Shopfloor PAYMENT REFORM
The UK’s biggest late payment shake-up in 25 years: What you need to know
Late payments are costing UK SMEs millions each year. New government proposals aim to level the playing field and protect small firms’ cash flow.
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Late payments have long plagued the UK economy, hitting small businesses and the self-employed hardest. The Department for Business & Trade (DBT) estimates they contribute to around 50,000 business closures and cost SMEs £684 million annually (Nov 2023). Now, the DBT has launched a consultation, closing on October 23 2025, on new legislation to combat poor payment practices by large businesses. Rob Rees, Divisional Director at Markel Direct, outlines what’s being proposed and how SMEs can protect themselves in the meantime.
What the consultation covers Launched in July 2025, the government’s Late Payment Consultation seeks views on a major overhaul of payment laws, aiming to ensure fairer cash flow for small firms. The consultation is a formal process to gather feedback from businesses before drafting legislation.
Proposals include: • Setting maximum payment terms of 60 days, potentially reduced to 45. • Requiring invoice disputes to be raised within 30 days or deemed accepted.
• Enforcing statutory interest (base rate + 8 per cent) and compensation on late payments.
• Mandating transparency through annual payment performance reports from large companies.
• Granting the Small Business Commissioner powers to issue fines, conduct spot checks and arbitrate disputes.
• Reforming construction retention clauses to protect or eliminate withheld funds.
Businesses can respond via the government’s online survey before the October deadline.
Why reform is needed Despite existing measures such as the Late Payment of Commercial Debts Act (1998), Payment Practices Reporting Regulations (2017) and the Fair Payment Code (2024), late payments continue to burden SMEs. Poor cash flow restricts investment, hiring and growth, while construction firms face months-long retentions. This review marks the biggest shake-up of late payment law in 25 years, aiming to strengthen protections for SMEs, hold larger firms accountable and promote cash flow fairness across industries.
Who will be affected The reforms will primarily benefit SMEs, helping reduce time lost to chasing payments and improving cash flow predictability. Large businesses, meanwhile, face tighter scrutiny, possible fines and stricter board-level oversight of payment practices.
Legislation could be finalised in 2026 or 2027, following review of consultation feedback and the parliamentary process.
7 tips to protect your business from late payments While reforms progress, SMEs must continue managing cash flow under current rules. Markel Direct suggests seven ways to safeguard against late payments: 1. Research new clients. Use credit reports (e.g. Experian, Equifax) and references to check a client’s payment record before signing contracts. Look for red flags such as county court judgements or poor credit scores. 2. Request deposits or staged payments. Asking for an upfront deposit or milestone payments can secure cash flow and show client commitment. 3. Set clear contracts. Agree on payment terms, due dates, late payment interest and accepted methods in writing before work begins. 4. Have a chasing process. Contact clients the day a payment is overdue, stay polite but firm. Follow up with email reminders and record all correspondence to create a clear paper trail.
5. Check your insurance.
Some business insurance policies include legal advice or debt recovery support. Markel Direct, for instance, offers a 24-hour helpline and template documents to assist with late payment issues. 6. Seek mediation or support.
Only 4 per cent of small firms consult public bodies about late payments. Services such as the Small Business Commissioner or professional mediators can help resolve disputes without court action. 7. Consider legal action. As a last resort, seek legal advice or use insurance-backed legal cover to recover debts. You are entitled to claim statutory interest and compensation on overdue payments. While no law can eliminate late payments entirely, these proposals, combined with proactive financial management, could mark a turning point for the UK’s small business community.
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