs make up 99% of the firms in the UK and are the lifeblood of our economy. I know that late payments are a massive barrier to growth, and I am determined to fix that”. The DBT at the time also introduced measures to protect SMEs. A link to our previous article on this topic can be found at the end of this article. 

In addition to political consensus, there is also an industry consensus that SMEs need additional protection against late payments. 

• Tina McKenzie, Policy Chair of the Federation of Small Businesses, argues that: “Making sure businesses are paid on time, that our high streets thrive, and creating conditions in which everyone can start and succeed in business are crucial priorities for small businesses, communities and the economy”. 
• In particular, the construction sector will benefit from this protection. According to Tim Barrett, Chair of the Construction Alliance North East: late payments worsen the financial position of SMEs in construction – a sector where small businesses are already prone to insolvency. 

Measures of the DBT 

The Government have outlined eight legislative steps aimed to strengthen the cash flow protections for SMEs – specifically relating to the issues caused by late payments. These comprise a mixture of requirements for large businesses, legal reform around payment terms, penalties, and powers for authorities and investigations. 

The Government’s proposals:

1. Audit and board requirements for large companies: 
   • Requiring boards or audit committees for large companies (not just SMEs) to review and comment on payment data before it is submitted to government and disclosed in directors' reports. 
2. Restrictions on payment terms:
   • Removing the option to agree payment terms longer than 60 days, setting a clear limit to protect smaller suppliers. 
   • Additionally, there are plans to reduce this maximum limit to 45 days after five years, subject to further consultation.
3. Introduction of a deadline for disputing invoices:
   • Introducing a 30-day limit for raising invoice disputes. If a business fails to raise a dispute within 30 days of receiving an invoice, it will have to pay the full amount within the agreed terms, and any late payments will incur statutory interest. 
4. Mandatory statutory interest:
   • Making the statutory interest rate payment on qualifying late payments mandatory so that parties will be unable to agree a lower rate.
5. Additional reporting on statutory interest:
   • Requiring qualifying companies to report the total statutory interest owed and paid to suppliers during each reporting period to enhance transparency and accountability in large companies' payment practices.
6. Financial penalties for persistent late payers:
   • Granting the Small Business Commissioner enforcement powers to impose financial penalties on large companies that repeatedly pay suppliers late. Businesses reporting a high percentage of late payments, for example, 25% or more, could trigger an investigation.
7. Additional powers for the Small Business Commissioner:
   • Enable the Commissioner to investigate unfair payment practices by verifying the accuracy of payment data submitted by large companies and conducting spot checks. 
   • Giving the Commissioner the authority to compel the disclosure of information, arbitrate disputes and impose financial penalties for non-compliance or persistent breaches.
   • Enabling the Small Business Commissioner to engage directly with company boards when reviewing payment performance or investigating related issues.
8. Use of retention clauses in construction contracts:
   • Amending the Construction Act 1996 to either prohibit retention clauses or require protection of retained sums, aiming to prevent losses due to insolvency and improve payment reliability for the construction industry. 

The changes will impact all businesses

The public consultation closes on 23 October 2025. As there is broad political and industry consensus that the existing late payment regime is insufficient to protect SMEs and requires strengthening, it follows that the Government’s proposals are likely to become law however this will require legislative change, in particular to the Late Payments Act.  

If these proposals do become law, they will impact businesses of all sizes – not just SMEs. All businesses should therefore be aware of the proposed changes when announced and proactively review and strengthen their internal payment procedures accordingly. The new rules will bring with them the potential for increased scrutiny and will have more stringent compliance requirements. We will continue to monitor developments. 

This update follows our article from November 2023, in which Victoria Hobbs discussed the impact on small businesses of the decision of Rishi Sunak’s Government to follow the European Commission’s announcement to introduce a new Regulation to tackle late payments in commercial transactions.

With thanks to Shiv Gupta for his help in producing this article.