Late payment rules to include mandatory interest and 60-day cap

The government is setting out a plan aiming to tackle late payment. New rules include a 60-day cap on payment terms to small businesses and mandatory interest applied to late payments.

These proposals have followed a period of consultation. However, actions will need to go through a period of primary and secondary legislation, which will be delivered ‘as soon as Parliamentary time allows’. So, we can’t give you a timeline nor confirm these measures will come out the other side exactly as described below.

Here’s a quick rundown of what’s being proposed.

Small Business Commissioner expected to be given more powers

The Small Business Commissioner is being given more powers to:

• Examine poor payment practices, why they’re happening and what large firms are doing to prevent them
• Make a formal judgement on disputes (small businesses could be able to ask the Small Business Commissioner to adjudicate a payment dispute)
• Fine the worst late payment perpetrators as well as those that don’t comply with the new legislation

60-day cap on payment terms

A new 60-day cap on payment terms will be placed on large businesses when paying small suppliers.

Limited exemptions will apply, such as when the purchaser is the smaller business or there are imported or exported goods involved.

Mandatory interest on late payments

Interest will also be added to overdue payments at eight per cent above the Bank of England base rate.

The example it uses is that if a small business is owed £10,000 by one of its customers and is paid 60 days later than the agreed payment date, the small business will get £10,293.15. That’s an extra £193.15 in interest plus £100 in compensation.

Deadline for disputing invoices

The government hopes to introduce a statutory time limit on raising disputes. Businesses that don’t raise their dispute within that time would need to pay compensation to their supplier.

Ban on withholding retention payments

There’s also a proposal to ban withholding retention payments under the terms of construction contracts. This would prevent small businesses losing out on retentions to insolvency or non-payment.

Talks about its implementation are in progress.

It’s all in the execution

These measures may sound good, but it all depends on how they’re implemented and enforced.

‘The usual loophole is to manufacture disputes, reset the clock or quietly pressure suppliers to accept ‘early pay’ schemes that skim margin.’

Rohit Parmar-Mistry, founder at Burton-on-Trent-based Pattrn Data, said: “If the government wants this to bite, the question is enforcement, not headline rates. A 60-day cap and mandatory interest helps, but the usual loophole is to manufacture disputes, reset the clock or quietly pressure suppliers to accept ‘early pay’ schemes that skim margin.

“The Small Business Commissioner’s new powers will only matter if it is fast, public, and willing to embarrass repeat offenders. Fines are good, but naming the board that signed off the behaviour changes incentives.

“The practical fix is boring: standardised e-invoicing, clear acceptance criteria and a simple dispute process with deadlines. In our audits of operations teams, late payment is often a process design choice, not an accident.

The test is simple. Will a tradesperson spend less time chasing and more time hiring?”

‘Late payment doesn’t just drain your bank account, it drains your belief in your business’

Sarah Gatford, a wellbeing coach at Derby-based Sarah Gatford, said the reforms are long overdue: “Late payment doesn’t just drain your bank account, it drains your belief in your business. Chasing, calculating, second-guessing whether to send that invoice reminder email or swallow the stress, again.

“Freelancers and sole traders aren’t a free credit line. We’re real people with real bills, running on real resilience, and that resilience has limits.

These reforms are long overdue. Proper penalties with mandatory interest that larger businesses should pay, rather than ignore, and an actual cap. Because ‘eventually’ isn’t a payment term.”

‘The Small Business Commissioner needs to get stuck in. If not, nothing changes.’

Steven Mather, lawyer and director at Leicester-based Steven Mather Solicitor, said: “This could be a real shift for small businesses provided the Small Business Commissioner actually gets stuck in, knee-deep, and helps enforce the changes.

If not, nothing changes.”

Thank you to Newspage for providing the above quotes.

What can I do in the meantime?

“Businesses should be careful not to see this as a complete answer to every payment issue,” said Ian Carson, head of dispute resolution at Harper James. “It won’t prevent genuine disputes over whether goods or services have been delivered properly. It’s not a substitute for having clear, well-drafted payment terms, dispute provisions and invoicing clauses in the first place. Those details will still make all the difference should problems arise.”

Take a look at our guide on how to tackle late payments below.

Read more

How to tackle late payments to your small business – Late payments cost small business owners £6.7bn a year just chasing overdue invoices. Antti-Jussi Suominen offers solutions as to how to handle late payments