What 2025 late payments law amendments means for SMEs

Late payments are believed to be responsible for 50,000 closures and an estimated cost of £684 million each year to small businesses in the UK each year.

Rob Rees, Divisional Director here at Markel Direct, discusses the key changes under the new late payments law, what they mean for small and medium-sized enterprises (SMEs), and explains the options available for protecting their finances.

New late payment law changes: Ensuring large companies pay on time

The Reporting on Payment Practices and Performance (Amendment) Regulations 2024 aims to address late payment issues that affect small businesses by introducing updates to the UK's payment reporting requirements, while also aiming to increase transparency and accountability in how businesses handle payments to suppliers.  

The amendments, effective from January 1 2025, build on the existing 2017 regulations. The most significant changes expected from January are:

Mandatory payment reporting: Large companies, especially those with over 500 employees, will now be required to report their payment practices in annual reports with additional details. They must disclose the value and percentage of invoices that remain unpaid within specified periods, the total amount delayed, and any disputes that cause late payments. These disputes will also be counted as late payments, adding greater transparency to the payment landscape.

Stricter enforcement: Companies and directors who fail to publish truthful and accurate payment reports may face criminal charges, including fines and even criminal records. This measure reinforces accountability at the executive level.

Expanded role for the Small Business Commissioner (SBC): Proposals include enhancing the Commissioner’s ability to investigate and report on late payments, providing SMEs with more avenues to address payment delays from larger clients.

Other proposed changes:

Another proposed change that could assist in tackling late payments is the introduction of the Fair Payment Code. This new code will replace the previous Prompt Payment Code, establishing tiered awards for businesses based on their adherence to prompt payment standards. Companies will have to meet specific standards to achieve gold, silver, or bronze status based on the number of days they take to pay a small business invoice.

• Gold status will be awarded to businesses that pay 95% of suppliers' invoices within 30 days.
• Silver status will apply to businesses that pay 95% of their small business suppliers within 30 days and all other suppliers within 60 days.
• Bronze status will be given to companies that pay 95% of all suppliers within 60 days.

It was announced to come into force in autumn 2024; however, details about its implementation date are still not forthcoming. Businesses are advised to keep an eye on updates from the Small Business Commissioner or the UK Department for Business and Trade for precise timelines or planning compliance.

How can SMEs prepare for the upcoming changes?

The new late payments law updates are designed to benefit SMEs. However, taking proactive steps on the SMEs part to ensure compliance can make the transition smoother.

Review payment terms with large clients: Even though the new law encourages larger companies to outline payment terms, SMEs should ensure that all agreements clearly specify payment terms in line with the new Fair Payment Code (30 to 60-day terms). This will also help SMEs identify clients who may need encouragement to align with prompt payment standards.

Prepare for the Fair Payment Code: For SMEs, aligning with good payment practices can make them more attractive as clients or subcontractors. Signing up for the Fair Payment Code, if applicable, can demonstrate a commitment to fair payment practices, reinforcing trust with suppliers and partners.

Use Small Business Commissioner resources: Under the updated law, the SBC is gaining more power to support cases of persistent late payment. SMEs should familiarise themselves with the SBC’s enhanced role and report any ongoing late payment issues.

Participate in consultations: Once the law comes into force, the Government will monitor its impact and may conduct consultations to refine the legislation further. SMEs will have the opportunity to contribute based on their experiences, helping shape future regulations.

Track payment performance of large clients: One of the updates requires large companies to report on late payments. As these records will be public, SMEs can use this as an opportunity to assess potential partners and avoid businesses with poor payment reputations.

7 tips to help you protect your finances from late payments as a SME

In theory, the new rules are paving the way to stop late payments, but it is only through enforcement that we will see their full impact. In the meantime, SMEs must continue to battle with cashflow issues and late payments under the existing framework. There are several practices you can follow to help manage these challenges.

Research new clients and their credit history

Before the new reporting on late payments takes place and larger companies are obliged to publicly keep their records, the usual methods of vetting a potential client should take place.

