Late payments have a significant impact on the UK’s economic growth, especially for small businesses that waste countless hours chasing overdue payments.
Thankfully, reforms are on the horizon. In this article, we explore what small businesses stand to gain from these changes and how they will affect larger companies, too.
1. Introduction to Late Payment Issues
Late payments are a major challenge for small businesses, affecting cash flow and growth. Each year, long payment terms and late payments contribute to the closure of 50,000 small businesses in the UK, costing them over £600 million.
In light of the pervasive issues with late payments, the UK government is introducing stricter payment reporting and transparency measures. The changes, which have been in effect since January 1, aim to hold large companies accountable and improve financial fairness for small businesses. But what do these reforms mean for both sectors?
2. What’s Changing? The Fair Payment Code & Reporting Regulations
Replacing the Prompt Payment Code (PPC), the new Fair Payment Code aims to support SME’s cash flow by encouraging UK businesses to make timely and fair payments while ranking them based on their payment practices.
Businesses can select the appropriate Award tier: Gold, Silver, or Bronze based on their performance. In addition to promoting best practices and enhancing payment performance, these Awards provide businesses with valuable reputational advantages.
Amendments to the Reporting on Payment Practices and Performance Regulations 2017 introduce new transparency and accountability measures for large businesses. Under these regulations, large companies are obliged to publish biannual reports that include average payment terms, the percentage of overdue payments, and their standard payment terms.
3. Definition of a Large Business Under the New Rules
The stricter late payment reporting requirements apply to large businesses, defined as companies that meet at least two of the following criteria:
- Annual turnover: More than £54 million
- Balance sheet total: More than £27 million
- Number of employees: 250 or more
These companies will now have to publicly disclose their payment practices, ensuring greater transparency for small business suppliers.
This transparency will help small businesses understand the payment practices of their larger partners, ensuring they are not unfairly impacted by late payments and can better manage their cash flow.
4. Key Reporting & Compliance Changes
Under the new regulations, large companies are held accountable for their payment behaviours and must now report:
- The percentage and value of invoices not paid within agreed terms.
- The total sum of overdue payments and the reasons behind delays.
- The proportion of invoices currently in dispute.
Failure to comply could result in criminal charges, including unlimited fines and penalties for responsible directors.
5. What This Means for Small Businesses
The new late payment law changes are designed to benefit small businesses
and ensure the following:
✅ Increased transparency – You can now check a company’s payment track record before working with them.
✅ Less chasing – Large firms face more pressure to pay on time.
✅ Stronger legal backing – Small businesses have more power to challenge unfair payment delays.
To ensure a smoother transition and better preparation for the changes, small businesses are encouraged to take proactive steps such as reviewing payment terms and tracking payment performance with larger clients, signing up for the Fair Payment Code, using Small Business Commissioner resources and more.
6. Conclusion
These reforms aim to level the playing field for small businesses dealing with large firms. They can significantly impact the way businesses manage their financial operations, from working capital and cash flow to regulatory reporting and compliance.
In addition to the changes, understanding your rights and keeping strong payment terms in contracts will help protect your business from late payments.
Want to make sure your payment terms are solid? We can help draft watertight contracts to protect your cash flow. Get in touch today!