Time to Pay Up: The Government Responds to the Late Payments Consultation

In January, we published our lookahead piece on payment practices, summarising recent changes to reporting obligations and flagging the anticipated Government response to its late payments consultation. That response has now arrived. On 24 March 2026, the Department for Business and Trade published "Time to pay up", confirming its intention to legislate as soon as Parliamentary time allows. The Government describes this as the strongest legal framework on late payments in the G7.

The reforms are aimed primarily at protecting SMEs, whose cashflow is disproportionately affected by late payment. The reach of these measures, though, will extend well beyond SMEs, with some applying to all commercial contracts regardless of the size of the parties.

A Hard Cap of 60 Days on Payment Terms

The Government will introduce a 60-day hard cap on payment terms, replacing the current position under which longer terms can be agreed provided they are not "grossly unfair". This forms part of the wider Small Business Plan announced alongside the consultation response.

The cap applies where a larger business is purchasing from a smaller one. It does not apply where both parties are large, where the purchaser is the smaller party, or where goods or services are being imported or exported. The aim of this cap is clear: protect smaller suppliers who lack the bargaining power to resist extended payment terms.

The consultation had initially proposed a further reduction to 45 days after five years. This has been dropped for now but the Government has said they may revisit this option down the line. The 60-day cap is expected to come into effect no earlier than 2027, with a transition period to allow affected businesses to make updates to their payment practices.

Mandatory Interest on Late Payments

Statutory interest at 8% above the Bank of England base rate will become mandatory across all commercial contracts. Unlike the 60-day cap, no exemptions have been stated. The ability for parties to agree an alternative remedy or a lower rate will be removed.

This is a meaningful shift. Under the Late Payment of Commercial Debts (Interest) Act 1998, parties can currently contract out of the statutory interest provisions, and many do. This option will no longer be available.

Large companies will also be required to report on the total value of statutory interest they owe and the amount actually paid. A gap between the two could trigger an investigation by the Small Business Commissioner.

A Statutory Deadline for Disputing Invoices

The Government will introduce a time limit for raising disputes over invoices, applicable to all commercial contracts. Businesses that fail to raise a dispute within the window will be required to pay compensation to their supplier. The consultation proposed a 30-day window, though government has not set a specific timeframe in its response.

For construction contracts, a separate mechanism will be developed to align with the existing payment notice framework under the Housing Grants, Construction and Regeneration Act 1996.

A More Powerful Small Business Commissioner

The Small Business Commissioner ("SBC") will receive three new powers: the power to investigate businesses suspected of poor payment practices (including through anonymous sources); the power to adjudicate payment disputes between small and larger businesses outside the courts; and the power to fine persistent late payers. Fines will be linked to unpaid statutory interest liabilities and could reach "tens of millions" for the worst offenders.

Boards or audit committees of large companies with poor payment records will also be required to publish commentary on GOV.UK explaining their performance and setting out the steps being taken to improve it.

Construction: A Proposed Ban on Retentions

The Government intends to ban retention payments under construction contracts, though further consultation on implementation is expected before a final decision is taken. If enacted, this would be a significant change for the sector.

What Businesses Should Be Doing Now

The legislative timetable remains uncertain. The measures will require a combination of primary and secondary legislation, and are unlikely to take effect before 2027. That said, the direction of travel is clear. Businesses and their advisers should be considering the following:

1. Reviewing standard form contracts and supplier or customer terms for payment periods exceeding 60 days, particularly where the supplier is a smaller business.
2. Reviewing interest clauses. Any terms that disapply or reduce the statutory interest rate are likely to become unenforceable.
3. Assessing internal invoice handling processes. The statutory dispute deadline means accounts payable teams will need to identify and raise genuine issues promptly.
4. For larger companies, preparing for enhanced reporting obligations by ensuring systems are in place to track statutory interest liabilities and actual payments.

We will continue to monitor developments as the legislation progresses. If you have any questions about how these measures may affect your business, please do get in touch.