Credit reports and credit scoring services can offer insights into their financial stability and payment track record. Both Experian and Equifax are examples of companies that can offer this service.

This upfront due diligence can help you identify red flags, make informed decisions about whether to engage with a particular client and save you from the frustration and financial strain of dealing with late-paying clients down the road.

 Other checks could include:

• Checking the prospect’s website for legitimacy and feel
• Asking for references on your customer from suppliers and banks
• Carrying out a search of the official Register of County Court Judgements

Consider asking for a deposit or staged payments

Consider requesting a deposit, or implementing staged payments, to secure your financial interests on a project. By asking for an initial deposit upfront or breaking down payments into stages based on project milestones, you not only reduce the risk of late or non-payment but also establish a commitment from your clients.

This approach can provide you with a steady cash flow throughout the project's duration, ensuring that your financial stability remains intact and allowing you to allocate resources efficiently.

Moreover, it fosters transparency and trust between you and your clients by aligning their payment obligations with the delivery of agreed-upon results, creating a win-win situation for both parties.  

Ensure contracts are clear from the outset

Before commencing any work, it’s worth ensuring there is a clear contract in place between your business and the client. Without a contract, chasing a non-payer is much more challenging from a legal standpoint.

Be sure to state your payment milestones and invoicing terms, including due dates, late payment interest or fees (on business-to-business debt if applicable), and accepted payment methods, as this helps set expectations upfront. 

Have a system in place for chasing late payments  

It pays to have a thorough system in place for chasing payments. On the day a payment becomes overdue, you should contact the client directly over the phone.

Try to keep the conversation friendly and professional, as there may be a reasonable explanation as to why the invoice hasn't been paid. Simply state that there is an outstanding balance and ask if there is a reason why the amount has not been paid. Try to agree on a date when the payment will be made, but if your client is unable to give a date straight away, say that you'll call the next day once they have had a chance to review. It can be a good idea to also send a follow-up email to confirm that the phone conversation took place and create a dated “paper” trail.

If you have still not received any payment after chasing the client, send them email reminders and follow up with a phone call. Many accountancy software packages can automate email reminders for you, reducing the administrative burden. Be firm, cautious of excuses, and press your client for a date of payment.

If payment isn’t forthcoming, be prepared to act decisively and explain the consequences of non-payment to your client. For example, you could contact your customer in writing and inform them that you will be exercising your statutory right to claim interest (which is set at 8% over the Bank of England base rate), as well as compensation to cover the debt recovery costs.

Speak to your insurer to see if they can help

Always check your insurance policy to see if it includes legal help. At Markel Direct, we provide our business insurance policyholders with access to a 24 hour legal advice helpline, as well as access to Business Hub, which contains legal document templates to help with late payment problems. Having access to valuable advice from experienced legal professionals can help you navigate challenging situations and give you the best chance of getting paid quickly.

Reach out to a professional mediator or the Small Business Commissioner

In a previous study, one of the most surprising findings was that only 4% of respondents said they consulted the SBC, Citizens Advice or other organisations about their late or non-payments, and 56% didn’t even know they could consult these organisations on this issue. On some occasions, the customer refuses to pay an invoice as there is a disagreement over whether the service or products provided were as agreed, or a customer can’t pay the full amount at once.   

If those are the reasons behind late payments, you can get a professional mediator to help. This option can be cheaper and offer more flexibility than taking a client to court.   

If mediation isn’t an option or doesn’t work, you might decide to make a complaint to the SBC, who may be able to investigate the case.

Consider taking legal action

When all else fails, and late payments persist, instead of just writing off the owed money, it might be time to consider taking legal action. While it's not an option to be taken lightly, it can be a necessary step to protect your financial interests. Your insurance provider may be able to help if you have arranged legal expenses insurance, or alternatively, consult with a solicitor who specialises in debt recovery.

Whilst pursuing legal action should be a last resort, and efforts to resolve the issue amicably should precede it, it’s important to remember you are within your rights to take this step.

Whilst there is no sure-fire way of protecting your business from late payments, taking these precautions can help SMEs and freelancers ensure they are in the strongest position to protect their finances and mitigate risk.