Following the announcement in last week’s King’s Speech the UK government introduced significant legislation in the House of Lords on 19th May 2026 in the form of the Commercial Payments Bill to tackle late payments. The announcement followed an extensive consultation conducted in the second half of last year, to tackle the problem of late payments and ensure businesses, particularly SMEs (Small and Medium-sized Enterprises), are paid on time. It is estimated that late payments cost the UK economy £11 billion a year and close 38 UK businesses every day. The new regime will mean that all businesses, whatever their size, will have to ensure the changes are embedded into both governance and practice. We consider the legislative proposals below and what businesses should already be thinking about while they wait for the new regime to come into force.
The legislative proposals:
- Audit and board requirements for large companies: It will be a legal requirement for the boards or audit committees of large UK businesses who have made a significant proportion of their payments late within the relevant reporting period to publish commentary on GOV.UK explaining how the company intends to improve its payment performance. This explanation will include why payment performance is poor, how the company intends to improve it and which actions from previous commentary have not been implemented and why.
- Restrictions on payment terms: Legislation will remove the option to agree payment terms longer than 60 days, to protect smaller suppliers especially in situations where contracts are between businesses of different sizes. However, the legislation will allow for some limited exemptions and flexibility, for example in cases where both parties are large companies, or the purchaser is a smaller party or the goods and services are either being imported or exported. These exemptions aim to preserve freedom to contract and mean that larger businesses can continue to make arrangements that will work best for their specific sectors. Plans to further reduce this limit to 45 days after five years have been abandoned but maybe considered again in the future.
- Deadline for disputing invoices: The consultation envisaged introducing a 30-day limit for raising invoice disputes. Legislation will introduce a new statutory time limit, with businesses not raising disputes within that time limit having to pay compensation to their supplier. However, the government does not want to cut across any existing disputes policies, especially within the construction industry and, therefore, any new dispute policy will make clear how any dispute window will work.
- Mandatory statutory interest: The Late Payment of Commercial Debts (Interest) Act 1998 (Late Payment Act) is the main existing legislative provision concerning late payment. Whilst the Act provides a statutory right to interest at 8% above the Bank of England Bank Rate, its scope is limited to B2B contracts for goods or services, and there are frequently questions about whether specific contracts or payments fall within its remit. Contracting out of the Late Payment Act is permitted but only if the contract offers an alternative substantial contractual remedy for late payments. New provisions will make it mandatory for all commercial contracts to contain a right to statutory interest and remove the ability for parties to agree a lower rate. If interest remains unpaid small businesses will be able to bring the dispute to the Small Business Commissioner (SBC) and resolve the issue via ADR.
- Additional reporting on statutory interest: The Reporting on Payment Practices and Performance Regulations 2017 (The Regulations) will be amended to require qualifying large businesses to report information relating to the payment of statutory interest. The aim is to enhance transparency and accountability in large companies’ payment practices. Businesses are worried about the increased administrative burden this may cause but the government has said it will publish guidance alongside the new regulations.
- Financial penalties for persistent late payers: The SBC will be granted enforcement powers to impose financial penalties on large companies that repeatedly pay suppliers late. The data submitted by large businesses under The Regulations will be used to identify these companies and businesses reporting a high percentage of late payments, for example, 25% or more, could trigger an investigation. The investigation would consider any mitigating circumstances, past performance, and any evidence that the company will be changing their future payment practices. The scale of the financial penalty would be based on businesses’ unpaid statutory interest liability. For example, twice the amount of statutory interest owed in the last reporting period.
- Additional powers for the SBC: The SBC will be given powers to investigate businesses who are suspected of breaching the new legislation, including the ability to compel the provision of information from companies and to undertake compliance checks. The SBC will also be given powers to adjudicate disputes between businesses outside of the court process and the power to fine or impose penalties on businesses. These powers will support businesses who are facing issues with late payments.
- Use of retention clauses in construction contracts: The government intends to amend the Construction Act 1996 to prohibit retention clauses and require protection of retained sums, aiming to prevent losses due to insolvency and improve payment reliability for the construction industry. However, it recognises that further consultation is necessary before this measure is implemented.
Impact on Businesses
These measures, especially in relation to the restrictions on payment terms and financial penalties for persistent late payers, will impact businesses of all sizes. All businesses will need to keep abreast of the legislative timetable and prepare to change any of their current terms of business which do not comply with the proposals. Further, internal payment procedures may need to be strengthened and any contractual terms which maybe in breach need to be identified such as those where payment periods exceed 60 days or where statutory interest payments will not be compliant. The legislation will also bring the potential for increased scrutiny of governance and audit as compliance requirements will be more stringent. Businesses need to be prepared for this.
Next steps
The Small Business Protections Bill (formally known as the Commercial Payments Bill) had its first reading in the House of Lords on 19th May 2026. The general debate on all aspects of the Bill is yet to be scheduled. We willcontinue to watch its legislative journey closely and provide updates where necessary.
For further information, please contact:
Victoria Hobbs, Partner, Bird & Bird
victoria.hobbs@twobirds.com
