The Commercial Payments Bill (also referred to during earlier stages as the Small Business Protections Bill) is currently progressing through the UK Parliament. It introduces a statutory 60-day payment cap on business-to-business contracts, mandatory late payment interest at 8% above the Bank of England base rate, new dispute rights, and expanded Small Business Commissioner enforcement powers.
For UK SMEs owed money by larger customers, the legislation strengthens statutory rights that already exist under the Late Payment of Commercial Debts (Interest) Act 1998 but have been unevenly enforced. For UK SMEs that owe money to smaller suppliers, the legislation introduces compliance obligations that will affect contracting practice from 2027 onward. This guide covers what the Bill does, when it is expected to take effect, and what UK SMEs should do to prepare.
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What Is the Commercial Payments Bill?
The Commercial Payments Bill is UK primary legislation introduced to the House of Lords on 19 May 2026 by the Department for Business and Trade. It formalises the reforms announced in the government’s response to the Late Payments Consultation published on 24 March 2026 following a consultation that received 867 responses from UK businesses of all sizes.
The Bill was originally referred to during the King’s Speech in May 2026 as the Small Business Protections Bill, and both names remain in use across different communications. The formal parliamentary name is the Commercial Payments Bill [HL], and this is the name that will apply once Royal Assent is granted.
Current parliamentary status
The Bill received its second reading in the House of Lords on 9 June 2026 and entered Committee stage in July 2026. It still requires completion of Committee stage, Report stage, and third reading in the Lords, followed by all stages in the House of Commons, before it can receive Royal Assent. The government has indicated that commencement is not expected before 2027 and will include a transition period to allow businesses to prepare. The provisions will not be applied retrospectively.
Which UK businesses the Bill covers
The Bill applies broadly to business-to-business commercial contracts for the supply of goods and services across England, Wales, Scotland, and Northern Ireland (with some limited exceptions). The 60-day payment cap applies primarily to contracts between larger businesses and smaller suppliers, with strictly limited exemptions for contracts where both parties are large businesses or where the purchaser is the smaller party.
The Four Main Reforms Explained
The Commercial Payments Bill introduces four reforms that will affect UK B2B payment practice. Understanding each in turn helps clarify the impact on UK SMEs.
Reform 1: The 60-Day Statutory Payment Cap
The Bill imposes a maximum payment period of 60 days on B2B commercial contracts within scope. Any contractual term purporting to require payment later than 60 days after the trigger date (typically the date of invoice or the date of goods or services being received) will be void under the new regime.
Strictly limited exemptions apply, including contracts where both parties are large businesses, where the purchaser is the smaller party, or where the goods or services are being imported or exported. Earlier proposals to further reduce the limit to 45 days after five years have been dropped from the current Bill but may be revisited in future.
Practical impact for UK SME suppliers
Any UK SME currently accepting contractual payment terms longer than 60 days from a larger customer will, once the Bill takes effect, be operating under a statutory 60-day maximum regardless of what the contract says. This improves the bargaining position for UK SME suppliers, but the payment behaviour of customers is a separate question that the Bill addresses through the other three reforms.
Reform 2: Mandatory Late Payment Interest at 8% Above Bank of England Base Rate
The Bill mandates late payment interest at 8% above the Bank of England base rate on overdue commercial invoices. This is not new in principle: the Late Payment of Commercial Debts (Interest) Act 1998 has provided this right for over 25 years. What the Commercial Payments Bill changes is the enforceability and the default position.
Under the current 1998 Act, UK SME suppliers have the right to charge the interest rate but must actively claim it, and the right can be varied by contract. Under the Commercial Payments Bill, the interest becomes harder for larger purchasers to contract out of, and the Small Business Commissioner gains powers to enforce it.
Practical impact for UK SME suppliers
At current UK base rates, the late payment interest rate translates to a meaningful annual charge on overdue invoices. UK SME suppliers should include the interest calculation on late invoices as a matter of course. Where the debt is undisputed, and standard chasing has failed, Money Claim Online handles claims up to £100,000 without requiring solicitor involvement, and the interest and fixed sum compensation can be included in the claim amount.
