Government announces new plan to tackle late payments
Positive news for small businesses this week, as the UK government announces its “Plan for Small and Medium Sized businesses”, including a package of proposed changes in law to tackle late payments. And they’re looking for YOUR feedback on the plans to make sure they’re doing the right things.
Prime-Minster Kier Starmer calls this the “toughest crackdown on late payments in a generation”, and the plan includes new rules around “automatic” late payment interests applied to overdue invoices, fines for consistent late payers, shorter “maximum payment terms”, and expanded powers for the Office of the Small Business Commissioner to continue dealing with bad behaviours.
As we all know, late payments are a HUGE issue for small businesses, especially freelancers, and not only does it cause cashflow issues, but also has impact on mental health, confidence, the amount of time we have and of course, puts far too many businesses out of business for good.
So giving more teeth to the rules around late payment is welcomed.
Starmer said:
“From builders and electricians to freelance designers and manufacturers—too many hardworking people are being forced to spend precious hours chasing payments instead of doing what they do best – growing their businesses. It’s unfair, it’s exhausting, and it’s holding Britain back. So, our message is clear: it’s time to pay up.”
There’s lot in the plan, but here are the things which we’ve read that stand-out that will hopefully have a positive impact:
Maximum Payment Terms reduced to 60 days.
From: Currently, there’s an implied payment-term of 30 days if nothing is defined in a contract, and a maximum of 60 days allowed if not “grossly unfair”.
To: A new maximum term of 60 days - which means anything longer than that is not allowed., even if it’s been put in a contact. No grey areas, no debate. Nothing longer than 60 days allowed. This will then reduce to 45 days within five years.
Why is this good for freelancers? There are still too many businesses with longer payment terms, and the previous law was pretty wooly on “grossly unfair”. Now it’s black and white, your clients cannot ask for anything longer, and 45 days is around the corner. You can of course still work to 30 days or less!
Mandatory Late Payment Interest, rather than optional
From: Right now, you have the right to charge interest on overdue invoices, which freelancers often use as leverage to get an invoice paid - a little threat of extra costs often made people pay up on time. And hirers could ‘opt-out’ of the fees if agreed in a contract.
To: Interest payments will become mandatory. If a business pays an invoice late, it will automatically owe interest, and cannot opt out of this obligation contractually or otherwise.
Why is this good for freelancers? This has shifted from a tool we can use to encourage payment, to something businesses are legally forced to do, regardless of whether we choose to enforce it or not.
This is fantastic news, as any excuses like “the client didn’t pay us yet” or “steve from accounts is away on holiday” won’t fly any more, and even more importantly, it’s not YOU adding interest, it’s a legal mandatory obligation (so the law plays bad cop, whilst you can be good cop).
HOWEVER, don’t get too excited just yet - as we all know, getting that interest payment from clients who are paying late can be incredibly hard work AND add extra burden and chasing and further cause anxiety, time and cost chasing. It can be hard enough to get paid, yet alone the interest fees. So, whilst the interest might be ‘automatically applied’, there’s nothing ‘automatic’ about actually getting the cash in your account.
Fortunately, the Small Business Commissioner has been given extra powers to help enforce the mandatory payments of interest, hopefully making it more likely to actually get it paid.
Invoice Dispute Deadlines
From: No clear guidelines on raising or resolving invoice disputes, which are often used as a technique to delay payments.
To: A mandatory 30 day invoice dispute and validation period, within which businesses have a limited time to raise clear and documented disputes, else the invoice must be paid in full, capping how long disputes can run.
Why is this good for freelancers? We all know that invoice disputes are used too often to further delay payments, with issues only being raised once the invoice is overdue, with vague and nonsense claims that something isn’t right. This change to create a clear window for resolution means the client can’t drag on a dispute for weeks.
Large businesses must also start reporting on invoices which are disputed, and publish this publicly, helping us understand their payment behaviours before we even start working with them.
Enforcement & Fines for persistent poor payers
From: Currently, there are relatively few powers to chase and fine businesses who are bad payers.
To: New powers for the Small Business Commissioner to issue fines, conduct spot checks, name bad payers, enforce new rules, and fine businesses who are consistently late payers.
Why is this good for freelancers? The SBC, who previously had very few powers in terms of tackling late payments, and had a more proactive “celebrate the good payers” model - have been given new powers to allow them to go after businesses who are not behaving with respect, and the abiliity to wield fines, worth potentially millions of pounds, against the biggest firms who persistently choose to pay their suppliers late.
Fines will be accompanied by public naming of offenders to shame repeat violators, protecting small suppliers from engaging with businesses who are likely to not pay on time.
Under the proposals, any company paying over 25% of its invoices late within a six-month window would be liable for a fine, calculated at twice the statutory interest they haven’t paid.
Additionally, larger companies (250+ people) will be required to report on how long they’re taking to pay their suppliers in their annual reports, and required to review payment practises at board level.
What else is there to know?
Whilst most of the changes above apply to all businesses, things like reporting are only applied to larger businesses - and as we know, we often work with smaller companies - any business under 250. Whilst the rules around mandatory interest and payment terms applies here too - chasing the invoices, getting the interest payments, and knowing whether they’re a good payer or not, still will fall mostly to us as freelancers.
Fortunately, the proposals also suggest beefing up the SBC, more people, more resources - which hopefully means they become a much greater ally to freelancers - so they can help us chase and tackle late payments from smaller companies, however, we know in the past the SBC has often not been as able to help when dealing with smaller businesses.
We’ll have to wait and see how and what changes here, and we’ll be reaching out to the SBC team to get their view on where freelancers working with small businesses fits in to this new plan.
However, all of these changes are a step in the right direction - and are very much welcomed to tackle the issue of late payments in the UK.
How can you get involved?
There’s an opportunity for you to have your views heard as a freelancer - as the government is currently holding an open consultation on these changes, and asking specific questions about the measures above, whether we think it will make a positive impact, and any unexpected consequences.
This is well worth getting involved, it’ll take you just a few minutes to share your views - and the more freelancers are heard, the better.
What do you think?
Is this positive for freelancers? Does it not go far enough? Does it just mean we have more work to do to calculate interest on late invoices? Does it mean clients will just pass on the cost of the interest to us, by reducing rates? Drop us a note at hello@freelancing.support
If you’re into reading the government policy documents: