Late payment in the UK: what's changed and why should you care?

In late 2024, the UK Government announced its intention to "crack down on late payments" and outlined a number of measures intended to support this. We look at what the changes mean and why it's more important than ever to take late payment seriously as an issue.

Key points – and why late payment matters

What's changing?

The Government has announced that it intends to adopt a more proactive approach to enforcement of the late payment disclosure regime for larger businesses and to consult on further changes designed to promote additional transparency and scrutiny as regards late payment. Alongside this, a revised voluntary code has been published together with a more demanding prompt payment standard for many suppliers to the public sector. See below for more detail.

Why it's important:

If you don't pay most of your suppliers within 60 days (or less), it may be time for a rethink – particularly if a reasonable number of those suppliers are smaller businesses. Here's why:

ESG: Late payment is increasingly being viewed as an ESG issue – businesses that take a long time to pay risk being seen as "bad corporate citizens" whose practices reduce overall growth in the economy (because money does not circulate as fast as it could or should) and can push suppliers, particularly smaller businesses, into insolvency.
Reputation and transparency: Rightly or wrongly, investors and trading partners may see longer payment periods as a sign that you are struggling to manage your cashflow effectively – and the disclosure regime means that for larger businesses, this information will be easily available. Many are also increasingly taking account of late payment as a relevant ESG metric when deciding who to invest in or trade with. Meanwhile, the Small Business Commissioner ("SBC") has not shied away from naming and shaming firms that don't pay smaller businesses on time, which can have a direct impact on a business's reputation and damage supplier relationships.
Litigation: Historically, many suppliers have been reluctant to pursue legal remedies for late payment due to lack of resources and for fear of undermining the commercial relationship. But if they no longer supply you, there's often less of a commercial reason to hold off – and if they don't want to litigate themselves, they can sell the debt to a third party collection agency. Lastly, if the supplier has become insolvent, the insolvency practitioner is quite likely to pursue the debt and late payment interest in order to maximise the return for creditors (and also has the ability to sell the debt to a third party).
Practical considerations: In addition to the above, a number of practical reasons mean that prompt payment makes sound business sense. For example, suppliers may charge late payment fees or interest charges for overdue invoices, increasing the cost of goods or services. Late payment costs across a number of different suppliers can accumulate quickly, lower a company's credit rating and make it more difficult and expensive to obtain financing or negotiate favourable terms with new suppliers.

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Overview – what's changed recently, what change is on the way (and what's not changed)

What's changed recently

The disclosure regime for larger businesses: The Payment Practices and Performance Regulations 2017 have been updated to require larger businesses to provide additional information. And as noted above, the Government has signalled a more proactive approach to enforcement. See section 2 for more detail.
Fair Payment Code: the 'Prompt Payment Code' has been replaced with a revised voluntary code, known as the Fair Payment Code, which takes a more ambitious approach. See section 4 for more detail.

What change is on the way

Government contracts: From 1 October 2025, businesses bidding for larger government contracts will generally be expected to have paid their own suppliers within an average of 45 days (and will be likely to have their bids rejected unless they can meet this standard). See section 3 for more detail.
Construction contracts: From 1 March 2025, larger businesses will need to provide more information about payment issues relating to construction contracts where they are the customer. See section 2 for more detail.
Further transparency/scrutiny measures: The Government has also indicated that it plans to require all larger businesses to publish payment performance data in their annual reports and to consult on measures relating to audit and audit committees. The aim of such proposals is "to help rebuild small businesses’ trust that they will be paid on time" and represents a further step to embed payment performance transparency into core business accountability (but at the time of writing and so far as we are aware, no further detail on these initiatives had been made public).

What's not changed

The statutory remedy for late payment: No changes have been made to the Late Payment of Commercial Debts (Interest) Act 1998, which gives suppliers a right to claim interest of 8% above the Bank of England base rate on overdue payments from the customer together with certain debt recovery costs (subject to various limitations). For more detail, see our March 2024 briefing.
Role of Small Business Commissioner (SBC): Although there had been proposals to allow the SBC to impose fines for late payment of smaller businesses, these have not been pursued. However, the SBC continues to provide a route for smaller businesses to make complaints and it has in the past "named and shamed" businesses which it considers have a poor record on late payment; high profile examples include Holland & Barrett, BUPA and Zurich Insurance.

Changes to the disclosure regime

The Payment Practices and Performance Regulations 2017 (PPRs) apply to all "large" UK companies and LLPs. Since 2017 they have required the relevant entities to report annually on their payment practices, with such information being made publicly available on this website. "Large" in this context applies to businesses which satisfy two of the following criteria on the businesses' last two balance sheet dates:

turnover of more than £36m;
balance sheet total of more than £18m; and
more than 250 employees.

Enforcement

The Government has stated that "[enforcement] will also be stepped up on the existing late payment performance reporting regulations". Past practice appears to have been to contact businesses believed to be caught by the regime and ask them to comply – following which most businesses appear to have done so. However, the regime has been in place since April 2017 and if the Government wished to adopt a more aggressive approach, it could look at using the criminal sanctions contained in the PPRs. By way of recap, these sanctions make it a criminal offence for a business, and every director of the company or designated member of an LLP, if the business fails to publish a report containing the necessary information within the specified filing period of 30 days. Anyone who knowingly or recklessly publishes a report, or any information or makes a related statement which is misleading, false, or deceptive also commits a criminal offence. These offences are punishable on summary conviction by a fine.

