The UK government’s proposed legislation to tackle late payments marks a significant development in the country’s business landscape. Announced as a priority measure in the King’s Speech, the reforms are now progressing through Parliament and are expected to come into force in late 2026 or early 2027.
With mandatory 60-day payment terms for large companies paying smaller suppliers, automatic interest on late payments, and increased enforcement powers for the Small Business Commissioner, the reforms aim to address an issue that has long constrained growth, liquidity, and confidence across the economy.
Late payments are estimated to cost the UK economy £11 billion annually, underscoring the scale of the challenge and the importance of reform.
Who is in Scope? Clarifying “Large Companies” vs SMEs
A key point of confusion is which businesses will be affected.
The reforms are not intended to target SMEs. Instead, they are aimed specifically at large companies and their payment practices.
A company is classified as “large” if it meets two out of the following three criteria, for two consecutive years:
- Annual revenue of over £54 million
- Balance sheet total over £27 million (gross assets: fixed assets plus current assets)
- More than 250 employees
Companies that do not meet these thresholds individually may still fall within scope if they are part of a larger group.
By contrast, SMEs are those operating below these thresholds and are therefore not subject to these rules, although they stand to benefit from improved payment practices across their customer base.
A Lifeline for SMEs
For SMEs, cash flow is often the defining factor between growth and stagnation. Delayed payments can restrict working capital, limit hiring, and in some cases threaten business survival.
The introduction of a 60-day maximum payment term provides greater predictability and financial stability, helping to rebalance dynamics between smaller suppliers and larger clients.
This is broadly positive. However, there are nuances worth considering. In some industries, SMEs have historically accepted longer payment terms as part of doing business with larger customers. As those terms shorten, there is a question as to whether:
- Larger companies reduce their reliance on SME suppliers
- Alternative commercial pressures emerge, such as increased discounting
- Supply chain dynamics shift in less visible ways
Implications for Large Corporates
For larger organisations, the reforms introduce both compliance requirements and strategic considerations.
Organisations will need to review internal processes including procurement, payment workflows, and cash flow forecasting.
Critically, there is a working capital impact:
- Businesses relying on extended payment terms as a form of funding will need to adapt
- Shorter cycles may increase funding requirements
- Treasury and financing strategies may need to evolve
While this presents a challenge, it also creates an opportunity to strengthen supplier relationships and build a more resilient supply chain.
Sector Spotlight: Property and Construction
The property and construction sector is particularly exposed due to its reliance on complex supply chains and subcontractors.
A significant additional development is the targeting of retentions, which are widely used in the construction industry and are expected to be banned under the reforms.
This represents a major shift for the sector:
- Retentions have historically been used as a risk management and cash flow tool
- Their removal will require changes to contract structures and project cash planning
- Developers and contractors may need to rethink how they manage performance risk and working capital
While the reforms could improve liquidity across supply chains and reduce disputes, they also introduce new financial and operational pressures for large contractors and developers.
Sector Considerations: Beyond Construction
Many sectors will experience the reforms differently.
For example, the publishing industry has reportedly secured an exemption due to its sale-or-return model, where extended payment cycles are a standard and accepted feature of the business.
This raises a broader question: Are there other sectors with similar commercial models where extended payment terms are intrinsic to how business is conducted?
Businesses operating on sale-or-return or consignment-style arrangements may need to:
- Reassess their commercial models
- Consider how they structure payment terms while remaining compliant
- Engage early in industry discussions around potential exemptions or adaptations
Wider Economic Impact
At a macro level, improving payment practices has the potential to unlock significant economic value.
Stronger cash flow across SMEs can lead to increased investment, job creation, and productivity gains, contributing to:
- Greater business confidence
- Reduced liquidity-driven failures
- A more level competitive environment.
Looking Ahead
Although not yet in force, the direction of travel is clear. With the reforms positioned prominently in the King’s Speech and progressing through Parliament, businesses should begin planning now.
For SMEs, the reforms offer long-overdue protection and improved financial stability.
For larger companies, the focus should be on early preparation, particularly where current models rely on extended payment terms. The shift will require careful consideration of working capital, supplier strategy, and broader commercial implications.
Importantly, while the reforms are widely positive, they are not without complexity. Businesses should avoid viewing them solely as a benefit to SMEs and instead recognise the wider system impact across supply chains and sectors.
The information in this article was correct at the date it was first published.
However it is of a generic nature and cannot constitute advice. Specific advice should be sought before any action taken.
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