Late payments: What the Government’s ‘Tackling Poor Payment Practices’ consultation means for UK businesses

By Michael Richards – Associate

Are you one of over 1.5 million businesses still affected by late payments? The practice is costing the UK economy nearly £11 billion per year and forcing 38 businesses to close every day. Our commercial debt recovery team is very aware of the obvious financial and hidden emotional toll poor payment practices can have on the day-to-day running of a business.

The effects of commercial debt on cash flow

Late payments continue to be one of the most damaging pressures on UK businesses, especially SMEs who rely on predictable cash flow to operate, invest, and grow. Despite years of voluntary codes, statutory interventions, and sector‑specific reforms the devastating impact continues to have a knock-on effect on supply chains.

So, what is the UK Government doing to address the growing problem of late payments?

With this longstanding issue showing no signs of naturally improving, the UK Government has launched its most ambitious and far‑reaching attempt in more than 25 years to overhaul business‑to‑business (B2B) payment practices. The Late Payments: Tackling Poor Payment Practices consultation, updated in January 2026, sets out an extensive package of legislative reforms designed to improve transparency, strengthen accountability, and accelerate timely payment behaviour across supply chains.

Why tackling late payments matters more than ever

Below we explain key points in the late payment consultation, why payment reform matters, and what businesses should prepare for.

The scale of paying invoices late is well documented and resulting problems:

Impact 1.5 million UK businesses and cost the economy almost £11 billion annually.
Cause 38 businesses per day to close, a stark indicator of how the ongoing poor payment culture is leaving businesses fragile.
Create cash‑flow blockages that undermine SME resilience, prevent timely payment of staff and suppliers, and stifle investment in skills, innovation, and growth.

These issues particularly affect smaller businesses, which often lack the financial buffer to absorb delayed payments. Government analysis also shows that the UK’s poor payment behaviour has broader economic consequences, slowing supply chain liquidity, progress and national productivity.

What has already changed regarding late payments?

Before this consultation, the Government had already introduced several reforms, including:

Mandatory payment practice reporting by large companies, expanded in scope over the past 18 months.
From January 2025, qualifying businesses must report both the monetary value of late payments and invoice disputes separately, addressing concerns about tactical disputes being used to delay payments.
Launching a new Fair Payment Code, led by the Small Business Commissioner, highlighting businesses that demonstrate positive payment behaviour.
Appointing Emma Jones CBE as Small Business Commissioner, bringing entrepreneurial experience to enforcement and awareness-raising.
New reporting obligations for construction contracts, including transparency on retention clauses from April 2025.

These steps prepared the ground for the broader legislative late payment reform we are seeing today. So, what are the key proposals and how can companies mitigate their risk?

8 key proposals in the late payment consultation

The consultation, first opened in July 2025 and updated in January 2026, proposes eight major legislative measures that together would create the strongest legal framework for addressing late payments in the G7.

1. Greater board‑level scrutiny of payment practices

Payment performance reporting. Large companies would be required to include their payment performance within annual Directors’ Reports, bringing this data into audited financial statements and increasing senior accountability.

2. Maximum payment terms

Enforcing strict maximum payment terms. The UK Government is considering this for B2B contracts, limiting how long large companies can take to pay SMEs and reducing the ability to impose unfair or excessively long payment terms in contracts.

3. Deadline for disputing invoices

Introducing a legally defined time window for raising invoice disputes. This would prevent companies from using ‘dispute tactics’ to stall payment indefinitely. As noted earlier, such tactics have been a recurring issue creating artificial delays in payment cycles.

4. Mandatory statutory interest

Paying statutory interest on late invoices. This could become mandatory rather than optional to deter businesses from treating late payment as a cost‑free cash‑flow tool.

5. Better reporting on statutory interest

Reporting interest. Businesses may be required to report how much statutory interest they owe or pay, creating further transparency and industry pressure to reduce late payments.

6. Financial penalties for persistent late payers

Exploring empowering regulators. With this change regulators could impose financial penalties on large businesses that routinely fail to pay on time, moving towards active enforcement for serial non-payers rather than passive reporting.

7. Strengthening powers for the Small Business Commissioner

Introducing enhanced authority. This inclusion would assure payment reporting data and increase intervention in payment disputes, enabling more effective oversight and enforcement.

8. Reforming retention clauses in construction

Two potential approaches are outlined:

A complete ban on cash retentions in construction contracts, or
Mandatory protection of retention sums, such as holding them in separate accounts or securing them with insurance or surety bonds.

Retention reform is particularly significant within the construction industry where this practice has long been criticised. Retaining sums often creates an unfair situation putting immense working capital strain on subcontractors and SMEs.

How late payment reform fits into the bigger picture

The consultation’s proposals are part of a continuing nationwide push to support the financial health of SMEs and increase supply‑chain liquidity. The UK Government has framed this reform package as essential to making the UK “the best place in the world to start, run and grow a business”. Reforms aim to ensure that companies spend less time chasing unpaid invoices and more time delivering goods and services.

The consultation ran until 23rd October 2025 and industry engagement – from SMEs to large corporates and trade organisations – will help shape the final legislation now moving through Parliament.

What should your business do now to prepare for late payment changes?

While legislation is being finalised, businesses should use this transitional period to:

Review current payment terms and practices for compliance.
Strengthen internal processes for invoice approval, dispute handling, and supplier communication.
Prepare for more stringent reporting requirements and board‑level scrutiny.
For construction firms, evaluate retention practices and consider alternative protection mechanisms ahead of potential mandatory changes.

With reforms already removing many loopholes and increasing public accountability, late payment changes are rapidly becoming a compliance risk no business can ignore. Until then, we advise seeking legal support to make sure you are getting paid on time.

Final thoughts on tackling poor payment practices

The late payments consultation signals a decisive shift towards enforcement, transparency, and fairness in UK commercial payment practices. Whether you are a small business seeking relief from persistent delayed payments or a large company preparing for new compliance burdens, the changing landscape will affect how every organisation manages its finances and supplier relationships.

Follow us as we keep you updated on late payment changes or if you have a specific question, please contact us: Hello@HM3Legal.co.uk

Some of our legal services

Corporate & Commercial

Buying and selling businesses, protecting assets and investments.

Employment Law

Settlement agreements, contracts, Employment Tribunal support, disciplinary and discrimination.

Commercial Property

Buying and selling property and land, lease negotiations and investments.

Disputes & Debt Recovery

For businesses including shareholder disputes, and for individuals such as probate.

GET IN TOUCH…

If you’ve got a legal enquiry, call us on 01244 318 131 or click here to complete a short form, and a bl**dy brilliant lawyer will be in touch.

JOIN US

RECRUITMENT

After a refreshingly different new role? Check out our current vacancies or contact us in complete confidence to explore possible opportunities at recruitment@law.uk.com

RECRUITMENT AGENCIES/PSL

Recruitment agencies – heads up, we do not accept speculative CVs including those responding to roles on our website. We work directly with a PSL and will not accept liability for fees or commission if we employ a candidate who applied directly to us, or who was put forward by an uninstructed agency.