New Commercial Payments Bill means no excuses for late payment

For businesses struggling with late payments, relief could be close at hand. The government’s Commercial Payments Bill went through its final reading in the House of Lords on 20th October and will soon come under the scrutiny of the House of Commons.

Initially introduced under the Small Business Protection Bill, the government hailed the changes as ‘the largest crack down on late payments in twenty-five years’, and it is hoped the new rules will improve the flow of cash through supply chains, thereby increasing economic productivity.

Currently, businesses have the freedom to contract on terms acceptable to them. They can agree any number of days for payment and an acceptable interest rate for outstanding debts, as long as that rate is fair and reasonable.

The new bill limits that contractual freedom by making any payment term over sixty days automatically void and replaced with a shorter term of thirty days for all commercial entities (with local authorities only permitted a maximum of thirty days to pay). Other clauses include a mandatory 8% above the Bank of England base rate being applied to outstanding debts. All suppliers will be given a mandatory right to a fixed sum of the greater of £40 or 1% of the contract price, where the purchaser raises a dispute outside of the statutory period or fails to provide sufficient information as to the dispute.

Kelly Dickman, an Associate in the Dispute Resolution team at Furley Page Solicitors, said: “The bill contains substantial changes that will impact all businesses. While there are a number of exemptions, as the government tries to balance the scales of the relative bargaining power between small entities and larger ones, small entities must still be proactive in protecting themselves by ensuring that their exemptions are enshrined in the contracts they sign with entities larger than themselves.”

Currently, none of the bill’s provisions will apply if:

• the purchaser is a sole trader, and the supplier is not a sole trader; or
• the purchaser is a micro undertaking, and the supplier is a small/medium/large undertaking; or
• the purchaser is a small undertaking, and the supplier is a medium/large undertaking; or
• the purchaser is a medium undertaking, and the supplier is a large undertaking; or
• the purchaser is a large undertaking, and the supplier is a large undertaking
  and
• neither the purchaser nor supplier is a public authority;
• the contract is in writing; and
• the contract specifies which exception (by reference to specific subsection of the legislation) applies.

New Powers for the Commissioner

In addition to the statutory provisions protecting smaller businesses, the bill also gives the Small Business Commissioner (SBC) powers to investigate, name and shame and levy fines of up to 1% of annual turnover against larger businesses suspected of persistently engaging in poor payment practices.

The new bill will also give the SBC powers to adjudicate contractual payment disputes between small and larger businesses outside of the court process and make binding interim decisions on these disputes. This could mean faster results for small businesses seeking overdue payments, rather than being forced into potential lengthy litigation battles.

Kelly Dickman concluded: “The Commercial Payments Bill is a decisive step by the government to try and protect small businesses in the arena of late payments, by restricting contractual freedom in the name of protecting small businesses.

“However, it is also worth remembering that for this bill, smaller and larger are relative and at present the bill contains no direct definitions for micro, small, medium and large undertakings. Therefore, all businesses must take care to understand the size of the entity they are doing business with. If the entity is smaller, then no matter how small your business is, you may be considered a larger business for this bill and be subject to the more onerous terms.

“Small businesses as purchasers cannot rest on the bill either if they want to avoid being caught by the more stringent terms for purchasers. They will need to be alive to the details of all contracts they enter, to ensure they include the required exemption clauses, otherwise they will be in the same position as those larger companies, that the bill is ostensibly designed to protect them from.”

Should the Commercial Payment Bill find favour with the House of Commons, it is expected to come into force in 2027 and will have repercussions on all businesses trading in the UK.