The UK’s biggest late payment shake-up in 25 years: what small businesses need to know
Posted by: electime 17th October 2025
Late payments have been a long-standing issue in the UK economy, particularly impacting small businesses and the self-employed. In fact, late payments are believed to be responsible for 50,000 business closures and an estimated cost of £684 million each year to SMEs, according to the Department for Business & Trade, November 2023.
To help tackle this issue, the Department for Business and Trade are seeking feedback on legislative proposals aimed at combating poor payment practices by large businesses. The consultation period finishes on the 23rd of October, with the objective to bring about much needed change.
Rob Rees, Divisional Director at Markel Direct, the specialist insurer of small businesses, provides an overview of what is being proposed, what they mean for small and medium-sized enterprises (SMEs), timelines for the legislation and how businesses can tackle late payments in the meantime.
What is the late payments consultation about?
The UK government launched the late payment consultation in July 2025, to address widespread delays in business-to-business payments and ways to mitigate the issue. The consultation period is the formal stage before legislation is drafted or introduced to Parliament, with the aim to gather evidence, opinions, and feedback from key stakeholders impacted by the issue (in this case, mainly the self-employed and SMEs). It also helps test the practicality, potential impact of policy proposals and identifies unintended consequences or gaps before laws are finalised.
This particular consultation seeks views from affected stakeholders on proposed new laws to:
- Introduce maximum payment terms (proposed at 60 days, with potential to shorten to 45 days in future).
- Require disputes over invoices to be raised within 30 days or be deemed accepted.
- Enforce statutory interest (Bank of England base rate + 8%) and compensation for late payments.
- Increase transparency through mandatory reporting of payment performance in large companies’ annual reports.
- Give the Small Business Commissioner new enforcement powers, including fines, spot-checks, and arbitration.
- Reform construction retention clauses to ensure withheld funds are safeguarded or eliminated.
The consultation period will remain open until 11.59pm 23rd October 2025, giving businesses ample time to review what the government is proposing.
Those looking to have their say can respond to this consultation through the online survey before the closing date. The full contents of the consultation can be found here.
Why is there a need for a consultation?
Although measures have been put in place to help tackle late payments, such as the Late Payment of Commercial Debts (Interest) Act 1998, Reporting on Payment Practices and Performance Regulations 2017 and Fair Payment Code (2024), late payments are still a challenge for many UK small businesses.
Poor payment practices can have a multitude of impacts for small businesses. As a result of poor cash flow, this reduces the ability for SMEs to invest, hire and grow, which has a detrimental impact on the wider economy and employment. Late payments have caused significant strains in sectors like construction, where retentions can be withheld for months or even years.
This consultation represents the most significant overhaul of late-payment law in over 25 years. The reform seeks to strengthen cash flow fairness for SMEs, enforce accountability in larger businesses, and reform harmful practices in sectors like construction.
Who will be impacted off the back of this consultation?
What is outlined in the proposal will primarily impact SMEs in a positive manner, as the main objectives are to improve cash flow, reduce time needed to chase invoices and protect them from the knock-on effect caused by late payments from large companies.
The proposal also aims to hold larger companies more accountable, by introducing fines, stricter regulations and mandated board level scrutiny of payment practices. These could potentially be enforced by the small business commissioner, if new powers are granted.
7 tips to help you protect your finances from late payments as a SME
Following the completion of the consultation period, the next steps include making necessary amendments to the legislation after considering the findings and then progressing the draft bill through the House of Commons. Taking this all into account, this could mean any action may not be implemented until 2026-2027.
In the meantime, SMEs must continue to battle with cashflow issues and late payments under the existing framework. There are several practices you can follow to help manage these challenges.
- Research new clients and their credit history
Before the new reporting on late payments takes place and larger companies are obliged to publicly keep their records, the usual methods of vetting a potential client should take place.
Credit reports and credit scoring services can offer insights into their financial stability and payment track record. Both Experian and Equifax are examples of companies that can offer this service.
This upfront due diligence can help you identify red flags, make informed decisions about whether to engage with a particular client and save you from the frustration and financial strain of dealing with late-paying clients down the road.