Reform 3: New Dispute Rights and Fixed Sum Compensation
The Bill introduces new rights for UK SME suppliers where a larger purchaser raises a dispute late or without sufficient information. The mechanism is a right to a fixed sum where a purchaser raises a dispute that does not meet criteria for timing or specificity.
This addresses a pattern that UK SME suppliers have reported repeatedly through the consultation: larger purchasers using dispute mechanisms as a tactical delay tool. Under the new regime, disputes must be raised promptly and with sufficient supporting information, or the purchaser becomes liable for the fixed sum compensation.
Practical impact for UK SME suppliers
The new right gives UK SME suppliers a commercial response to tactical dispute raising, which changes the bargaining dynamics with larger customers. UK SMEs should ensure their invoice records, delivery confirmations, and specification agreements are clean and well-documented, because the dispute framework requires clear documentation on both sides.
Reform 4: Prohibition on Construction Retention Payments
The Bill prohibits the deduction and withholding of retention payments under the terms of a construction contract. This is a reform that particularly affects the UK construction sector, where retentions have been a late payment mechanism for decades.
How retentions work in UK construction currently: UK construction contracts typically include a retention clause allowing the main contractor to withhold approximately 3% to 5% of the contract value from subcontractor payments. The retained amount is typically released in two stages: half at practical completion, and the remaining half at the end of a defects liability period (typically 12 months post-practical completion). For a UK construction subcontractor on a £500,000 contract at 5% retention, this means £25,000 held for approximately 12 months from practical completion, which is a working capital drag equivalent to approximately 5% of the project revenue held for a specific year.
Why the prohibition matters for UK construction subcontractors
The retention system has been a late payment mechanism for decades. For UK specialist trades (electrical, mechanical, plumbing, groundworks, roofing), the retention amounts across multiple concurrent projects typically represent 10% to 20% of the annual working capital demand. Removing the retention drain reduces the working capital requirement for UK construction subcontractors and specialist trades.
Timing considerations for the retention prohibition
The timing of implementation of this reform will be subject to further consultation, so the date on which retentions become prohibited in UK construction contracts is not yet fixed. The transition period will likely be longer than the transition period for the 60-day payment cap, because the construction sector needs time to renegotiate contract templates and adjust to the working capital implications.
Practical impact for UK construction sector SMEs
For UK subcontractors and specialist trades in the construction sector, the prohibition on retentions removes a cash flow drag that has affected the sector for decades. For UK main contractors and larger construction businesses, the reform removes a working capital tool that has typically been used to fund the overall project cash flow. Both sides need to plan for the transition. Our invoice finance and asset finance services are suited to UK construction sector cash flow patterns, and our business loans can bridge retention-related cash flow gaps during the transition. The British Business Bank publishes UK SME finance research including construction sector coverage that provides broader context on the sector’s cash flow patterns.
Current Regime vs New Regime: What Is Changing
For UK SMEs trying to understand what is new versus what already exists, the side-by-side comparison below shows the position under the current regime (the 1998 Act, the Reporting on Payment Practices and Performance Regulations 2017, and the voluntary Fair Payment Code) versus the position under the Commercial Payments Bill once it takes effect.
The Comparison Across Seven Areas
| Provision | Current regime (1998 Act + current regulations) | New regime (Commercial Payments Bill) |
| Maximum payment terms | No statutory cap; can be varied by contract | 60-day statutory cap; cannot be contracted out (strictly limited exemptions) |
| Late payment interest | 8% above Bank of England base rate; must be actively claimed by supplier | 8% above Bank of England base rate; SBC-enforceable |
| Fixed sum compensation | £40 to £100 per invoice depending on invoice value | Retained, plus new fixed sum for tactical or insufficient disputes |
| Dispute framework | No statutory framework addressing tactical disputes | New rights for suppliers where disputes raised late or without sufficient information |
| Construction retentions | Widely used (typically 3% to 5% held for approximately 12 months post-practical completion) | Prohibited under new regime (subject to further consultation on timing) |
| Small Business Commissioner powers | Advisory role; free mediation; limited enforcement | Investigation of persistent poor payers, binding adjudication, financial penalties, reporting enforcement |
| Reporting requirements | Half-yearly reporting for large companies under 2017 Regulations | Enhanced reporting including interest paid and owed disclosure; board or audit committee commentary required for persistent poor payers |
Provisions shown reflect the current draft Bill as of Committee stage in the House of Lords. Provisions may be amended during parliamentary passage. Refer to the official Bill page for the current position.
