In brief
On 19 May, the Small Business Protections Bill (formally known as the Commercial Payment Bill) (“Bill”) was introduced to Parliament, marking a significant step in the UK government’s efforts to strengthen protections for small businesses. Positioned as “the toughest crackdown on late payments in a generation”, the Bill seeks to place a clear obligation on larger businesses to pay smaller suppliers promptly.
Impact on commercial contracts
From a commercial contracts perspective, the most notable reforms are the introduction of statutory maximum payment terms, the removal of contractual flexibility around statutory interest, and the imposition of a mandatory deadline for disputing invoices. Together, these reforms will, if enacted, reshape payment terms in many commercial contracts. The Bill also contains separate provisions relating to construction contracts, which are not addressed here.
In more detail
Maximum payment terms: A hard 60 day limit
The Bill introduces a statutory maximum payment term of 60 days (reduced to 30 days for public authorities), subject to certain exemptions. Once in force, this will operate as a hard cap and terms that do not comply will be void. Contracts with no payment term (or a term that is void) will be subject to an implied payment term of 30 days.
Exemptions from the payment term cap apply where both parties are large undertakings, or where the purchaser is the smaller party. These exemptions are, however, subject to a number of conditions. In addition, the Bill does not yet define key terms such as “large undertaking”, with these concepts to be clarified in secondary legislation. It will therefore be important to monitor how these exemptions develop as the Bill progresses through Parliament.
The payment term must begin with one of four events set out in the Bill. These reflect familiar commercial milestones – for example, the point at which the purchaser has notice of the amount due. Of particular note, however, is the treatment of payment terms linked to completion of an acceptance or verification procedure (e.g., when purchasing software). The Bill introduces an implied term that treats the acceptance or verification procedure as being completed within 30 days unless it is “fair and reasonable” for a longer period to apply. Completion of the acceptance or verification procedure then triggers the start of the payment term.
The government’s earlier proposal to ultimately reduce the maximum payment term to 45 days has been abandoned for the time being following concerns raised during consultation about cash-flow management and international competitiveness.
Mandatory statutory interest: No contractual alternative
One of the most significant reforms is the introduction of a mandatory right to statutory interest on late payments - 8% above the Bank of England base rate. Contract terms that purport to vary or exclude the right to statutory interest will be void. This includes by way of imposing conditions on the right to statutory interest, by specifying a different rate of interest or by delaying the date from which interest begins to accrue.
This represents a material departure from the current regime, where parties may agree alternative remedies for late payment, provided there is a “substantial remedy” for late payment of the debt. In practice, this has often enabled parties to negotiate lower contractual interest rates in place of the statutory default.
The changes are intended to address the imbalance in bargaining power that can lead to smaller suppliers accepting weaker late payment protections to secure or maintain commercial relationships.
Deadline for disputing invoices: Use it or lose it
The Bill also introduces a statutory deadline for disputing invoices, backed by financial consequences for non-compliance. In most cases, disputes must be raised at least eight days before the date when payment is due.
Failure to meet this deadline - or to provide sufficient detail to enable the supplier to understand the basis of the dispute - will trigger a fixed financial liability. This will be the higher of GBP 40 and 1% of the contract price (or, where only part of the invoice is disputed, 1% of the disputed amount).
Again, any attempt to exclude or vary this in the contract is void. However, there is a carve out “if the interests of justice require it”. The example given is where the dispute relates to the supplier’s breach of contract.
This represents a deliberate move to prevent disputes being used tactically to delay payment. In practice, this places increased emphasis on careful invoice review and timely escalation, requiring businesses to ensure their internal processes are aligned with the Bill’s prescribed deadline.
Increased enforcement and oversight
The new payment rules will be supported by expanded enforcement powers for the Small Business Commissioner (SBC), strengthening its role in tackling poor payment practices.
In particular, the Bill confers on the SBC powers to adjudicate disputes between small and larger businesses and to investigate the payment practices of larger organisations. The SBC will be able to require the publication of information relating to payment practices and to issue enforcement directions, including requiring a business to take (or refrain from taking) specified action in connection with poor payment practices. Financial penalties of up to 1% of annual turnover in the UK may be imposed for non-compliance.
Practical implications
Billed as “the toughest late payment regime in the G7”, these reforms signal a much stricter approach to payment practices. Against this backdrop, businesses (and, in particular, large businesses) should use this as an opportunity not only to review their existing payment terms and templates but to embed robust controls, ensuring they are well placed to comply with, and adapt to, the new regime as it takes shape.
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Charlotte Harrington, Knowledge Lawyer, has contributed to this legal update.