The UK Government describes the current status quo as 'wasteful and unproductive' costing the UK economy £11 billion annually and leading to the closure of 38 UK businesses every day. The consultation saw 867 formal responses from businesses of every size, sector and region.
On 24 March 2026, the UK Government published its response and the direction is clear: reform is coming and it is shifting towards harder legal obligations and stronger enforcement. The proposals are described as the largest set of late-payment reforms in over 25 years. It is important to note at the outset, that late payment touches upon devolved matters and as a result, the proposals will not automatically apply across the UK unless otherwise specified. Measures taken are likely to be subject to consent or parallel legislation by the Scottish Government. At the time of writing, the Scottish Government is in purdah and we will need to wait until the next parliamentary term to find out the overall impact in Scotland.
Deducting Retention Under Construction Contracts
The biggest proposal comes in the form of banning the practice of deducting and withholding retention payments under the terms of construction contracts - a deeply embedded industry practice. Contractual retention reform is certainly not a new proposal. In 2021, the Scottish Government considered the matter, ultimately deciding against a ban. Instead, it opted for recommending the establishment of a statutory retention deposit scheme with a long-term ambition to see a reduction in use of traditional contractual retention. However, it is clear the UK Government intends to go one step further with its latest proposal.
Respondents raised concerns about removing retentions believing they are a cost-effective mechanism, providing an incentive for firms to fulfil their contractual obligations and rectify defects. Some respondents favoured a retention protection measure approach rather than an outright ban. Here retentions would be protected from upstream insolvency but remain available for quality assurance. The Government will have to counterbalance the risks which will follow in the absence of retention. Respondents expressed a lack of confidence citing the challenges of ensuring quality of delivery in construction projects, and that the rate of errors and defects in the industry remains high. Whilst it is acknowledged some alternatives already exist, for example parent company guarantees or retention bonds, it is not a one stop solution. What happens when the parent company's financial standing or reputation is in question? Furthermore, retention bonds create additional costs and may offset the cash flow benefits expected in the absence of retentions.
The UK Government plans to consult on how best to implement its decision. It will require a great deal of legislation and given the significance of the proposal, it will not be instantaneous, nor will it be easy. Regard must also be given to the danger that retention might reappear under a different guise. It is a proposition that in its current state remains open in terms of scope, mechanism and transition.
Maximum Payment Terms
The UK Government intends to introduce a maximum payment term of 60 days (with limited exceptions). The exceptions include: where both parties are large companies; where the purchaser is the smaller party; and where the goods or services are either being imported or exported.
Implementation of this will need to be aligned with construction payment legislation under the Housing Grants, Construction and Regeneration Act 1996, the Fair Payment Code, and the Reporting on Payment Practices and Performance Regulations 2017 etc. The current regime allows for flexibility. Parties can agree to longer payment terms subject to them not being 'grossly unfair.' However, the UK Government's proposal will sacrifice this flexibility in an attempt to protect small and medium enterprises who are normally disadvantaged when it comes to negotiating payment terms.
This 60-day ceiling may only be the start. There is a possibility that this may be later reduced to 45 days after five years. This will likely be subject to further consultation.
Mandatory Interest on Late Payments
It is proposed that all commercial contracts will contain a right to statutory interest at 8% above the Bank of England base rate (with no exemptions). Currently there is an ability to opt-out under the Late Payment of Commercial Debts (Interest) Act 1988.
Large companies will also be required to report on interest payments under the Reporting on Payment Practices and Performance Regulations 2017, including the value of interest that a company is liable to pay and the value of interest it has actually paid. This will identify persistent late payment behaviour and trigger investigations into their practices with the possibility of potential fines. The investigations will be commence following a specified 'trigger point'. The Government suggests an investigation may occur when a company reports that it has paid 25% or more of its suppliers late. Such a reporting requirement will fall under company law as a reserved matter and therefore will be implemented UK wide.
Late payment already carries reputational risk but this will be exacerbated by the requirement that large businesses publish commentary on GOV.UK explaining their reasons for poor practices. It also means that directors may be held accountable for systemic delays. Therefore, this will be a matter of compliance equivalent perhaps to that in tax and data protection such as the UK GDPR Regulations and the Data Protection Act 2018.
Extending the Powers of the Small Business Commissioner (SBC)
The SBC will have extended powers to undertake investigations; compel production of information; conduct compliance checks; adjudicate on disputes and impose financial penalties. The hope here is to make the SBC more effective in tackling late payments.
The new powers are intended to create a viable enforcement mechanism for small and medium enterprises, lowering costs and complexity. It is certainly a less adversarial route and it is intended that the Small Business Commissioner acts as a regulator allowing action against patterns of behaviour and not just on individual complaints.
The Office of the Small Business Commissioner is a UK wide independent body, established under the Enterprise Act 2016, whose functions relate to reserved matters rather than devolved competences. Expect to see this implemented consistently throughout the UK, though how the Commission's work will interact with the devolved issues surrounding payment is yet to be seen and will require coordination.
Statutory Time Limit for Disputes
A statutory time limit for raising invoice disputes will be introduced whereby businesses that do not raise disputes within the time limit will need to pay compensation to their supplier. For construction contracts, this will require to be introduced in a way which aligns with the already existing payment notice mechanisms under the 1996 Act. The consultation suggested a 30-day window, however, this has not been confirmed.
As a result, we are likely to see a tightening of contract administration and verification so that any issues regarding defects etc are identified and evidenced within the dispute time limit.
What to Expect and Next Steps
The UK Government's response to the consultation is certainly a dramatic move from voluntary compliance to legal enforcement and this will mark a significant shift for the industry. However, the details are not final, and it leaves a number of issues in limbo. How will the proposals work in practice? Challenges do exist and concerns have been raised on issues such as potential impact on working capital, international competitiveness, removal of bargaining chips in negotiations, the independence and involvement of audit committees and further regulatory burdens which may follow.
Failing to adapt could be costly. Businesses should be proactive:
- Contract reviews should be undertaken identifying payment provisions, dispute mechanisms and interest provisions.
- Subsequent to review, contract templates should be updated to reflect the proposals such as the 60-day cap and interest.
- Administrative changes should be made to ensure disputes are raised within the deadlines.
- Cash-flow should be restructured particularly where businesses rely on extended payment cycles.
Large businesses should treat payment practices as a compliance risk. It is no longer just reputation at stake. For small and medium enterprises, it should be a welcome change offering protection through strong and enforceable rights. At the time of writing, however, uncertainty remains.
This article has been co-authorised by David O'Neill, Trainee Solicitor at MFMac.
