The Small Business Commissioner will be given sweeping new powers to investigate poor payment practices, adjudicate payment disputes, and fine the worst offenders – with fines worth tens of millions for firms that persistently pay late or fail to comply with the new laws. 

The measures will tackle a problem costing the UK economy £11 billion every year and ease the cost of living for entrepreneurs and SME owners who are often forced to wait months – or even years – to receive money they have already earned and having to chase endlessly to receive it. 

Some 38 businesses shut their doors every single day because they are not paid on time – the equivalent of 266 a week, and well over a thousand in any given month.  

Every small business owner, including tradespeople, freelancers, family firms and the self-employed, have to waste time and money chasing unpaid invoices when they could be growing their business. 

The changes will include a new 60-day cap on payment terms on all large firms when paying smaller suppliers. New mandatory interest on late payments will also be introduced, with a requirement for all commercial contracts to include statutory interest set at 8% above the Bank of England base rate.   

For example, if a small business is owed £10,000 by one of its customers and is paid 60 days later than the agreed payment date, they will be owed £10,293.15 including mandatory interest (£10,000 plus £193.15 interest plus £100 compensation).

The government also proposes a ban on withholding of retention payments under the terms of construction contracts, consulting on its implementation. This will prevent small firms from losing retentions to insolvency or non-payment. 

Business secretary Peter Kyle said: “Far too many businesses are forced to shut down because they have not been paid – that is simply unacceptable.

“We are unveiling the strongest, most robust changes to payment laws in over a generation – laws that will transform the fortunes of small businesses for years to come and make their day to day lives much easier.”

NFRC welcomed the move, which it said represents the most significant overhaul of the UK’s payment regime in over 25 years and will help to address the cash flow crisis that has long crippled NFRC members and other specialist contractors across the construction industry.

NFRC group CEO James Talman said: “This outcome is one our industry has been campaigning for years to achieve. For too long, specialist contractors have been forced to operate under a system that allowed larger firms to withhold their money, delay payment, and use their cash as free working capital.

“Today, the government has shown that it has listened, and we could not be more pleased.”

David Frise, chief executive of BESA, said: “This is a landmark moment for our industry and a hugely significant step forward for BESA members and the wider building services engineering sector. We have been campaigning for many years to end the unfair and outdated practice of retentions, which has placed an unacceptable financial burden on specialist contractors.

“The government has listened to the concerns of our members and the wider industry. This decision has the potential to transform cashflow, improve business resilience, and create a fairer, more sustainable supply chain.

“It is particularly encouraging that policymakers engaged directly with our members during the consultation process. That real-world insight has clearly helped shape a more robust and meaningful response.”

Debbie Petford, legal and commercial director at BESA, added: “We have been waiting a long time for meaningful reform backed by legislation, and the proposed ban on retentions is a critical part of that. Too many businesses have struggled or failed because they have been denied the lifeblood of healthy cashflow.

“This consultation was a once in a generation opportunity to address poor payment practices, and it is extremely positive to see the government taking decisive action. The collapse of major firms in recent years has only reinforced how vulnerable smaller contractors are within the supply chain.

“While there is still work to do on implementation, this is a major step towards creating a business environment where firms can thrive, not just survive.”

Brian Berry, chief executive of the FMB, said: “We welcome the Companies House reforms as an important step in tackling economic crime, but they don’t go far enough to protect homeowners from rogue builders. These reforms will verify a builder’s identity, but they won’t verify their competence, their insurance, or their track record. Anyone can still call themselves a builder with zero barriers to entry and zero protections for consumers.

“Homeowners are being left in horrific situations – we’ve seen vulnerable people living without working toilets for over a year, wheelchair users left homeless on their own property, life savings wiped out. The legal system is failing them. That’s why we’re calling for mandatory national licensing with minimum competency standards for all builders. ECCTA tells you who they are. Licensing would tell you if the builder is qualified and competent builder. Complete consumer protection requires both.

“By contrast, FMB members undergo rigorous vetting before they can join, which includes: insurance verification, financial background review, directors’ background checks, online review assessments, and trading history verification. On top of this, FMB inspectors examine prospective members’ work on site before approval and members must agree to the FMB Code of Conduct with regular ongoing monitoring throughout their membership.”