What this comparison shows:
The big changes are the introduction of the statutory 60-day cap (new), the SBC enforcement powers (new), and the construction retention prohibition (new). The late payment interest rate is not new in itself but becomes harder to avoid. The reporting requirements build on the existing framework rather than replacing it.
The Small Business Commissioner Gets Expanded Powers
Underpinning the four reforms above are expanded powers for the Small Business Commissioner (SBC). The expanded powers include:
Investigation and enforcement powers
The SBC can investigate larger businesses suspected of persistent poor payment practices, make recommendations, and take enforcement action including financial penalties. This changes the enforcement position from the current regime where the SBC has advisory but limited enforcement powers.
Binding adjudication of contractual disputes
The SBC can adjudicate contractual payment disputes between smaller and larger businesses outside of the court process and make binding interim decisions. This provides UK SMEs with an alternative to court proceedings for payment disputes, which is faster and less expensive than the court route.
Enforcement of reporting requirements
The SBC gains powers to take enforcement action against larger businesses that breach their statutory reporting requirements on payment practices and performance under the Reporting on Payment Practices and Performance Regulations 2017. The reporting requirements interact with Companies House filing obligations for large companies as defined by the Companies Act 2006, so UK SMEs approaching the large company reporting threshold should plan for dual compliance across both frameworks.
The Fair Payment Code, which currently has over 550 UK signatories including British Telecommunications, Aviva, AstraZeneca, and BAE Systems, will continue to operate alongside the new statutory framework as a voluntary best-practice framework.
What This Means for UK SMEs Owed Money
For UK SMEs on the supplier side of the payment relationship, the Commercial Payments Bill is positive. Four practical improvements to the position:
1. Payment terms cannot exceed 60 days.
Any contractual clause purporting to require payment later than 60 days becomes void once the Bill takes effect. UK SMEs currently accepting 90-day or 120-day payment terms will move to a statutory 60-day maximum regardless of the contract wording.
2. Late payment interest becomes harder for purchasers to avoid.
The mandatory interest rate at 8% above the Bank of England base rate becomes enforceable by the SBC rather than requiring UK SMEs to pursue individual court action.
3. Tactical dispute raising becomes more expensive for larger purchasers.
The new dispute framework introduces fixed sum compensation for disputes raised late or without sufficient information, which changes the commercial dynamic.
4. The SBC provides a faster and cheaper route than court proceedings.
For UK SMEs facing payment disputes with larger customers, the SBC adjudication route provides binding decisions outside the court process.
However, the new regime does not immediately fix the cash flow gap that late payment creates. A UK SME whose largest customer takes 60 days to pay under the new regime still faces a 60-day working capital gap. The Bill improves the position over the next few years but does not eliminate the underlying pattern. For UK SMEs looking to close that 60-day gap right now, our invoice finance service is typically the structural response.
What This Means for UK SMEs That Owe Money to Suppliers
For UK SMEs on the purchaser side of the payment relationship, particularly larger UK SMEs contracting with smaller suppliers, the Commercial Payments Bill introduces four compliance considerations:
1. Contract term audit is now essential
UK SME purchasers currently operating on payment terms longer than 60 days with smaller suppliers need to identify these arrangements and prepare for renegotiation before commencement.
2. Payment process reform is valuable
The mandatory late payment interest regime raises the commercial cost of persistent late payment. Investment in accounts payable systems, payment scheduling processes, and supplier communication frameworks reduces the financial exposure.
