The UK government announced new measures to support small businesses and the self-employed by tackling late payments.

According to the government, late payments cost small businesses £22,000 a year on average, leading to 50,000 business closures annually.

The government said in the announcement that it ‘will consult on tough new laws which will hold larger firms to account and get cash flowing back into businesses.’

New legislation is also being brought in the coming weeks, which will require all large businesses to include payment reporting in their annual reports, putting the onus on them to provide clarity about how they treat small firms. This will mean company boards and international investors will be able to see how firms are operating.

Enforcement will also be stepped up on the existing late payment performance reporting regulations, which require large companies to report their payment performance twice yearly on gov.uk.

Prime Minister Keir Starmer said in the announcement, “We’re determined to back small businesses by unlocking their barriers to growth, and stamping out late payments is at the heart of this.”

“We know how important it is for business owners to have the peace of mind and certainty around their cashflow to keep their businesses alive. Late payments cost businesses tens of thousands of pounds and is one of the biggest reasons businesses collapse,” Starmer said. “After years of delay, we’re bringing forward measures that small businesses have long been calling for to tackle late payments once and for all.”

Under current laws, responsible directors at non-compliant companies who don’t report their payment practices could face criminal prosecutions, including potentially unlimited fines and criminal records.  

The consultation, which will be launched in the coming months, will also consider a range of further policy measures that could help address poor payment practices.

The government added that cracking down on late payments will unlock growth for 5.5 million small firms by enabling them to invest their time in hiring more employees, boosting wages, and exporting worldwide rather than chasing down late payments.

A new Fair Payment Code has also been announced to replace the old Prompt Payment Code and will be open to signatories this autumn. Businesses will need to prove they have met good payment standards before being awarded official code status.

This will be designed to encourage businesses to pay faster and more often to be awarded either gold, silver, or bronze status. The code will also highlight responsible businesses that do the right thing by their suppliers and small firms. 

Business Secretary Jonathan Reynolds said, “Late payments are simply unacceptable and this government is determined to level the playing field for small business. When the cashflow runs dry, small firms go under which is why we need to hold larger business to account with their payment practices and foster an environment that supports growth and jobs.”

The announcement comes as new research published by the Department for Business and Trade found that payment problems multiply the further down the supply chain goes. The research also found a clear imbalance between big and small firms, and that administrative errors are a major factor in creating slow payments, with 24% of firms saying that incorrectly handled invoices add to delays.

Kate Shoesmith, Deputy Chief Executive, Recruitment and Employment Confederation (REC), said in a release, “The new government had to act quickly on late payments given its drag on businesses’ cash flow, investment and innovation just when we need the economy to run smoother to drive growth.”

“Recruitment is just one of the dynamic sectors hamstrung by late payments, with payment periods for suppliers of agency workers (who were paid that week by the agency) of up to 120 days demanded, Shoesmith said. “We hope the promise of reform and consultation will help give employers the greater confidence in the economy they are seeking to move on their hiring and investing intentions.”