Other checks could include:
- Checking the prospect’s website for legitimacy and feel
- Asking for references on your customer from suppliers and banks
- Carrying out a search of the official Register of County Court Judgements
- Consider asking for a deposit or staged payments
Consider requesting a deposit, or implementing staged payments, to secure your financial interests on a project. By asking for an initial deposit upfront or breaking down payments into stages based on project milestones, you not only reduce the risk of late or non-payment but also establish a commitment from your clients.
This approach can provide you with a steady cash flow throughout the project’s duration, ensuring that your financial stability remains intact and allowing you to allocate resources efficiently.
Moreover, it fosters transparency and trust between you and your clients by aligning their payment obligations with the delivery of agreed-upon results, creating a win-win situation for both parties.
- Ensure contracts are clear from the outset
Before commencing any work, it’s worth ensuring there is a clear contract in place between your business and the client. Without a contract, chasing a non-payer is much more challenging from a legal standpoint.
Be sure to state your payment milestones and invoicing terms, including due dates, late payment interest or fees (on business-to-business debt if applicable), and accepted payment methods, as this helps set expectations upfront.
- Have a system in place for chasing late payments
It pays to have a thorough system in place for chasing payments. On the day a payment becomes overdue, you should contact the client directly over the phone.
Try to keep the conversation friendly and professional, as there may be a reasonable explanation as to why the invoice hasn’t been paid. Simply state that there is an outstanding balance and ask if there is a reason why the amount has not been paid. Try to agree on a date when the payment will be made, but if your client is unable to give a date straight away, say that you’ll call the next day once they have had a chance to review. It can be a good idea to also send a follow-up email to confirm that the phone conversation took place and create a dated paper trail.
If you have still not received any payment after chasing the client, send them email reminders and follow up with a telephone call. Many accountancy software packages can automate email reminders for you, reducing the admin burden. Be firm, cautious of excuses, and press your client for a date of payment.
If payment isn’t forthcoming, be prepared to act decisively and explain the consequences of non-payment to your client. For example, you could contact your customer in writing and inform them that you will be exercising your statutory right to claim interest (which is set at 8% over the Bank of England base rate), as well as compensation to cover the debt recovery costs.
- Speak to your insurer to see if they can help
Always check your insurance policy to see if it includes legal help. At Markel Direct, we provide our business insurance policyholders with access to a 24-hour legal advice helpline, as well as access to Business Hub, which contains legal document templates to help with late payment problems. Having access to valuable advice from experienced legal professionals can help you navigate challenging situations and give you the best chance of getting paid quickly.
- Reach out to a professional mediator or Small Business Commissioner
In a previous study conducted by Markel Direct, one of the most surprising findings was that only 4% of respondents said they consulted public bodies (such as the Small Business Commissioner or Citizens Advice) about late or non-payments, and 56% didn’t even know they could consult these organisations on the issue of late payments. Other reasons for payment delays can include the customer refusing to pay an invoice as there is a disagreement over whether the service or products provided were as agreed, or a customer can’t pay the full amount at once.
If those are the reasons behind late payments, you can get a professional mediator to help. This option can be cheaper and offer more flexibility than taking a client to court.
If mediation isn’t an option or doesn’t work, you might decide to make a complaint to the Small Business Commissioner, who may be able to investigate the case.
- Consider taking legal action
When all else fails, and late payments persist, instead of just writing off the owed money, it might be time to consider taking legal action. While it’s not an option to be taken lightly, it can be a necessary step to protect your financial interests. Your insurance provider may be able to help if you have arranged legal expenses insurance, or alternatively, consult with a solicitor who specialises in debt recovery.
Whilst pursuing legal action should be a last resort, and efforts to resolve the issue amicably should precede it, it’s important to remember you are within your rights to take this step.
Whilst there is no sure-fire way of protecting your business from late payments, taking these precautions can help SMEs and freelancers ensure they are in the strongest position to protect their finances and mitigate risk.
For more information and advice on handling late payments, visit the Markel Direct website.
