What the Law Gives You, and How to Get Paid on Time

Late payment can turn a profitable sale into a cashflow problem. A business may have completed the work, paid its employees and suppliers, and accounted for tax before the customer settles the invoice.

Research commissioned by the Department for Business and Trade and the Office of the Small Business Commissioner estimates that late payments cost the UK economy almost £11 billion a year. Around £26 billion is owed to businesses in late payments at any one time, affecting more than 1.5 million businesses, or 28% of the business population, with an average outstanding amount of approximately £17,000. The same research estimated that 14,000 businesses close each year because of late payments, while affected businesses spend an average of 86 staff hours a year chasing overdue invoices.

Performance has improved in some parts of the economy. Department for Business and Trade statistics published in July 2026 show that large businesses paid suppliers in an average of 32 days during 2025, paying 15% of invoices late compared with 25% when reporting began in 2018.

For SMEs, good cashflow management starts well before an invoice becomes overdue.

When Does a Business Payment Become Late?

The rules on late commercial payments apply to qualifying transactions between businesses for goods and services.

Where businesses agree a payment date, payment terms for private-sector business transactions should usually be no longer than 60 days. Businesses can currently agree a longer period, provided it is fair to both parties. Public authorities are generally expected to pay within 30 days.

Where no payment date has been agreed, a commercial payment normally becomes late 30 days after the later of the customer receiving the invoice or the goods or services being supplied.

This makes written payment terms particularly important. An invoice that simply says “payment due” without matching clear contractual terms can create unnecessary uncertainty when payment is chased. Terms should establish when an invoice falls due, which payment methods are accepted, what information the customer needs to approve it and what happens if payment is late.

For larger or longer projects, consider deposits, staged invoicing or payments linked to agreed milestones, rather than raising a single invoice once all the work is complete.

Statutory Interest on Late Commercial Debts

Under the Late Payment of Commercial Debts (Interest) Act 1998, businesses can have a statutory right to charge interest when another business pays late. The statutory rate is 8% above the applicable Bank of England base rate.

The reference rate is fixed for six-month periods. The Bank of England rate in force on 30 June applies from 1 July to 31 December, while the rate on 31 December applies from 1 January to 30 June.

The Bank Rate was 3.75% on 30 June 2026, so the statutory late-payment interest rate for qualifying debts becoming late between 1 July and 31 December 2026 is 11.75% a year.

Suppose a qualifying £5,000 invoice becomes overdue during this period and remains unpaid for 45 days. At 11.75%, the statutory interest for those 45 days would be approximately £72.43. Interest normally runs from the date the payment becomes late until payment is made.

Check your contracts before applying statutory interest. Where a contract already provides its own late-payment remedy or rate of interest, the statutory regime may not apply.

Compensation for Recovering Late Payments

Interest is one part of the picture. Businesses can also claim a fixed amount towards the cost of recovering a qualifying late commercial payment. The statutory compensation currently depends on the size of the debt:

The charge applies to each qualifying late payment, and reasonable additional recovery costs may also be recoverable in appropriate circumstances.

Using the £5,000 example above, the business could potentially claim £72.43 of interest after 45 days plus the £70 fixed recovery amount, a total of £142.43, before considering any further qualifying recovery costs.

Charging interest and compensation is a commercial decision as well as a legal one. Some businesses mention the possibility of statutory charges in their standard payment reminders before formally applying them.

Preventing Late Payment Before It Starts

A large part of effective credit control happens before the due date. Build payment management into the sales process rather than treating debt collection as a separate task once something has gone wrong. A practical system should cover:

• Credit checks before extending credit. Review Companies House information where relevant, carry out proportionate checks and set a sensible credit limit. Asking a customer for their full set of statutory accounts, rather than only the ones filed publicly, can also be a good idea.
• Terms agreed before work starts. State the deadline clearly in contracts, quotations or engagement documents, and make sure the customer has accepted them rather than meeting them for the first time on the invoice.
• The customer’s own payment process. Larger organisations may require purchase-order numbers, supplier registration, invoice portals or departmental approval. Find out before the first invoice is raised.
• Prompt, accurate invoicing. Delaying an invoice by ten days gives the customer ten extra days of credit. Wrong addresses, missing purchase-order numbers and unclear descriptions can also give customers legitimate reasons to delay approval.
• Easy payment. Clear bank details and appropriate payment options. For regular customers, Direct Debit can reduce administration and missed due dates.
• Reminders before and after the due date. Software can automate these, and communication should become more personal as an invoice ages. A telephone call can often identify an approval problem or genuine dispute faster than repeated automated emails.
• Consistent escalation. Set internal points at which an overdue account moves from a reminder to a call, formal demand, suspension of further credit or external recovery.
• Customer concentration. A business can have healthy overall sales while becoming too dependent on one or two slow payers. Review how much of the debtor balance sits with individual customers.

