The UK government has vowed to tackle “the scourge of late payments once and for all.”
In its Plan for Change for Small and Medium Sized Businesses published last week, it said late payments cost the UK economy £11 billion every year, and the issue shuts down 38 businesses every day.
Now the government is planning new legislation to stamp out late payments. “Too many hardworking people are being forced to spend precious hours chasing payments instead of doing what they do best – growing their businesses,” Prime Minister Keir Starmer said.
“It’s unfair, it’s exhausting, and it’s holding Britain back. So, our message is clear: it’s time to pay up.”
The proposed new rules will:
Introduce maximum payment terms for invoices. These will be set at 60 days initially, coming down to 45 days in time.
Make interest on late invoices mandatory.
Give the Small Business Commissioner (SBC) more powers to speed up disputes and fine companies which are repeat offenders, as well as name and shame them.
Compel big companies to report on average payment terms, and review their policies at board level.
According to the report, “This will be the most significant legislation to tackle late payments in over 25 years and will give the UK the strongest legal framework on late payments in the G7.”
A welcome change, but questions remain
The new rules are designed to support businesses with fewer than 250 employees, which covers the vast majority of design studios and agencies.
“The Small Business Plan is a welcome signal of support for the backbone of the design economy; our SMEs, micro-businesses and freelancers,” says Shamir Hale, senior policy and advocacy manager at the Design Council.
“From tackling late payments to improving access to finance, these pro-small business measures will make a real difference to the designers powering our economy.”
Writing on LinkedIn, designer Dominic Martin–Manning pointed out how late payments “can have a significant impact on whether we survive, or end up on the scrap heap.” He said he hoped the new laws would “help alleviate some of those fears.”
“Stricter rules – and the risk of penalties – will hopefully change mindsets and improve respectful practices.”
This enthusiasm was echoed by those who represent freelancers, for whom the challenge of late payments is often especially hard to navigate.
According to Leapers, an organisation which supports freelancers’ mental health, 72% of freelancers had to chase late invoices last year.
“The proposed changes to tackle late payments are very much welcomed, as too many freelancers face this issue regularly, with tangible negative impact on both finances and mental health,” says Leapers founder Matthew Knight.
“I’m especially glad to see the SBC have more powers to investigate and fine persistent late payers, more transparency around bad behaviours, and increased penalties. The end of 60+ day payment terms is also fantastic.
“Stricter rules – and the risk of penalties – will hopefully change mindsets and improve respectful practices,” he adds.
But Knight did raise some questions about the details of the proposals. He pointed out that many late payers are themselves companies with fewer than 250 employees, and so would not be subject to the increased scrutiny laid out in the plan.
He also pointed out that while mandatory interest on overdue invoices is positive, it would still be down to those owed money “to chase and chase” for this extra payment.
“For some hirers, could it put them off using freelancers, rather than sorting out their internal processes?” Knight asks. “Could also end up being seen as an additional cost of business, and cost be passed on to suppliers or customers?”
The backbone of the UK economy
Small and medium-sized businesses, or SMEs, make up 99.8% of the UK’s business landscape. They employ 16.6 million people, 60% of the total UK workforce. According to estimates from the Department for Business and Trade, around 80% of SMEs are micro businesses, with one to nine employees.
But SMEs are struggling – in 2023, only 40% reported an increase in turnover, which was down 6% from 2022.
The proposals are part of the Government’s wider efforts to kickstart the UK’s economic growth. “Through our Plan for Change, we will make the UK the best place to start and grow a business,” the plan states.
“You are not just businesses – you are the nation’s dreamers and doers, innovators, the beating heart of communities, and the backbone of the economy.
“But for too long, the odds have been against you, as previous governments let problems stack up – leaving businesses dealing with endless red tape, struggling to access finance and navigating additional trade barriers.”
Alongside the late payments legislation, the plan pledges to cut the administrative costs of running a business by 25%, make tax easier to navigate with the help of AI, help SMEs bring down their energy costs, and provide £4 billion in extra finance, including 69,000 start-up loans, “to inspire the next generation of entrepreneurs and small business owners.”
The Government has opened a public consultation on the plans, and Knight urges freelancers and small business owners to make sure their voices are heard.
“They should absolutely read the proposals and provide input into the public consultation, which runs until October,” he says.