Payment reforms: Department for Business and Trade announces new legislation to tackle late payment

Following our article published on 6 January 2026 outlining the government’s proposed reforms to tackle poor payment practices in the UK, the Department for Business and Trade has confirmed it will introduce new legislation to tackle late payments, a problem currently estimated to drain almost £11 billion from the UK economy annually.

The proposals represent the most significant shift in payment legislation in over 25 years, focusing on strengthening the powers of the Small Business Commissioner and mandating stricter payment terms.

Imposing a ban on retentions

Retention clauses are currently permitted to allow the withholding of a portion of the contract sum until certain conditions are met. In construction, this is usually the completion and/or the expiry of the relevant defect periods.

Feedback from consultation respondents, however, suggested general support for reform to retentions. The government has advised it therefore intends to ban this practice to help prevent loss through insolvency and late/non-payment. Respondents advised that an outright ban on retentions was preferable to mandatory protection schemes, such as ring-fencing funds in separate accounts.

Maximum 60-day payment terms

Currently, The Late Payment of Commercial Debts (Interest) Act 1998 permits payment terms longer than 60 days to be agreed between businesses if they are not ‘grossly unfair’.

The government now intends to take forward stricter maximum payment terms limited to 60 days, replacing the current ‘grossly unfair’ test. Although, in light of consultation feedback, there will be some limited exemptions to this, namely where:

Both parties are large companies
The purchaser is the smaller party
The goods or service are either being imported or exported

It is suggested that these exemptions will balance protections for smaller businesses who are often the most disadvantaged when negotiating payment terms, while allowing larger businesses to continue making arrangements that help them remain competitive both in the UK and abroad.

Statutory time limit for disputes

New statutory time limits will be introduced to stop companies from using ‘frivolous disputes’ to stall payments, a move backed by strong consultation feedback. Disputes that are raised outside the permitted window will trigger mandatory compensation for the supplier.

In the construction sector, the government will introduce measures to align with the existing payment notice mechanisms under the Housing Grants, Construction and Regeneration Act 1996.

Statutory interest at 8% over base rate

During the consultation, 80% of respondents agreed with introducing mandatory interest for late payments. The government therefore intends to take this forward, mandating statutory interest on late payments at 8% above the Bank of England base rate.

The Reporting on Payment Practices and Performance Regulations 2017 currently require qualifying companies to disclose their payment practices and policies. This will be expanded under these reforms, to now require businesses to report both the total interest owed and the amount actually paid to suppliers.

The Small Business Commissioner’s new powers

Reflecting the 76% of respondents who believe the Small Business Commissioner (SBC) requires more authority, the government will expand the SBC’s powers to better support small firms struggling with late payments from large businesses. New powers will enable the SBC to investigate payment issues, mandate information sharing, and conduct compliance checks.

The Commissioner will also be empowered to resolve payment disputes and issue fines for non-compliance.

What does this mean for construction businesses?

The government’s proposed reforms represent a major shift in payment legislation in the UK, which could result in risk for construction businesses if they are not well prepared. Businesses should audit their current suite of contracts to identify retention clauses, as well as outdated interest rates and dispute windows in order to fully comply with the government’s proposals once they become law.

To avoid falling foul of the proposed reforms, companies should also seek to improve their contract administration processes, specifically around accelerating invoice approvals, certification processes, and disputing invoices, to ensure full compliance with the new payment framework.

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