Check Payment Data Before Accepting Large Customers

Large companies and LLPs within the reporting requirements must publish their payment practices at least twice a year. Current size tests include meeting at least two of £54 million turnover, £27 million balance-sheet total and 250 employees. Published information can show how long a business typically takes to pay and what proportion of payments were late against agreed terms.

The previous Prompt Payment Code has also been replaced by the Fair Payment Code, administered by the Office of the Small Business Commissioner. Gold requires at least 95% of all invoices paid within 30 days. Silver requires at least 95% within 60 days, including at least 95% of invoices to small businesses with fewer than 50 employees within 30 days. Bronze requires at least 95% within 60 days. Award status is one useful indicator, although normal credit checks should still form part of the decision.

What to Do When an Invoice Becomes Overdue

The first step should usually be to establish why the payment has not been made. Confirm the customer received the invoice and has the supporting information required, then ask whether it has been approved, whether there is a genuine dispute and when payment will be released.

Where the customer acknowledges the debt but has temporary difficulties, a written payment plan may sometimes provide a better outcome than immediate legal proceedings. If reminders fail, send a formal demand setting out the amount outstanding, the original payment date, any interest or recovery costs claimed and the deadline for settlement. Before starting court proceedings, weigh the likely recovery costs against the value of the debt and the customer’s financial position. Winning a claim does not guarantee recovery if the customer has no funds or is insolvent.

The Office of the Small Business Commissioner provides free support to small UK businesses facing payment problems with larger private-sector customers, defining a small business as one with fewer than 50 employees for its existing complaint service. Businesses considering this route should normally contact the Commissioner before starting court proceedings, as the office may no longer be able to assist once legal action has begun.

Consider the VAT Effect

Under standard VAT accounting, a business normally accounts for VAT based on its sales and purchase invoices even when the customer has not yet paid, which can mean paying HMRC before collecting the cash.

Eligible VAT-registered businesses can consider the VAT Cash Accounting Scheme, under which VAT on sales is generally paid when customers pay the business. For 2026/27, businesses can generally join where estimated VAT-taxable turnover for the next 12 months is £1.35 million or less, and normally have to leave if it rises above £1.6 million. The scheme suits some businesses better than others, because input VAT is also normally reclaimed when suppliers are paid rather than when their invoices arrive.

Where VAT has already been accounted for and a debt later proves irrecoverable, VAT bad debt relief may be available. Among the conditions, the debt must normally have remained unpaid for at least six months after the later of the payment due date and the date of supply, and must have been written off in the business’s VAT records. Claims generally need to be made within four years and six months of the later of those dates.

Late-Payment Law Is Set to Change

The Commercial Payments Bill was introduced in May 2026. As at 7 August 2026, it had completed committee stage in the House of Lords without yet becoming law, and its report stage was still to be scheduled.

The proposals include a firm maximum payment period of 60 days for many business-to-business contracts, subject to limited exemptions, beginning no earlier than 2027. The government has identified possible exemptions where both parties are large businesses, where the purchaser is the smaller party and for certain imports and exports.

The Bill would also make statutory late-payment interest mandatory rather than leaving suppliers to decide whether to claim it, strengthen the Small Business Commissioner’s enforcement and dispute-resolution powers and introduce additional scrutiny of poor payment behaviour by large businesses.

These proposed measures should not yet be treated as part of the current late-payment regime. Review your contracts and credit-control procedures again once the legislation receives Royal Assent and commencement dates are confirmed.

Make Payment Management Part of Financial Management

Late payment cannot always be prevented, though businesses can reduce their exposure to it.

Clear contracts, prompt invoicing, sensible credit limits, regular debtor reviews and consistent follow-up all improve the chances of getting cash in when expected. Review an aged-debtor report regularly rather than only at the year end, and build realistic collection dates into forecasts. If a significant customer routinely pays 15 days after its contractual deadline, assuming every invoice arrives on the due date can overstate the cash available.

Most importantly, debtor management should begin well before an invoice is 60 or 90 days overdue. Treating payment terms, invoicing and credit control as part of the normal financial management cycle gives far more opportunity to spot problems before an unpaid invoice starts affecting payroll, tax payments or supplier commitments.

If you need help improving your cashflow, managing late payments or strengthening your credit-control processes, get in touch with the Caseron team.