But with the consultation closing on 23rd October, the devil will be in the detail of the Government's likely early-2026 response. Behind the bold announcements, crucial questions remain unanswered. If unresolved, SMEs could face a new regime laden with the potential for misinterpretation and loopholes.

The importance of tackling late payments

It’s unsurprising the Government has made late payments a tent pole of its small business plan – they’re a big deal. In fact, late payments cost the UK economy £11 billion per year and shut down 38 businesses every day. Government research estimates around 1.5m businesses have been affected by late payments, with £26 billion owed at any given time. Further research suggests that 49% of invoices sent by UK small businesses in 2023/24 were paid late, a 6% increase from the previous year.

These reforms, billed as some of the most significant legislative changes in over 25 years, will amend the Late Payment of Commercial Debts (Interest) Act 1998. But four critical sticking points could make or break their effectiveness – meaning it’s crucial that we see clarification around them in the next iteration of the Government’s plans.

1. Will the 30-day dispute window be a protection or a loophole?

The Government's proposal introduces a 30-day invoice verification period, requiring businesses to confirm or dispute invoices within a month of receiving them. If no dispute is raised within this period, the full amount becomes payable under the agreed payment terms. Businesses that raise a dispute after 30 days will still be required to pay invoices in full, with late payments accruing statutory interest.

On paper, this reform aims to prevent last-minute objections that delay payment and provides greater certainty for SMEs. However, we need to see how the government aims to deal with potential threats to making it work in practice.

For example, the 30-day window could become a standardised delaying tactic if not properly monitored. Further clarification is therefore required around areas such as what constitutes a 'legitimate' dispute. If a large company raises spurious objections – questioning quality, delivery dates, or contract terms for example – within the 30-day window, they could still delay payment indefinitely while the dispute is 'resolved.'

That raises further questions about whether there will be any consequences for companies that persistently make frivolous objections.

2. Will the enforcer's bite actually hurt?

Perhaps the most anticipated reform is the expanded power of the Small Business Commissioner to fine large firms who consistently pay late, with penalties potentially running into millions of pounds. The policy will use payment behaviour data to identify persistently late-paying businesses, with penalties based on their unpaid statutory interest liability.

Additionally, large companies (those with over 250 employees) will face tougher payment caps (45 days, down from the current 60) and must disclose supplier payment performance in their annual reports. Audit committees must now actively review and challenge payment practices at board level.

However, there remain a number of unanswered questions. For example, is it just companies over 250 employees that can be fined, or will mid-sized firms also face penalties? What constitutes 'persistent' late payment – is it a percentage of invoices, a monetary threshold, or a pattern over time?

More critically, the scale of fines matters. For multinational corporations with billions in revenue, even a million-pound fine might be dismissed as a cost of doing business if it's cheaper than improving their payment systems or giving up the cash flow advantage of late payment.

The deterrent effect will depend entirely on whether these fines are proportionate to company size and genuinely painful. We are therefore hopeful that the government will reveal more on its proposed calculation methodology

3. Could mandatory 8% interest be a double-edged sword?

The reforms make the statutory interest rate of 8% mandatory on all late payments, removing the ability of businesses to negotiate lower compensation rates. This is designed to make late payment genuinely costly.

Given that the average amount SMEs were owed in 2023 was £27,214, and 11% of small businesses are owed between £50,000 and £100,000, mandatory interest could represent significant compensation.

However, there could be potential unintended consequences. Some large contractors may simply look at restructuring their supply chains if working with smaller suppliers becomes significantly more expensive due to interest liability. SME suppliers could potentially be dropped in favour of larger contractors who can absorb payment delays, or negotiate longer payment terms upfront.

There's also a risk of relationship breakdown. Many SMEs, particularly those dependent on one or two major clients, may feel uncomfortable enforcing the mandatory interest for fear of losing the contract entirely.

4. Will binding arbitration represent justice or burden?

The reforms give the Small Business Commissioner new powers to provide legally binding arbitration in disputes and impose financial penalties or make arbitration awards.

In theory, this is exactly what SMEs need. On average, SMEs face three legal issues per year but only seek professional advice 25% of the time. Many report that the current court system is expensive, complicated, and slow – hardly an attractive option when you're chasing an unpaid invoice while managing cash flow.

However, SMEs will naturally be keen to know more about the proposed system. A successful arbitration system must have tribunal-like simplicity – with low cost, rapid decisions, and meaningful enforcement mechanisms. If the system becomes another bureaucratic hurdle, or if accessing it requires legal representation that SMEs cannot afford, then it may not be a practical tool in reality.

Late payment reforms represent a genuine attempt to tackle a crisis that has plagued UK small businesses for decades. However, the difference between true reform and lip service lies in the details, in this case: clear definitions of legitimate disputes, proportionate and enforced penalties, protection against supply chain retaliation, and accessible arbitration.

Without these, the Government's late payment promises risk becoming another disappointment for the 1.5 million businesses still waiting to be paid.