In Business: Late payment

Late payment remains a stubborn and damaging feature of UK commercial life. In 2024, the government pledged to crack down on this problem, announcing reforms to increase transparency, strengthen enforcement and reshape corporate behaviour. While the proposed changes are welcome, they also serve as a timely reminder: paying on time is not just good practice, it is a test of corporate integrity.

As lawyers, we often focus on legal obligations: what the law requires, what the contract says, what parties have agreed to. But fairness is not always a matter of legal duty. One might argue that if a supplier agrees to 120-day terms, then that is simply the deal – no harm, no foul. But let’s be honest: in practice, that agreement is rarely between equals. Larger businesses often use their financial muscle to press smaller suppliers into accepting terms they would never freely choose. That is not fairness; it is leverage.

Late payment is not a victimless delay. When smaller suppliers are forced to bankroll a customer’s balance sheet, the ripple effects can be significant. It stifles investment, threatens jobs, and in the worst cases, pushes businesses into insolvency. Even where insolvency does not follow, late payment puts undue pressure on cashflow, often forcing businesses to divert resources from innovation or growth simply to stay afloat.

One of the most significant developments here is the growing recognition of the environmental, social and governance (ESG) implications. Businesses that delay payment may be seen not just as inefficient or inconsiderate, but as socially irresponsible.

Why? Because slow payment practices can harm economic ecosystems. They can contribute to a culture of delay, where cash hoarding at the top of the chain deprives others further down of the liquidity they need to operate. It is no surprise that investors and partners are starting to scrutinise payment practices as part of due diligence. Late payers are no longer just bad debtors – they may be bad corporate citizens.

The updated Payment Practices and Performance Regulations 2017 (PPRs), revised in 2024, are part of the government’s effort to address this issue. Larger UK companies and LLPs must now report not just the percentage of invoices paid on time, but the total monetary value involved and whether delays were due to disputes. This shift from percentage to pound signs increases the impact of public reporting – numbers that once floated under the radar are now front and centre.

This matters, because transparency creates scrutiny. And scrutiny brings reputational risk. With the government signalling a tougher enforcement regime – including potential criminal sanctions for misleading reports – the stakes are higher.

Alongside the regulatory push, the revised Fair Payment Code introduces a tiered award system to publicly recognise prompt payers. A Gold Award requires payment of 95% of invoices within 30 days; Silver, 60 days (with small businesses still prioritised); while Bronze simply reflects compliance with existing norms.

This code is voluntary, but its optics are not. For legal advisers, this means we need to start asking not just what our clients are doing to comply with the law, but what they are doing to comply with evolving stakeholder expectations.

From October 2025, any business bidding for government contracts over £5m must demonstrate it pays its suppliers, on average, within 45 days. This new standard raises the bar from 55 days. Businesses that fall short may find themselves locked out of lucrative opportunities.

This is a major shift and highlights a broader trend: public and private sector buyers alike are looking to partner with suppliers who reflect their values. Late payment is not just a financial issue anymore; it is a reputational one.

 Gaming the system

To fundamentals. What does it mean to agree to pay within 30 days? For some companies, it means 30 days from invoice. For others, it means 30 days from month-end. Still others interpret it to mean 30 days after invoice approval – a process that itself might take weeks due to complex internal workflows.

Then there are those who game the system, disputing invoices on minor technicalities or dragging their heels under the guise of process. These tactics may be contractually permissible, but they erode trust. If your terms say ‘30 days’ but your processes mean ‘90 days’, then your negotiation has misled your supplier.

The Late Payment of Commercial Debts (Interest) Act 1998 offers suppliers statutory interest, but it is rarely used. Many contracts include express terms that disapply or dilute the statutory remedy, and suppliers are often reluctant to pursue claims out of fear of souring the commercial relationship.

However, that is beginning to change. In an age of rising insolvencies and tighter margins, suppliers have more reason to enforce their rights. Insolvency practitioners may pursue overdue debts with vigour. Third-party debt collectors are more aggressive. And with reputational risks growing, late payers face pressure not just from their creditors, but from their peers.

The government has flagged additional reforms: requiring large companies to disclose payment performance in annual reports, and placing responsibility on audit committees to monitor compliance. These changes aim to embed payment performance into core business accountability, not just leave it as a finance department issue.

Meanwhile, changes specific to construction contracts require large businesses to disclose use of retention clauses and related practices.

Clients will need to revise contract drafting, particularly around payment terms, approval processes and dispute resolution. Procurement departments must align operational practices with contractual promises. And GCs will increasingly find themselves involved in discussions not just about legal risk, but reputational resilience.

There is also a role for lawyers in shifting corporate culture. When we advise clients on what they can do, we must also help them think about what they should do.