UK to adopt ‘toughest laws on late payments in the G7’

Last month, the UK Government revealed its updated plans to clamp down on late payments to small businesses. What’s changing, how will businesses be affected, and what should they be doing to prepare?

What do the new rules say?

In short, the Government is introducing new measures to ensure small businesses are paid on time. The aim is to tackle late payments by implementing what it describes as the “toughest laws on late payments in the G7”.

Key changes include a new 60-day cap on payment terms for large firms paying smaller suppliers, which will be reduced to 45 days after five years.

The Small Business Commissioner will also gain enhanced powers to investigate poor payment practices and impose multi-million-pound fines on persistent late payers.

Commercial contracts will include statutory interest at 8% above the Bank of England base rate for overdue payments. Additional measures include a statutory time limit for disputing invoices and a ban on withholding retention payments in construction contracts.

The new rules are not expected to come into force before 2027.

Why are the new measures being introduced?

Chasing late invoices is both time-consuming and costly, placing significant strain on entrepreneurs and SMEs.

Late payments cost the UK economy £11 billion annually, according to research by London Economics for the Department for Business & Trade and the Office of the Small Business Commissioner.

On average, affected businesses spend 86 hours per week chasing unpaid invoices, and 38 businesses close each day due to late payment.

As highlighted in SAP Taulia’s Annual Survey 25/26, the issue is worsening. This year’s findings show that 55% of suppliers reported late payments, up from 51% the previous year.

The new rules aim to address these challenges, particularly for small suppliers. Planned exemptions to the 60-day limit include transactions where both parties are large businesses, situations where the buyer is the smaller party, and contracts involving imports or exports.

Impact of the new rules

For many small suppliers, these reforms will be a welcome development. The introduction of significant fines for repeat offenders marks a notable shift from previous efforts.

As Emma Jones, Small Business Commissioner, said in a press release announcing the changes: “These reforms will reduce the hours spent chasing debt, allowing small businesses to focus on more productive and enjoyable growth.”

However, a recent public consultation highlights potential challenges. Longer payment terms are sometimes used as a negotiation lever, and restricting them may affect commercial flexibility.

Some larger companies are concerned about the negative impact on their working capital. In its response to the consultation, the government acknowledges that “larger businesses will transfer some of their working capital to their smaller suppliers, where current payment terms are higher than the 60-day maximum.”

There is also concern that some firms may standardize payment terms at 60 days, effectively turning the limit into a default.

Be prepared

New legislation inevitably introduces complexity, but with proper preparation and the right systems in place, businesses can minimize disruption.

Companies should:

1. Review current payment practices
2. Assess compliance with the new requirements
3. Identify necessary changes
4. Evaluate the impact on cash flow and commitments

This should be approached as a cross-functional initiative, ensuring alignment across finance, procurement, and operations.

Have the right tools in place

For businesses concerned about the impact of these changes, having the right tools is essential.

SAP Taulia offers a range of solutions that can help businesses pay suppliers early while optimizing their own working capital, including supply chain finance and virtual cards. Furthermore, our supplier management solution makes it easy for suppliers to submit invoices and access real-time status updates.

Meanwhile, businesses can use our AI-powered cash analytics to track their adherence to prompt payment code regulations worldwide and decide how best to optimize their working capital.

To find out more, speak to one of our experts today: https://taulia.com/company/contact-us/