Late Payments Clampdown: What Businesses Must Know
Late payment isn’t just bad practice anymore. It’s about to become a board-level compliance risk. Your construction business could lose government contracts and face mandatory interest charges you can’t waive.
Late payments drain £11 billion from the UK economy every year, forcing 38 businesses to close their doors every day. Complex subcontracting chains and widespread retention clauses make construction particularly vulnerable to payment delays. Currently, 87% of SMEs report invoices paid late, with large companies taking 30% longer to pay than smaller firms.
One in five insolvencies comes directly from late payments, whilst construction businesses across the UK are owed over £30 million in outstanding payments. The government has now stepped in with a blunt message for businesses. Pay faster or face the consequences.
Talk to us today if you need support with late payments or construction disputes. Let us help you keep your business running smoothly and without complicated payment delays.
What is the Industry Standard for Late Payments?
Government reforms launched in July 2025 will fundamentally alter payment practices for UK businesses, with construction facing particularly significant changes.
Under the new proposals, all businesses will face mandatory standards:
- Maximum payment terms capped at 60 days, with potential future reduction to 45 days
- A strict 30-day window for raising invoice disputes
- Automatic statutory interest if disputes aren’t raised within the deadline
- Mandatory interest provisions that cannot be waived in contracts
For firms working on public sector contracts, tighter rules apply from 1 October 2025:
- Average payment time of 45 days (reduced from 55 days)
- 95% of all invoices paid within 60 days
Construction businesses face an additional challenge unique to the sector. Retention clauses have long caused cash flow problems. The government is now consulting on either banning these clauses entirely or requiring the money to be held in protected accounts that safeguard it from issues like client insolvency.
Businesses can also voluntarily sign up to the Fair Payment Code, which operates on a tiered award system. Gold tier members commit to paying 95% of invoices within 30 days. Silver and Bronze tiers allow longer payment periods but require faster payment specifically to small businesses.
How Do Late Payments Affect a Business?
The damage from late payments extends far beyond simple cash flow problems. When invoices remain unpaid, businesses face consequences that threaten their financial stability and growth.
Cash tied up in unpaid invoices cannot fund operational expenses, wages, or investment. This forces many businesses to seek expensive short-term financing or delay payments to their own suppliers, creating a knock-on effect throughout the supply chain.
The costs accumulate quickly:
- Late payment interest and fees mount over time
- Credit ratings deteriorate, making future financing more expensive
- Administrative burden increases when chasing overdue payments
- Supplier relationships suffer when your business cannot pay promptly
Reputational damage now carries real weight. Under enhanced disclosure requirements, larger businesses must report detailed payment data publicly. The Small Business Commissioner actively “names and shames” poor payers, making this information accessible to potential clients, partners, and investors who increasingly view poor payment practices as a warning sign about how a company operates.
The New Rules Transforming Payment Practices
These reforms fundamentally change who is responsible for late payments within your business. Payment performance is no longer just an issue for your accounts team. Company directors will be personally responsible for reviewing and reporting on how quickly invoices are paid, with this information published in annual reports for everyone to see.
The Small Business Commissioner now has real power to enforce these rules. They can conduct surprise checks on your payment records, demand information during investigations, issue financial penalties, and make legally binding decisions in payment disputes.
Late payment interest is now unavoidable. When you pay invoices late, you face automatic interest charges of 8% above the Bank of England base rate. Even if your contract specifies a lower rate, recent court cases show this won’t protect you. The 8% penalty will apply unless your contract already includes an interest rate of at least 5% over the base rate.
How Can a Business Identify Overdue Payments?
Strong operational controls start with proper receipting practices. Most invoice disputes stem from poor receipting. When goods and services are properly logged with time, place, and quantities, and matched to purchase orders and invoices, disputes become rare.
Digital systems provide the foundation for effective tracking:
- Implement e-invoicing to create clear audit trails
- Match receipts to purchase orders and invoices systematically
- Log deliveries with verified date, location, and quantities
- Track payment against contractual terms in real-time
Regularly reviewing your payment data helps you identify which clients consistently pay late, allowing you to adjust credit terms or require upfront deposits on future projects with those clients.
Equally important is tracking your own payment performance to suppliers. Monitor how many invoices you pay on time, how long your approval process takes, and how often disputes arise. Your board should regularly review any interest charges building up and patterns in payment delays to ensure compliance with the new rules.
Common problems that slow down your payments include inconsistent records of goods received, poorly written purchase orders, and delays in setting up new suppliers on your system. Fixing these basic issues prevents disputes, speeds up the approval process, and helps you stay within the 30-day window for raising any payment queries.
Act Now to Avoid Penalties and Gain Advantage
Ignoring these reforms carries serious consequences. Businesses that fail to meet the new payment standards will be excluded from government contracts worth over £5 million annually. For many construction firms, public sector work provides steady, reliable income, making this exclusion a significant threat.
The government can also prosecute businesses that fail to report payment data accurately or publish misleading information about their payment practices.
Public sector payment requirements take effect from 1 October 2025, whilst the broader government consultation on all reforms remains open until 23 October 2025.
If you need guidance on implementing these changes or are facing payment disputes, our construction law specialists can help you navigate the new regulations and protect your business interests.