Changes to the PPRs made in 2024

The PPRs were amended in 2024 so that businesses are now required to provide additional information as follows:

the total sum of invoices paid (i) within 30 days; (ii) in 31 to 60 days; and (iii) in 61 days or more (previously the requirement was only to provide percentages of invoices paid within these timeframes, not the combined value of the amounts involved).
the total sum of the payments not paid on time within the relevant period, as agreed between the parties (previously the requirement was only to provide a percentage figure); and
the percentage of payments that were not made within the relevant period as a result of a dispute.

Whilst the first two bullets essentially just require the larger business to do some additional arithmetic, collating information on disputes for the last bullet may necessitate some changes to information-gathering processes.

The PPRs were also amended to clarify that where a supply chain finance provider is involved, payment is deemed to have been made at the point the finance provider receives payment from the business, not when the supplier gets paid by the finance provider.

What is supply chain finance?

Involvement of a supply chain finance provider will typically mean that the supplier is paid (by the finance provider) after say, 30 days; the larger business will then pay the finance provider an amount equivalent to the supplier's invoice at a later date. These arrangements normally involve the supplier being paid less than the value of its invoice by the finance provider. This is so that when the latter finally gets paid by the supplier's customer, it is able to cover its costs and make a profit on the transaction. This change means that there is no advantage, at least so far as the PPRs are concerned, in larger businesses arranging supply chain finance for their suppliers.

These changes are on top of the existing requirements of the PPRs – such as reporting on the business' own process of resolving payment disputes and statistics on average payment times. Further detail of these disclosure requirements is set out in our February 2017 Briefing.

Construction contracts: the latest changes to the PPRs

From 1 March 2025, larger businesses will also be required to report on whether any construction contracts where they are the customer contain retention clauses i.e. provisions enabling the customer to withhold certain payments until certain conditions have been met. If retention clauses are included, then a significant amount of further information is required. Government guidance on these changes is awaited. Whilst these measures are most obviously relevant to the construction sector, it's worth bearing in mind that the concept of "construction contract" is broad and it is not always straightforward to apply.

Changes to requirements for supplying the public sector

Late payment has been a concern for businesses bidding for public sector contracts for a number of years, and some contracting authorities not only ask questions about it in tender documents but impose contractual requirements on how quickly private sector partners are expected to pay their suppliers. The Government in its Autumn 2024 Budget stated that "effective from 1 October 2025, any company bidding for government contracts over £5 million per annum will be excluded from the procurement process if they do not pay their own suppliers within an average of 45 days". Procurement Policy Note 018 makes clear that suppliers bidding for government contracts above the £5 million threshold will generally be expected to meet and pay:

all their invoices within an average of 45 days; and
95% of their invoices within 60 days (or 90% with an action plan put in place to reach 95%).

This will replace the current standard of all invoices needing to be paid within an average of 55 days (the target of 95% within 60 days is unchanged). If a supplier is unable to demonstrate that it meets these standards of prompt payment, it is likely to have its bid rejected. That said, there are some exceptions to this, and not all public sector contracts worth over £5 million are covered - please contact us if you would like further information on these aspects.

Finally, note that late payment is just one amongst many issues that can lead to suppliers being effectively denied access to public sector contracts - see our briefing "New UK Procurement Act: Advancing Pro-Growth Agenda with Stricter Measures Against Competition Law Breaches".

The new Fair Payment Code

The Fair Payment Code is a voluntary code supervised by the Small Business Commissioner (SBC) that businesses can sign up to receive an award rating based on their timeliness in paying suppliers. It has replaced the Prompt Payment Code, with the key difference being a ranked award system for participating businesses. The awards are as follows:

Gold Award: for paying at least 95% of all invoices within 30 days;
Silver Award: for paying at least 95% of all invoices within 60 days, including at least 95% of invoices to small businesses within 30 days; and
Bronze Award: for paying at least 95% of all invoices within 60 days.

A business will keep its award for two years, after which a new application must be submitted. Businesses can submit an application expressing an interest in signing up to the Fair Payment Code here.

The Small Business Commissioner on what's fair

"You could claim it’s fair to pay in 120 days because the supplier agreed to that, but as the bigger customer with the deeper pockets, it’s not fair to use your power to push the smaller supplier into accepting those longer payment terms. […..] It’s not fair to use your suppliers to bankroll your business ambitions or make your books look good. It’s not fair that your procurement department should tell a supplier that they’ll be paid in 30 days when the company has long, convoluted approvals processes, or a single payment run each month, that means the supplier won’t get paid for 90 days. 30 must mean 30 days from the day the invoice is submitted to the customer, or the contractual negotiations have misled the supplier. And it most certainly isn’t fair to dispute invoices on purpose, or to quibble over minor errors, just so that you can delay paying them."

Source: All's Not Fair - Small Business Commissioner

Whilst the Small Business Commissioner's remarks above are not a statement of the law, they do reflect much of the thinking around late payment as an ESG issue. It's also worth noting that the authors of the 2023 Prompt Payment and Cash Flow Review Report (commissioned by the previous Government) made clear their desire "to place [late payment] more firmly on the Environmental, Social & Governance (ESG) agenda." Finally, putting questions of fairness to one side, there are significant economic benefits to be gained from improving payment times; for example, the cost of late payment to small businesses in the UK has been estimated at over £680 million a year.

How we can help

Late payment requires a holistic approach, involving specialists from across different practice areas. That's why, at Travers Smith, we ensure that our advice in this area is based on close cooperation between our top ranked Technology and Commercial Transactions team and our highly regarded Operational Risk & Environment team. If this is an area we can assist your business with, please get in touch with any of the contacts listed below.

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