Getting ready for the Commercial Payments Act

The pace at which the Commercial Payments Bill (the Bill) is moving through Parliament suggests that the highly anticipated late payment reforms may not be as long in the making as originally thought. That said, we are not off to the races just yet, rather that the horses are getting into formation on the starting line. The summer months, however, present businesses with an opportunity to pause, draw breath and digest what is in the draft legislation and what might make it onto the statute books next year.

The Bill has now completed the Committee Stage in the House of Lords, a detailed examination of the individual parts of the draft legislation. Both the House of Lords and the House of Commons are now on their summer recess, and both houses will resume sitting on Tuesday 1 September when the Bill will move to the Report Stage, during which all members of the Lords are given a further opportunity to examine and make amendments to the Bill. The Bill will then have its third reading before moving to the House of Commons.

Tackling poor payment practices in the UK

The magnitude and sheer importance of the Bill, which once in force will apply across the UK, cannot be overstated. Its introduction in Parliament just one week after the King's Speech in May indicates how highly late payment ranks on the government's agenda; the statistics below are taken from the Department for Business, Innovation, Science and Trade's 2025 consultation on late payments:

In the UK, late payments:

• cost the economy £11 billion each year;

• lead to the closure of 38 UK businesses every day;

• waste (on average) 86 hours per year chasing invoices; and

• waste (on average) 133 million staff hours per year across all UK businesses.

All of the above relates to money for which the work has already been completed, resources have already been spent and payment is overdue. 

As is the case with all Bills, amendments can be made throughout the legislative process, and the final statute will differ from the Bill before us today. The Bill amends Part II of the Housing Grants, Construction and Regeneration Act 1996 (the Construction Act), one of the most important pieces of legislation affecting the UK construction industry. You can read our thought leadership on the Construction Act 30 years after it received Royal Assent here. 

The Commercial Payments Bill – quick overview

Given the breadth of the proposed reforms, over the coming months, as the Bill is debated in the House of Commons, our specialist teams will explore sector specific impacts in detail. 

In the meantime, here's what you need to know:

Retention payments in the construction industry – the beginning of the end?

The most far reaching change for the construction sector is the proposed prohibition of retention mechanisms in construction contracts. While the question of scrapping retentions is not new (see: 'Should we retain retentions?', and 'Is it time to call time on retentions?'), the policy represents a major shift away from the long established industry practice. 

We recently considered the potential impact of the Bill's ban on retention: Have you received an unexpected Bill? - Retention on the ropes as Parliament doesn't hold back (or allow anyone else to!). In brief, the Bill introduces a transition period of two years from commencement, during which retention clauses will remain lawful. However, three years after the commencement date: 

1. all retention clauses in construction contracts will become void;
2. all terms in construction contracts and related agreements that provide for the treatment of sums deducted or retained under retention clauses will also become void; and
3. all sums deducted as retention during the three-year period following the commencement date ("the transitional retained sum") will have to be paid to the contractor within the timescales provided for in the Bill.

A more powerful Small Business Commissioner (SBC)

Another significant reform in the Bill is the arming of the SBC with key additional powers. This marks a major evolution of the SBC’s role from an advisory to an enforcement footing. 

Under the Bill, the SBC is empowered to:

1. Examine payment practices: investigate the payment practices of larger businesses where there are reasonable grounds to suspect persistent poor payment practices (and to publicly announce such an investigation and publish a report of the investigation following its conclusion);
2. Improve transparency of information: require a person to provide information in its possession or control, when the SBC is deciding whether to investigate, is investigating or is monitoring compliance with a direction (and the Bill makes it an offence for a person to knowingly provide false information in response to the SBC's request);
3. Adjudicate payment disputes: adjudicate certain payment disputes, referred by small businesses and relating to amounts owed by larger businesses;
4. Issue enforcement directions: issue enforcement directions to larger businesses in respect of non-compliance, requiring them to take action such as amending their standard contractual terms; 
5. Issue publication directions: that require larger businesses to publish information about their payment (and poor payment) practices; and 
6. Impose fines: impose fines on larger businesses where they fail to comply with enforcement directions or persistently continue to engage in poor payment practices (with such fines up to 1% of the company's annual turnover in the UK). 

The SBC is also empowered to publish general advice and information relating to transactions either between businesses, or between businesses and public authorities, and provide training, which will further bolster its advisory capacity, in addition to its enforcement ability.

Limiting late-stage invoice disputes

A common frustration for suppliers is the emergence of invoice disputes shortly before payment is due.

