The reforms announced on 24 March 2026 represent the most significant change to payment obligations in commercial contracts for over a generation. Businesses face material exposure on both sides: as customers, through mandatory payment caps and compulsory statutory interest; as suppliers, through newly available enforcement routes and adjudication mechanisms.
Background
The existing framework is the Late Payment of Commercial Debts (Interest) Act 1998, which entitles businesses to charge interest at 8% above the Bank of England base rate on overdue commercial invoices. Payment terms exceeding 60 days are already open to challenge on grounds of unfairness, and public bodies are obliged to offer terms not exceeding 30 days.
The Government consulted on proposed reforms between 31 July 2025 and 23 October 2025, receiving over 850 formal responses — the highest ever engagement on this topic.
The Announced Reforms
On 24 March 2026, the Government announced sweeping new powers for the Small Business Commissioner (SBC) to investigate poor payment practices, adjudicate disputes, and fine persistent offenders — with penalties potentially worth tens of millions of pounds.
The principal measures are as follows.
1. Cap on Payment Terms
A mandatory 60-day payment window will apply to all commercial contracts involving companies with annual revenues above £54 million. The Government has indicated an intention to reduce this to 45 days over a five-year period.
2. Mandatory Statutory Interest
Suppliers will gain the right to charge statutory interest at 8 percentage points above the Bank of England base rate on overdue invoices. Critically, the reform removes the existing ability to contract out of this obligation.
3. Enhanced SBC Enforcement Powers
The SBC will be empowered to identify and fine persistent late payers based on data published under the Reporting on Payment Practices and Performance Regulations 2017. It will also be able to impose financial penalties for breaching payments legislation and for failing to comply with its investigations and adjudication processes.
4. Out-of-Court Adjudication
The SBC will have a new adjudication function to settle late payment disputes outside the court process, providing a faster and lower-cost route for qualifying businesses.
5. Board-Level Accountability and Reporting
Companies found to be consistently breaching payment standards will be required to publicly disclose their practices in annual reports. Audit committees or company boards will be required to provide commentary on payment performance before data is submitted to Government.
6. Retention Payments in Construction
The Government proposes to ban the practice of deducting and withholding retention payments under construction contracts, with a consultation on implementation to follow.
Economic Context
Late payments are estimated to cost the UK economy almost £11 billion per year and contribute to approximately 14,000 business closures annually — equivalent to 38 businesses every day.
Implementation Timetable
The legislative timetable remains to be confirmed. Key provisions — including the payment terms cap and Commissioner enforcement powers — are expected to take effect in late 2026, though the consultation findings may influence timing.
How STA Legal Can Assist
STA Legal's commercial disputes and advisory teams offer specialist support across the full range of issues arising from these reforms.
Litigation. Where payment disputes cannot be resolved by negotiation, we act for claimants and defendants in proceedings before the Business and Property Courts, including the Commercial Court and Circuit Commercial Courts. We advise on the recovery of principal debt, statutory interest under the 1998 Act, and the strategic use of summary judgment applications where liability is not genuinely disputed.
Arbitration. Where commercial contracts contain arbitration clauses, our disputes team has experience in institutional and ad hoc arbitral proceedings under the rules of the major arbitral institutions, including advice on interim relief and enforcement of awards under the Arbitration Act 1996.
Adjudication. We will advise clients on the strategic choice between SBC adjudication and litigation, having regard to cost, speed, enforceability and claim value. For construction clients, we have existing experience of adjudication under the Housing Grants, Construction and Regeneration Act 1996.
Redrafting of Commercial Agreements. The 60-day cap and the removal of contracting-out rights will render non-compliant provisions in existing supply chain and procurement contracts unenforceable. We are available to audit contract portfolios, advise on transitional arrangements, and redraft payment, dispute resolution and interest provisions to ensure compliance with the incoming framework.
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Leonard Scott
Client Services Director • Commercial Litigation
