The UK government has introduced landmark legislation designed to tackle one of the biggest frustrations facing small businesses: late payment by larger companies.
The new Commercial Payments Bill, which has entered Parliament, is being described by ministers as the most significant overhaul of commercial payment rules in more than a quarter of a century. The legislation aims to improve cash flow for small and medium-sized enterprises (SMEs), reduce business failures, and strengthen protections for suppliers that often struggle to secure payment from larger customers.
Under the proposed law, large firms will no longer be able to impose excessively long payment terms on smaller suppliers. Instead, commercial contracts will generally be capped at a maximum of 60 days, with only limited exemptions permitted. The legislation will also require businesses that pay late to automatically pay interest at a rate eight percentage points above the Bank of England base rate.
Government ministers argue that late payments have become a chronic problem across the British economy, costing businesses billions of pounds every year and contributing to company closures nationwide. Official estimates suggest poor payment practices cost the UK economy around £11 billion annually, while approximately 38 businesses close each day due to cash-flow problems linked to unpaid invoices.
One of the most significant aspects of the bill is its impact on the construction sector.
The legislation will prohibit the deduction and withholding of retention payments in construction contracts. Retentions have long been controversial within the industry, with contractors often forced to wait months or even years to receive money withheld as security against potential defects. Industry groups have repeatedly argued that the practice places severe pressure on smaller firms and subcontractors.
The government says removing cash retentions will help improve liquidity throughout construction supply chains and reduce financial uncertainty for smaller businesses operating in the sector. However, ministers have indicated there will be further consultation regarding implementation timelines before the changes fully take effect.
The bill also grants substantial new powers to the Small Business Commissioner.
Under the proposals, the commissioner will gain authority to investigate larger companies suspected of persistently poor payment practices, adjudicate payment disputes outside the court system, and impose financial penalties on firms that repeatedly breach the rules. The commissioner will also be able to direct businesses to improve their payment behaviour and enforce compliance with statutory reporting requirements.
Large businesses could face fines worth millions of pounds if they repeatedly fail to meet payment obligations. Boards and audit committees of persistent late payers may also be required to publicly explain their poor payment performance and outline corrective action plans.
Supporters of the reforms argue they address a long-standing imbalance between major corporations and smaller suppliers.
Many small businesses have historically been reluctant to challenge late payments or claim statutory interest for fear of damaging commercial relationships with larger customers. Business groups say this has allowed some large firms to effectively use suppliers as an unofficial source of credit by delaying payments for months at a time.
Online reaction to the bill has generally been positive.
Across business forums, industry groups, and social media discussions, many entrepreneurs welcomed the tougher rules. Several business owners argued that large companies have relied on extended payment terms to manage their own cash flow while transferring financial risk onto smaller firms. Others described the legislation as long overdue and praised the government’s decision to strengthen enforcement powers.
Not everyone is convinced, however.
Some large business groups have expressed concerns that rigid payment deadlines could create operational challenges for companies with complex supply chains or lengthy verification procedures. Critics have also warned that businesses may need additional flexibility when dealing with international contracts or large-scale procurement projects.
The government has defended the proposals, insisting that prompt payment should be a basic standard of responsible business conduct.
Business Secretary Peter Kyle has described the reforms as creating the strongest commercial payment framework in the G7 and has indicated ministers are unwilling to weaken the legislation despite lobbying from some larger firms.
The Commercial Payments Bill is currently progressing through Parliament and will undergo scrutiny in both Houses before becoming law. If enacted, it could fundamentally reshape how businesses manage invoices, supplier relationships and payment practices across the British economy.
