Potential changes to UK late payment legislation: key points for in-house lawyers

The Government has been consulting on proposed changes to late payment legislation – changes that, if enacted, could represent a major shift in how late payments are managed in the UK. This article outlines the proposals and considers steps in-house lawyers should take now to prepare.

Background

The current government has been vocal in its commitment to tackling late payments, which it estimates costs the UK economy almost £11 billion annually and closes down 38 UK businesses each day, hitting small and medium-sized enterprises (SMEs) hardest.

Some reforms are already in motion, such as requiring large companies to disclose payment performance in their annual reports. However, these are modest compared to the more ambitious proposals set out in the recent consultation.

The policy objectives of the proposals are to improve business-to-business payment behaviour and reduce late payments. The key problems identified are:

• Late payments – invoices not paid on time
• Long payment terms – suppliers pressured into accepting unnecessarily extended payment windows
• Disputed payments – invoicing disagreements causing delays or reductions in payment

The Government sees these issues as interconnected and hopes the proposed reforms will shift business attitudes towards prompt payment. 

Key proposals

• Limiting long payment terms to maximum 60 days. With a possible further reduction to 45 days after 5 years.
• A 30-day deadline for disputing invoices. Failure to dispute an invoice in this window will make the payer liable for the full amount.
• Removal of the ability to opt out of the mandatory interest rate for late payments. The statutory rate of interest (8% above base) will apply to all late payments.
• Financial penalties for persistent late payers.
• Increased scrutiny of large company payment practices.

Possible impact

If implemented, this could have a significant impact on payment practices in the UK. Cash flow problems upstream are often a key reason why organisations seek to delay payments downstream – either through express contract terms enabling a slower payment window or by 'off-contract' delays of payment. 

There is a clear logic to the reforms: if every party in a supply chain pays more promptly the collective benefit to businesses and the wider economy could be substantial. However, the reality may be more complex. Organisations that comply may face financial strain if their own customers do not follow suit.

It is also worth questioning whether the reforms will have the intended real-world impact. For example, the inability to opt out of the statutory interest rate for late payments may not lead to widespread enforcement. Many suppliers, even when contractually entitled, do not routinely charge interest on overdue invoices. Will new legislation change this behaviour?

Time will tell. But if these changes are enacted, organisations will need to carefully assess the impact on cash flow — particularly during the transition period.

Next steps

The Government is due to report on this consultation in January 2026, at which point we will have a better idea of whether any of these proposals will make it into law. At this stage industry insiders anticipate that at least some of the reforms will be adopted.

The consultation is currently silent on implementation but, if it is anything like the Late Payment of Commercial Debts (Interest) Act 1998 – the legislation that will be heavily amended by the reforms – it is likely that it will only apply to contracts entered into after the legislation comes into force. 

If that's the case, then there will be a considerable period of time in which businesses will be operating under a dual system for managing late payments.   

In respect of contracts impacted by the reforms, payment provisions will need to be reviewed and updated to ensure compliance with the legislation. In particular:

• Clauses specifying a lower than statutory interest rate for late payments will need to be removed.
• Extended payment windows will need to be shortened.
• Provisions relating to invoice disputes will need to be tightened.

We will keep you up to date on any further developments in this area.

This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.

© Farrer & Co LLP, October 2025