The government's late payment reforms: a practical guide for businesses

It has long been accepted that 'cash is king' and that cashflow is a key factor in the survival and success of many organisations. But the scale of the impact of late payments is now firmly on the government's agenda and under the spotlight.

According to research carried out by the Small Business Commissioner, late payments cost the UK economy approximately £11bn each year and contribute to the closure of around 14,000 businesses annually. As such, the government ran a public consultation from 31 July to 23 October 2025, and published its formal response on 24 March 2026, confirming a package of reforms designed to make significant changes in this area to improve payment practices, and act as a deterrent to the worst offenders.

The reforms largely build on the existing statutory framework, but materially strengthen it by restricting the ability of purchasers to contract out of key protections and by introducing new procedural constraints. The reforms remove the ability to negotiate away rights that previously existed.

Although there are no implementation dates yet announced, the reforms are expected to take effect no earlier than 2027, with the implementation being subject to the legislative timetable. This article provides a summary of what we know so far.

Statutory interest on late payments

At present, the statutory interest rate (currently 8% above the Bank of England base rate) only applies to a late payment where a commercial contract is silent on the rate of interest which will apply. As such, agreeing a lower percentage rate in a commercial contract has the effect of contracting out of this default position.

Under the reforms, this will no longer be possible. The statutory rate will be required to apply to commercial contracts, with no ability for the parties to agree a lower rate or contract out of the statutory position. That flexibility will be removed.

60-day cap on business payment terms

The consultation has revealed that many larger businesses seek to rely on extended payment periods, placing considerable pressure on the cash flow of smaller suppliers. As such, the reforms will introduce a statutory ceiling of 60 days on most business-to-business contracts where a larger purchaser is contracting with a smaller supplier.

This will not apply to all contracts, and the detail of the exemptions is yet to be finalised. However, confirmed exemptions include:

• contracts where both parties are large companies;
• where the purchaser is the smaller party; and
• where the contract relates to the import or export of goods.

Unlike the interest rate, this 60-day cap will not be a default position, but rather a ceiling which cannot be exceeded. Where shorter time periods are already agreed for payment terms, those will continue to apply.

If your contracts fall within the scope of this cap, and your internal invoice approval cycle routinely exceeds 60 days, it would be sensible to start looking at ways to reduce this. Once the cap takes effect, these contractual provisions will no longer apply, and payment terms will be limited to 60 days.

Deadline to dispute an invoice received

Currently, there is no statutory time limit for disputing invoices. This has led to businesses raising disputes shortly before, or after, invoices fall due, sometimes with the aim of postponing payment indefinitely.

Under the reforms, a statutory deadline will be introduced. The precise period has not yet been settled, although a 30-day limit was proposed during consultation. We are expecting specific, and separate, notice periods to apply for construction contracts.

If a purchaser fails to raise a dispute within the statutory window, statutory interest will accrue notwithstanding the late dispute.

It is always good practice to review invoices on receipt to ensure that any genuine queries can be resolved promptly. These reforms will make this even more important, as the window to raise a concern will be limited, and the interest clock will start to tick if that window is missed.

Retention payments

Although it is still unclear how this will take effect in practice, and further consultation is to follow, another key part of the reform package to bear in mind for the years ahead is a complete ban on retention payments in the construction industry.

New reporting requirements for late payments

Large companies and LLPs falling within the scope of the Reporting on Payment Practices and Performance Regulations 2017 are already required to report on their payment practices. The reforms will extend this obligation and require these organisations also to report both their late payments, including the total amount of statutory interest owed, and how much they have paid.

This reporting is intended to provide transparency on their payment practices and shine a light on where there may perhaps be a persistent issue.

Those whose payment data demonstrates a pattern of persistent late payment will be required to publish a formal statement on GOV.UK detailing the measures they plan to introduce to improve their payment practices and responding to any communications received from the Small Business Commissioner.

Evaluating your practices now will help ensure that you will not fall into this category of being a persistent late payer. It will also help you avoid your organisation being required to undertake this additional regulatory burden and, in turn, maintain your good reputation, or help to improve your reputation in this area.

Expanded powers for the Small Business Commissioner

The Small Business Commissioner will receive a significant expansion of its existing powers, including the ability to:

• investigate and require businesses to provide information disclosure;
• settle payment disputes;
• recover costs from the businesses concerned, including for investigations and adjudications; impose potentially significant fines; and
• conduct compliance checks on data submitted under the 2017 Reporting Regulations.

The Commissioner's role will change from a body that publishes findings to a regulator with real enforcement powers.

Preparing for the late payment reforms: practical steps for businesses

In this article, we are aiming to help you to plan and take account of these significant changes on the horizon when entering into new long-term arrangements, or reviewing any existing terms.

At this stage, some preparatory steps which you could consider taking include:

• looking at your standard terms and any existing contracts to see whether they contain:
• any payment terms that exceed 60 days;
• any interest clauses that reduce or exclude the statutory rate;
• contractual provisions purporting to substitute alternative remedies for statutory interest
• reviewing your invoicing procedures, and considering these both against the 60-day cap on payment terms, and your process for initial review of invoices, so that any issues which need to be raised can be resolved early and within the dispute window which will be set; and
• for larger businesses, examining existing payment performance data to ensure there is no risk of being categorised as a persistent late payer, and the additional reporting obligations and potential intervention by the Small Business Commissioner.

To find out more about how the proposed late payment reforms could affect your organisation, including payment terms, invoicing procedures and reporting obligations, please contact our Commercial team or your usual Farrer & Co contact.

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

© Farrer & Co LLP, May 2026