3. Dispute management processes need to be specific and timely
Under the new dispute framework, disputes need to be raised promptly and with sufficient supporting information. UK SME purchasers with existing dispute processes should audit them for compliance with the new requirements.
4. Working capital impact needs modelling
For UK SMEs currently using extended supplier payment terms as a working capital tool, the 60-day cap affects the working capital position. Our business loans and asset finance services provide the alternative working capital finance for UK SMEs needing to bridge the gap.
How Invoice Finance Interacts with the New Regime
For UK SMEs facing late payment pressure right now, invoice finance remains the structural response regardless of the Bill’s progress through Parliament. The mechanism is straightforward: invoice finance converts unpaid customer invoices into next-day cash, releasing typically 80% to 95% of the invoice value immediately. The lender collects from the customer at the contractual payment date, and the business meets its obligations from the invoice advance rather than waiting for the customer payment.
How the Bill affects the invoice finance market. Three impacts worth understanding:
First, the 60-day cap affects the invoice finance risk profile
UK invoice finance lenders currently underwrite facilities against portfolios of receivables with varying payment terms. The shift to a statutory 60-day maximum reduces the tail-end risk in the invoice finance portfolio, which may (over time) affect the pricing UK invoice finance lenders offer. UK Finance publishes market data on the UK invoice finance industry that provides broader context on the sector.
Second, the mandatory late payment interest may affect the invoice finance yield calculation
UK invoice finance lenders collect from customers at the contractual payment date. Where the customer pays late, the mandatory interest becomes part of the collection amount. Over time, this may affect the commercial economics of UK invoice finance products.
Third, the SBC adjudication route provides an alternative to invoice finance for disputes
For UK SMEs facing payment disputes rather than general late payment, the SBC adjudication route becomes an alternative to invoice finance. Where the invoice is undisputed but simply late, invoice finance remains the structural response.
The Bill’s expected 2027 commencement date does not remove the cash flow pressure UK SMEs face today. UK SMEs facing late payment pressure right now should consider invoice finance as the structural response rather than waiting for the Bill to take effect.
The Commercial Payments Bill in the Broader UK SME Regulatory Context
The Commercial Payments Bill is one of several concurrent UK SME regulatory developments in 2026-27, and UK SMEs should understand the broader regulatory context when planning their response. Four concurrent developments affect UK SME finance and compliance planning:
Making Tax Digital for Corporation Tax
The rollout of Making Tax Digital for Corporation Tax through 2026 and beyond affects how UK SMEs report to HMRC and, indirectly, how UK alternative lenders access underwriting data. UK SMEs planning for the Commercial Payments Bill should also plan for the Making Tax Digital compliance requirements as part of the broader digital reporting framework.
The points-based VAT penalty regime that took effect from 1 January 2023 increases the compliance stakes for UK SMEs with VAT arrears. Combined with the Commercial Payments Bill’s improvement to UK SME cash flow, the overall UK SME regulatory environment rewards proactive compliance.
Bank Referral Scheme reform
HM Treasury’s 2026 review of the Bank Referral Scheme is considering reforms to the referral process for UK SMEs rejected by mainstream banks. The reforms may affect how UK SMEs access alternative finance after bank rejection.
Employment rights reform
The Employment Rights Bill 2025 introduces changes to UK employment law that affect UK SME employment cost structures. Combined with the cash flow implications of the Commercial Payments Bill, the overall UK SME operational environment is shifting in 2026-27.
For UK SMEs navigating the broader regulatory environment, the practical implication is that the finance response to the Commercial Payments Bill should be considered alongside the broader compliance planning, not in isolation.
The Timeline: When Do the New Rules Take Effect?
The commencement timeline for the Commercial Payments Bill remains uncertain because the Bill is still progressing through Parliament. The current position:
Where the Bill is now
The Bill is in Committee stage in the House of Lords (as of July 2026), which involves line-by-line scrutiny of the Bill’s clauses and schedules. Amendments may be proposed and accepted during this stage.
