Government Vows Toughest Crackdown On Late Payment Laws

For SMEs, a sizable late payment can be so damaging as to risk the venture’s future.

According to Government statistics, around 38 businesses shut their doors every single day –  the equivalent of 266 a week – because they are not paid on time. In total, it costs the UK economy around £11 billion a year.

As Small Business Commissioner Emma Jones CBE has detailed previously in her weekly column for Startups.co.uk, the reasons for late payments are numerous, ranging from technical glitches and outdated tool usage to simply poor organisation. Paying fairly, she argues, should be part of every business’s culture.

The figures, though, show that it isn’t, which is why Jones’ Office, the Small Business Commissioner, will receive “sweeping new powers” to enforce multi-million-pound fines as part of a wider initiative to crackdown late payments.

What are the reforms?

The Department for Business and Trade has announced its plans to “build upon and strengthen legislation on late payments”, which were laid out in the 1998 Late Payment of Commercial Debt Act and were published more than 25 years ago. The new measures, it says, will be the toughest in the G7.

For SMEs, the key change is a new 60-day cap on the payment terms that all large firms can use when paying smaller suppliers. This could be the most powerful tool for SMEs, as it reduces the risk of falling into debt while waiting to be paid.

As we reported in July, 32% of founders say they have considered taking out a business loan to make up costs when waiting for a late payment, while others have considered alternative finance products.

The reforms also include a new mandatory interest scale on late payments. This will be set at 8% above the Bank of England base rate.

“If a small business is owed £10,000 by one of its customers and is paid 60 days later than the agreed payment date, they will be owed £10,293.15 including mandatory interest (£10,000 plus £193.15 interest plus £100 compensation)”, the government says.

Alongside these wider late payment measures, greater powers have also been granted to the Small Business Commissioner to investigate, adjudicate and levy fines in disputes.

The final major change is the proposed banning of retention payments, which are often included in construction contracts, to “prevent small firms losing retentions to insolvency or non-payment”. At present, however, this is subject to consultation.

When will they come into effect?

The reforms are a result of a late payments consultation, which ran from 31st July 2025 to 23rd October 2025. From this, a list of measures to be taken forward was compiled.

The Government will now push for an Act of Parliament on this primary legislation, and then a secondary legislation will be required to enact the reforms into law. There is no time frame mentioned; however, with just the statement published that “We will legislate as soon as Parliamentary time allows.”

“Real progress”

Business organisations are largely positive about the reforms. Tina McKenzie, Policy Chair at The Federation of Small Businesses, said that the organisation has worked in partnership on the reforms and is confident of their impact.

“The new laws will finally bring a stop to big businesses using their small suppliers as sources of free credit”, McKenzie states, adding: “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.”

She termed the reforms “real progress” and said that the FSB will “…keep working with the Government to make sure new laws are brought in as soon as possible”.

Jones added that the reforms will empower both the Government and businesses to tackle late payments. She explains: “The measures the Government has announced 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.”

This will translate into time savings for businesses but also means that they will be more resilient. This, she claims, will help the whole economy.

For business owners, any help with late payments will no doubt be welcomed. They now just need the hows and whens from the Government.