Ben Zielinski

Late payments have long undermined small businesses. According to the government, they cost the UK economy an estimated £11 billion annually and contribute to the closure of 38 businesses every day. Despite previous initiatives like the voluntary Fair Payment Code and mandatory reporting under the Reporting on Payment Practices and Performance Regulations 2017, smaller businesses are often hesitant to challenge delays for fear of damaging key commercial relationships.

In response, the UK government has launched a consultation, open until 23 October. It proposes the most significant overhaul of payment practices in over two decades. Notably, these reforms, to apply throughout the UK, aim to shift enforcement responsibility from small businesses to regulators and large organisations.

Proposed key measures outlined in the consultation include:

• Maximum payment terms: Firms would be prohibited from agreeing to payment terms exceeding 60 days, which could be reduced to 45 days by 2030.
• Invoice dispute deadline: A 30-day deadline for disputing invoices would be introduced to prevent delaying tactics by firms and to ensure prompt resolution.
• Mandatory statutory interest: The statutory interest rate under the Late Payment of Commercial Debts (Interest) Act 1998 (currently 8 per cent above the Bank of England base rate) would become mandatory, removing the option to agree lower compensation rates for late payment.
• Public reporting: Interestingly, the consultation proposes public reporting of statutory interest liabilities. This would see the UK’s largest businesses required to disclose the amount of late payment interest owed. This increases reputational accountability.
• Expanded powers for the Small Business Commissioner (SBC), including authority to conduct spot checks, enforce a 30-day invoice verification period, investigate poor payment behaviour, and issue financial penalties to repeat offenders.

These proposed reforms mark a shift from voluntary compliance to formal regulatory oversight and see the SBC evolve from advisor into a regulator with teeth. Substantial fines would add real enforcement power to the reforms and lift the burden from small businesses to initiate complaints.

Unlike previous frameworks, the proposed approach would no longer rely on creditors taking action, which has hindered enforcement historically. If implemented effectively, these penalties could be a strong deterrent, compelling larger firms to prioritise timely payments and adopt more responsible practices.

Undoubtedly, the proposed changes present large firms with both legal and governance issues. For example, late payment would be elevated from a contractual issue to a compliance risk. Businesses that fail to update internal procedures or contract terms, may face regulatory action and liability for statutory interest and fines. They would also have to consider reputational damage that could arise from public reporting of late payment interest liabilities. Company boards and audit committees would be expected to oversee payment practices, elevating the issue to a governance priority.

These reforms represent a cultural shift in commercial behaviour. Transparency, fairness, and accountability would be a requirement of conducting business, not optional. By empowering regulators and introducing serious financial consequences, the government clearly aims to drive meaningful change and to rebalance the payment landscape in favour of small businesses.

In summary, the government’s proposal represents a promising attempt to combat the long-standing issue of late payment. However, its success will depend on the details, including enforcement thresholds, penalty scales and resources allocated to the SBC. Without robust mechanisms and adequate funding, there’s a risk these well intentioned changes could fail to effectively tackle the problem and continue to leave many small firms feeling financially exposed.

Ben Zielinski is a legal director at Shoosmiths. This article was co-written by Sophie McNally, an associate with Shoosmiths. Both are based in the law firm’s Glasgow office. This article first appeared in The Scotsman.