Remaining parliamentary stages
After the Committee stage in the Lords, the Bill needs to complete Report stage and third reading in the Lords, then all stages in the House of Commons (first reading, second reading, Committee, Report, third reading), then consideration of any Commons amendments, before receiving Royal Assent.
Expected commencement
The UK government has indicated the Bill is not expected to come into force before 2027. Secondary legislation will typically be needed to bring provisions into force, and the government has committed to a transition period to allow UK businesses to prepare.
Non-retrospective application
Contracts, payments, and disputes will be judged according to the rules in place at the time. This means UK businesses do not need to renegotiate existing contracts retrospectively, but they should plan for the new rules to apply from the commencement date onward.
What could change during passage
UK legislation can be amended during parliamentary passage, and the final provisions of the Commercial Payments Bill may differ from the current draft. UK SMEs should follow the parliamentary progress through the official Bill page and refresh their understanding as the Bill progresses.
How UK SMEs Should Prepare Now
While the commencement date remains uncertain, UK SMEs on both sides of the payment relationship should take practical steps now. The preparation improves the position when the Bill takes effect.
For UK SMEs owed money by larger customers:
1. Audit your contract terms
Identify which customer contracts currently include payment terms longer than 60 days. These terms will become void once the Bill takes effect, so the practical impact on your cash flow should be modelled.
2. Review your invoice practices
Ensure your invoices include the late payment interest terms under the current 1998 Act (8% above the Bank of England base rate plus a £40 to £100 fixed sum compensation per invoice depending on invoice value). This positions your business to enforce the new rules once they take effect.
3. Consider becoming a Fair Payment Code signatory now
The Fair Payment Code is a voluntary UK best-practice code operated by the Small Business Commissioner. Signatories commit to payment standards including 30-day payment terms for a proportion of invoices. Becoming a signatory now (rather than waiting for the Bill to take effect) provides UK SMEs with a visible commitment to good payment practice that differentiates the business to potential customers and larger suppliers. The commercial benefit typically exceeds the administrative cost by a wide margin, particularly for UK SMEs looking to win contracts with larger businesses whose procurement teams increasingly weigh payment practice credentials.
4. Model the cash flow impact of the 60-day cap
For UK SMEs with customers currently on 90-day or 120-day terms, moving to 60 days improves the cash flow position. Modelling this improvement helps identify opportunities for growth investment or debt reduction that the improvement will unlock. Try our business loan calculator if you want an indicative view of what different facility sizes and terms would look like against the improvement.
For UK SMEs that owe money to smaller suppliers:
1. Audit your supplier contract terms
Identify which supplier contracts include payment terms longer than 60 days. These will need to be renegotiated ahead of the Bill taking effect, or they will become void once commencement occurs.
2. Review your payment processes for compliance with the new dispute framework
Any disputes with suppliers need to be raised promptly and with sufficient supporting information under the new rules. Ensure your accounts payable team understands the new requirements.
3. Consider the reputation implications of the expanded Small Business Commissioner powers
Large UK businesses subject to SBC investigation for persistent poor payment practices face financial penalties and reputation risk. The commercial case for good payment practice strengthens under the new regime.
4. Model the working capital impact of the 60-day cap
For UK businesses currently using extended supplier terms as a working capital tool, the shift to 60-day maximum terms affects the working capital position. Alternative working capital finance (invoice finance, business loans, or asset finance) may be needed to bridge the gap.
Worked Example: A UK Manufacturer Preparing for the New Regime
A UK contract manufacturer with £3.2 million annual turnover supplies parts to two large industrial customers on 90-day payment terms. The manufacturer’s business also purchases raw materials from three smaller UK suppliers on 30-day payment terms.
Current position
The manufacturer’s working capital cycle runs approximately 105 days (30-day raw material payment plus 90-day customer payment less 15-day production and delivery cycle). The working capital demand at the business’s turnover level is approximately £920,000, funded through a combination of retained earnings and a £400,000 invoice finance facility at an 88% advance rate against the customer receivables.