The Bill seeks to address this by requiring payers to raise disputes within a prescribed period (8 days before the payment due date, unless the due date is within 14 days of the date the payee performed its obligations which are the subject of the invoice, in which case, the last date to raise an invoice dispute is the payment due date). Businesses that fail to do so and subsequently seek to challenge an invoice may be required to compensate the supplier.

Failure to dispute an invoice (which requires notifying the payee of the dispute and providing it with sufficient information to enable it to understand what the dispute is about) within this time period will result in the payer having to compensate its payee if it chooses to dispute the invoice at a later date. This compensation is the higher of £40 or 1% of the contract price (or 1% of the disputed contract price, if the sum is disputed). Contract terms will be void if they purport to exclude or vary the above. 

Construction contracts will remain subject to a separate approach aligning with existing payment notice mechanisms under the Construction Act.

Capping payment periods

A statutory maximum payment period of 60 days will apply to payments between businesses within the private sector. Any longer payment periods will be void – subject to those terms being inconsistent with the Bill.

Importantly, this doesn't change the position in respect of 'public contracts' (as defined in the Procurement Act 2023 (PA 23)) which have had prompt payment mechanisms (payment within 30 days) hardwired in as an implied term for some time in respect of public contracts themselves and the entire supply chain flowing underneath a public contract and certain regulated below threshold contracts (as defined in the PA 23). 

The Bill recognises this nuance by clarifying that contracts which are already caught by the relevant provisions in the PA 23 will not be subject to the 60-day payment terms in the Bill.  It will become more important to clarify whether a contract is subject to the PA 23, particularly noting that the payment provisions in the PA 23 can extend past contracts which are above the relevant thresholds and, therefore, usually have to be competitively procured.  

The Bill appreciates the need for businesses to enjoy flexibility (without wishing to water down the protections) and exemptions will apply in specific cases, such as in contracts between two 'large undertakings' and contracts where the purchaser (payer) is the smaller party (i.e. the purchaser is a medium-sized undertaking and the supplier is the large undertaking, or the purchaser is a sole trader and the supplier is not a sole trader). Importantly, these exceptions do not apply where either party is a public authority. The Secretary of State may also make regulations to confirm what is meant by a micro, small, medium-sized or large undertaking.  

Stronger late payment penalties

The most fundamental late payment penalty is the entrenching of statutory interest as a statutory right. Statutory interest, which was introduced by the Late Payment of Commercial Debts (Interest) Act 1998, is currently fixed at 8% above the Bank of England base rate. Under the Bill, any term of a contract purporting to exclude or vary the right to statutory interest is void.

For contracts, other than construction contracts, interest starts to run on the day after the payment day. For construction debts, interest starts to run on the day after the final date for payment. 

The 'payment day' has a different meaning for Public Contracts caught by sections 68 or 88 of the PA 23 linked to those provisions.

Enhanced reporting and transparency

While there are already regulations in place that mandate reporting for certain businesses under the Bill, the SBC is given enhanced power to ensure large businesses meet these reporting duties. 

As highlighted above, the SBC will also have the power to hand out publication directions to larger businesses if, following an investigation into payment practices, it is satisfied that the larger business has persistently engaged in poor payment practices. Compliance with a publication direction may be enforced by bringing civil proceedings to obtain injunctive relief or another appropriate remedy.

The SBC's annual report is also substantially expanded. The report must contain:

• a summary of the disputes referred to the SBC adjudication scheme;
• a summary of the investigations carried out, and any recommendations made, the directions given or financial penalties imposed; 
• a statement confirming whether any such recommendations have been followed, directions complied with or penalties paid; and
• a summary of any action taken by the SBC to enforce the requirements of regulations made under section 3 of the Small Business, Enterprise and Employment Act 2015 (which allows the Secretary of State, via regulations, to impose a requirement on companies to publish a report on their payment practices and performance) and stating whether any financial penalty imposed under the regulations has been paid.

The SBC must have regard to the need to exclude confidential matters, specifically where publication would affect the interests of that business. 

Public authorities (being 'contracting authorities' within the meaning of the PA 23) do not fall within the definition of 'larger businesses' and are not caught by the reporting provisions. As mentioned above, pursuant to the PA 23, prompt payment mechanisms (payment within 30 days) are implied into public contracts and contracting authorities have significant reporting requirements under the PA 23, including reporting on the number of payments they actually make within the 30 days requirements.

Getting ready for the Commercial Payments Act: our roundtable breakfast discussions

The Bill is a landmark piece of legislation that represents the biggest reform of its kind in a generation. Trowers' Construction Practice will be hosting a series of roundtable discussions in each of our UK offices country to discuss the issues arising. 

If you are interested in finding out more about our workshops and activities relating to the Bill please email any one of the authors of this article or your key Trowers contact.