Late-paying businesses would be charged interest at 8 per cent above the Bank of England base rate under the government’s proposals on reforming payment practices.
The government yesterday (31 July) unveiled an eight-point list of proposals that revealed it was considering options to “reform or ban cash retentions” in construction contracts.
Among other proposals, the government said it intended to strengthen the Late Payment of Commercial Debt Act 1998 to ban firms from negotiating lower compensation rates for late payments.
A consultation document on the proposals said: “The proposal will make it mandatory for businesses that pay their suppliers late to compensate their suppliers using the statutory interest rate set at 8 per cent above the Bank of England base rate.
“Businesses will no longer be able to negotiate different compensation rates for late payments.”
The act currently enables businesses to charge interest when an invoice is late.
But the government said that, in practice, “small businesses are reluctant to ask larger business for interest on late payments because they do not want to damage their relationships”.
It added that larger businesses often set out standard terms which include payment of interest at a low percentage rate.
In addition, the Small Business Commissioner could be given the authority to fine companies that persistently fail to pay their suppliers on time.
The penalties would be based on unpaid statutory interest owed in the last reporting period. “For example, twice the amount of statutory interest owed in the last reporting period,” the consultation said.
Companies would be flagged for investigation if they reported that a threshold proportion – suggested at 25 per cent – of invoices were paid late under the existing Reporting on Payment Practices and Performance Regulations 2017.
The Small Business Commissioner would be empowered to consider each firm’s circumstances, past payment performance and any improvement plans before deciding whether to issue a financial penalty.
Director of policy at the Association for Consultancy and Engineering, Marie-Claude Hemming, said: “The scourge of late payments continues to plague our industry. It is imperative that the new proposals work for the infrastructure sector and stamp out poor behaviour once and for all.
“Today’s announcements will not be a panacea for all SME problems. However, we look forward to working with government over the coming months and years to ensure the SME agenda remains at the heart of policy making.”
Debbie Petford, legal and commercial director at the Building Engineering Services Association, welcomed the proposals, saying: “The collapse of ISG last year demonstrated just how vulnerable small contractors are to insolvencies further up the supply chain.
“Too many perfectly good businesses have been lost because they have been denied the lifeblood of healthy cashflow.
“This consultation is the opportunity we have been calling for to address this blight on our industry once and for all.”
What reforms is the government proposing to payment practices affecting small and medium enterprises?
Mandatory board-level scrutiny of payment practices
Large companies would be required to include payment performance data in their directors’ reports, with audit committees expected to provide formal commentary. The Small Business Commissioner (SBC) would be allowed to contact boards directly to flag concerns or request improvements.
A statutory cap on payment terms
The Late Payment of Commercial Debts (Interest) Act 1998 would be amended to outlaw payment terms longer than 60 days. The current exemption, which allows longer terms if they are not deemed “grossly unfair”, would be removed. A future reduction of the cap to 45 days is proposed, subject to further consultation in five years.
A deadline for raising invoice disputes
Businesses would be required to raise any dispute within 30 days of receiving an invoice. After that, they would be obliged to pay in full within the agreed payment period or face interest penalties. This measure aims to prevent firms from delaying payments by raising last-minute challenges.
Mandatory interest on late payments
Statutory interest, currently set at 8 per cent above the Bank of England base rate, would become a legal requirement for all qualifying contracts. Companies would no longer be allowed to waive this right or negotiate a lower rate in their standard terms.
Greater transparency on interest owed
Large firms would have to publish the total statutory interest owed and paid to suppliers as part of their biannual payment performance reporting. This is intended to highlight poor behaviour and encourage more businesses to pay promptly.
Financial penalties for repeat late payers
The SBC would be granted powers to impose fines on large companies that consistently pay invoices late. A trigger point is proposed – such as 25 per cent of payments being made beyond agreed terms – after which the SBC could investigate and, where appropriate, issue penalties. Fines would be linked to the value of unpaid interest.
Expanded enforcement powers for the SBC
The SBC would be able to compel large firms to disclose payment data, launch investigations based on anonymous tips or third-party data, and issue legally binding arbitration awards in payment disputes. This would significantly expand the commissioner’s remit beyond its current, primarily advisory, function.
New rules on construction retentions
The government is consulting on two alternative approaches to address the widespread misuse of retention clauses in construction contracts. One option is to ban retentions altogether. The other is to allow retentions but mandate that funds be protected, either by placing them in segregated bank accounts or by using insurance-backed instruments of guarantee.
