Blair McDougall MP, acting as Minister for Small Business and Economic Transformation, has announced a series of reforms designed to help SMEs tackle the scourge of late payment. In this article, we look at why reform is needed and if it is likely to make a difference.
Spot the Problems
According to the latest government statistics, 38 businesses close every day because late payment starves them of the ability to pay wages and suppliers. The average SME spends 86 hours a year chasing late payment, with 15% of them blacklisting persistent late-paying accounts. When an SME negotiates payment terms with a large business, the deck is not stacked in their favour. Using the excuse of being a large entity and assumedly less efficient at processing invoices, extended payment terms and lengthy dispute windows are dished out based on the ultimatum of ‘take it or leave it’. Ironically, with a larger workforce and more resources, large businesses should be better able to pay invoices on time! Unless you are an SME in the privileged position of being able to provide what no one else can, most large businesses apply blanket procurement policies with little room for negotiation. Here at Advocate Commercial Debt Recovery, we have come across contracts that blatantly allow the debtor to stall payment using contractual clauses that clients felt they had no option but to accept. The reforms announced below aim to stack the deck more favourably for SMEs.
Reform 1 – Stronger Powers for the Small Business Commissioner
Since its founding in 2016 to much fanfare and promise, the Small Business Commissioner (SBC) has struggled to gain recognition amongst SMEs. A 2024 statutory review found the SBC’s impact was limited and lacked enforcement power. Until now, the SBC has primarily been confined to reporting and advising. Under the first reform proposed by Blair McDougall, the SBC will be given three new powers. The Power to Investigate: any business suspected of poor payment practices can be investigated by the SBC and compelled to comply with information requests. The Power to Impose: the SBC has been given the power to impose fines on companies breaching payment legislation and performance obligations. The Power to Adjudicate: The SBC has been given the power to adjudicate in payment disputes and make binding decisions. This will be particularly useful for SMEs who are not part of a trade body offering adjudication.
Reform 2 – Expand Payment Performance Obligations
Under the Reporting on Payment Practices and Performance Regulations 2017, large companies must report twice yearly to .Gov on how well they are doing at paying suppliers on time. In 2026, this became a legal obligation. In conjunction with new SBC powers to police it, this reform puts an additional legal requirement on large companies with poor payment performance to explain why and what they intend to do about it. The aim here is to put late payment on the agenda at board meetings. Large companies will also be obligated to report how much late payment interest they paid out compared to the value they were liable for. If the disparity is too big, the SBC can investigate and fine prolific offenders.
Reform 3 – Maximum Payment Terms
In the UK, payment terms of 30 days are the most widely used. For buyers, longer payment terms provide a cashflow advantage, whereas for suppliers, it can choke their ability to buy stock and pay staff. Under the reform, maximum payment terms of 60 days will be brought in, except for imports/exports, when both entities are large companies, and when the buyer is the smaller party. People will always try to game the system. In industries where average payment terms are already low, we could see 60 days become the new 7 or 30, putting creditors in a worse position. Imposing a blanket maximum payment term will benefit the minority of creditors currently saddled with longer terms.
Reform 4 – Fixed Interest Rate
Current legislation allows a creditor to claim late payment interest at 8% above the Bank of England base rate. Until now, there was room to negotiate the interest rate when drawing up a contract. Here at Advocate Commercial Debt Recovery, we have had clients tell us they have been forced to forego interest clauses to secure a contract. The fixed interest rate reform removes the ability for parties to agree on anything other than 8% above the base rate and stops creditors from being used as a source of low-cost credit. In keeping with the SBC’s stronger powers, SMEs will be able to call upon them to help recover unpaid interest. It is unclear how effective the SBC will be at doing this because it will take significant resources from a service that cannot claim its time costs back from either party.
Reform 5 – Time Barred Disputes
Most businesses will not entertain a dispute outside of the pre-agreed time frame unless payment has already been made or they risk losing a flagship customer. The courts currently require a debtor to explain why they failed to raise a dispute earlier and evidence the validity of their 11th-hour defence. This reform will impose a statutory time limit on raising a dispute. However, a debtor will still be entitled to raise a time-barred dispute on payment of compensation being made to the creditor. Both the time limit and compensation amount are yet to be announced. The time frame for raising disputes is currently dependent on the industry norms. For example, 24 hours would be reasonable for the sale of fresh bread, but not a pallet of light bulbs. A pragmatic and balanced approach needs to be taken if time-barred disputes are to affect positive change.
Reform 6 – Ban on Withholding Retentions in the Construction Industry
In the construction industry, a percentage of the overall contract value (retention) is held back after practical completion and paid after the defects liability period ends. If the buyer enters liquidation during the retention period, the sums owed are classed as unsecured debt and are unlikely to be paid in full. Waiting out the retention period or not receiving it at all places a strain on cash flow, forcing swathes of otherwise viable businesses to collapse. Under the new reform, buyers will have to ringfence and protect retentions. This means if the buyer enters liquidation during the defects period, the retention will still be paid in full. The reform will also prohibit the debtor from withholding a retention after the defect liability period ends, even if a dispute exists. It is expected that buyers will try to find a way around the triple threat of mandatory 60-day payment terms, fixed interest, and retention ban by increasing payment timescales and defects periods. This reform will need to go through a consultation period within the construction industry and is widely expected to be watered down to appease top-tier contractors and their investors.
Evolution not Revolution
Since the introduction of the Late Payment of Commercial Debts Regulations 2013, follow-up initiatives like the Reporting on Payment Practices and Performance Regulations 2017 and the Fair Payment Code have hardly been groundbreaking despite the hype. The latest reforms have the potential to build on the 2013 regulations, but are at risk of being diluted by the political swamp of Westminster or abandoned altogether with an impromptu change of government. Even with successful implementation, the six reforms will benefit some and hinder others. No matter how well regulated or legislated, debtors will always be debtors, and creditors will always be trying to make them pay. Despite Blair McDougal’s reforms stacking the deck marginally less in favour of debtors, the overall impact on SMEs will not be immediately felt. Changing the culture of late payment takes time to advocate for. As the name suggests, it is a cause that Advocate Commercial Debt Recovery has been championing since the Late Payment of Commercial Debts Regulations 2013 came into force.