Impact of the Commercial Payments Bill
Once the Bill takes effect (expected 2027), the 90-day customer payment terms will be capped at 60 days. The manufacturer’s working capital cycle reduces to approximately 75 days. The working capital demand reduces to approximately £655,000, a £265,000 improvement.
Commercial response
The manufacturer has three options for the £265,000 improvement:
- Option A: Reduce the invoice finance facility from £400,000 to £180,000, saving approximately £8,800 per year in facility costs at typical UK invoice finance pricing.
- Option B: Retain the £400,000 facility and use the £265,000 improvement to fund growth investment (new equipment, additional staff, market expansion).
- Option C: Retain the £400,000 facility and build cash reserves against future working capital demand.
The manufacturer chose Option B. The £265,000 improvement was earmarked for a new production line that will expand capacity ahead of an expected new customer contract in 2028. The broker conversation with Funding Bay covered the working capital modelling, the timing of the improvement (which depends on the Bill’s commencement date), and the alternative finance options for funding the growth investment.
The lesson: the Commercial Payments Bill does not just improve the late payment position for UK SME suppliers. It improves the working capital economics of UK SME businesses in ways that can be modelled and planned for in advance. The businesses that plan ahead capture the opportunity; the businesses that wait until commencement typically respond reactively.
When Immediate Action Beats Waiting for the Bill
For UK SMEs facing late payment pressure right now, waiting for the Commercial Payments Bill to take effect is not a viable response. Three scenarios where immediate action beats waiting:
Scenario 1: Cash flow pressure this month or this quarter
The Bill’s expected 2027 commencement date does not help a UK SME facing payroll pressure this Friday or an HMRC bill next week. Immediate response through invoice finance, an unsecured business loan, or HMRC Time to Pay is better than waiting.
Scenario 2: A customer with persistent late payment issues
For UK SMEs facing customers with persistent late payment patterns, the existing rights under the Late Payment of Commercial Debts (Interest) Act 1998 already provide the interest and fixed sum compensation. Where the dispute is disputed rather than tactical, the Small Business Commissioner provides free mediation, and where the debt is undisputed, Money Claim Online handles claims up to £100,000 without requiring solicitor involvement.
Scenario 3: A large customer moving toward insolvency
For UK SMEs concerned about a customer’s ability to pay at all, the Commercial Payments Bill does not help. The response is a combination of tightening credit terms, considering invoice finance with bad debt protection, and (in distress scenarios) engaging an insolvency practitioner through the Insolvency Service. UK SME owners considering personal legal advice on personal guarantees or director liability should engage a solicitor regulated by the Solicitors Regulation Authority (SRA).
For UK SMEs where immediate action is needed, speak to a broker who can identify the product route that fits your situation.
The Bottom Line
The Commercial Payments Bill is the most significant UK late payment reform in over 25 years. Once it takes effect (expected in 2027, subject to parliamentary passage), it will improve the position for UK SMEs on the supplier side of the payment relationship and strengthen the enforcement position of the Small Business Commissioner. The 60-day payment cap, mandatory late payment interest, new dispute rights, and construction retention prohibition are all improvements over the current regime.
But the commencement date is not immediate. UK SMEs facing late payment pressure right now still need the structural finance response that has always worked: invoice finance for receivables-driven pressure, business loans for one-off working capital pressure, and broker-led routing to the UK lender that fits the business profile.
Speak to a broker about the current cash flow implications for your business. The conversation is free, uses a soft credit search that does not affect your file, and most operators can tell you within an hour whether invoice finance, a business loan, or another facility fits your situation. Funding Bay is authorised and regulated by the Financial Conduct Authority and works across 200+ UK lenders including specialist invoice finance and working capital lenders.
For UK SMEs facing broader questions about UK business finance beyond the Commercial Payments Bill implications, support and community resources are available through the Federation of Small Businesses (FSB) for UK SME advocacy and member resources, and the British Business Bank for UK SME finance research and general guidance.
