Lord Sharpe of Epsom (Con)

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My Lords, I refer to my small business interests, as set out in the register. I welcome the chance to speak on this Bill for the first time, and I thank all noble Lords who have contributed. Most of all, I thank the Minister for his introduction, his previous engagement and the genuine expertise that he brings to this subject.

I begin by reaffirming the support of these Benches for the broad provisions of the Bill. Industrial strategy must allow smaller businesses to both survive and compete with larger firms, so entrenching good payment practices, tackling asymmetry in the construction industry and increasing the powers of the Small Business Commissioner are all sensible aims.

A number of interesting questions have been raised on late payment terms, specifically around the 45-day and 60-day limits. Good questions addressing this issue were asked by my noble friends Lord Lansley and Lord Holmes, the noble Lord, Lord Mendelsohn, and the noble Baroness, Lady Thornton. But I would like to press on this: the new payment term must inevitably be balanced against the ability of businesses to arrange their finances and pay. To assist the House, could the Minister outline the trade-offs between the 45-day and 60-day payment limits, which have already been considered in the decisions taken in the Bill?

I note, for example, that the impact assessment suggests that 350,000 more small businesses might be caught by a change from 60 to 45 days. Can the Minister confirm that those numbers are roughly correct? Has the impact assessment or any assessment that the Minister has seen looked at precisely what the financial impact of that would be for those businesses? I can see merit in both sides of the argument, but it would help the House to understand the logic behind the conclusions that have been made.

I also understand the logic behind a timeframe for resolving disputes. Businesses that delay payments should not be able to raise a dispute within the timeframe and then delay payment indefinitely, as the noble Baroness, Lady Kramer, has just noted. The existence of this possibility undermines the principle behind the new deadline for raising disputes. That said, I am cautious about the impact of a deadline on resolving disputes. The value of payment disputes that will fall under Clause 7 will have a very large range, so enacting an arbitrary timeframe of, say, 14 days would disincentivise large disputes being brought forward and divert resources towards ensuring they get resolved within the deadline. There is a risk of creating a bottleneck around whichever the dispute deadline would be. However, I recognise the worry associated with an open-ended resolution timeline, so if the noble Baroness and the Minister believe that this worry can be reconciled with my reservations, I would be very happy to work with them as the Bill progresses.

I take this opportunity to repeat the concern my noble friend Lord Hunt of Wirral raised about the scrapping of retention payments, which we otherwise support. In their impact assessment, the Government stated that they would seek to remedy the removal of this insurance option by

“working with industry to find other ways of making sure construction suppliers provide a good service”.

That is surely the right approach. Purchasers must have available means to seek redress in the case of defects or defaults, a point ably argued by the noble Lord, Lord Docherty of Milngavie. This is particularly the case in the public sector, as public money must have adequate protection against underperforming workmanship. I hope the Minister can today update the House on the steps taken with the industry towards providing that assurance. As the noble Lord, Lord Mendelsohn, noted, other public bodies and various public authorities, in particular, local authorities, can be habitual late payers. Public bodies must set an example when they are the ones driving reform. Can the Minister outline how the Government intend to cut back on late public payments? Can he also set out a timeline for phasing out public retention payments, perhaps before the three-year transition period culminates? There are a number of questions around this subject that deserve answers.

I also look forward very much to the debates on the points raised by my noble friend Lord Lansley, which had considerable merit. The noble Baroness, Lady Alexander of Clevedon, also raised some very good points about retention payments re-emerging as something else, so I look forward to the Minister’s views on what might be done to prevent that state of affairs developing.

I would also like to pick up on a point made by my noble friend Lord Leigh of Hurley on the definitions of micro, small, medium and large businesses. The Bill uses the Procurement Act 2023, alongside giving the Secretary of State powers to make definitions, but my noble friend is right to point to the Companies Act 2006, alongside the use of less complex entities by standard setters, not to mention the Enterprise Act 2016 and the Small Business, Enterprise and Employment Act 2015, which all use variations of definitions that essentially describe the same thing.

I would be grateful if the Minister reassured the House that the regulation-making power in Clause 3(7) will not be used further to deviate from any of the existing definitions of businesses. Perhaps more optimistically, does the Bill not present a chance to standardise the definitions of different sized businesses? We should use this opportunity to think about how we fundamentally categorise businesses, especially as low-headcount, high-turnover tech and AI businesses are in the ascendant. Using a full-time employee equivalent, rather than a simple nominal headcount, alongside a standardised turnover and balance sheet total amount, would be a more proportional and accurate way of categorising most businesses, although I recognise that there is some tension with the point I just made about new tech and AI-type businesses. It is needlessly bureaucratic that so many definitions exist across so much legislation. This has been a long-running issue on all sides of the House, so I hope the Minister will agree to work with us to resolve it through the later stages.

I recognise the concerns surrounding the Small Business Commissioner. A perfectly free and competitive market would, of course, negate the need for a third party to arbitrate disputes, but in the absence of such a market, we support expanding the remit of the commissioner’s office to deal with these instances. Moving responsibilities away from the courts is the right choice, but, as has been stated, this must come with sufficient resources. Similarly, in the absence of such a perfect market, I understand the concern that suppliers that raise consistent disputes or enter into proceedings with an influential customer may face being blacklisted. So, for the Small Business Commissioner to work as intended, it must have the trust of the businesses it works for, and this means ensuring against negative repercussions from raising a dispute. I thank the noble Baroness, Lady Kramer, my noble friend Lord Leigh and others for raising these concerns, and I hope the Minister will be able to address them. I also look forward to hearing the Minister’s thoughts on enforcement and resources, as noted by, among others, my noble friends Lord Hunt and Lord Risby. For example, does the Minister have any idea how many staff work for the Office of the Small Business Commissioner, what resources they currently have and whether they will be increased in anticipation of this new legislation?

As the noble Baroness, Lady Kramer, noted, a more fundamental concern with this part of the Bill is the expansive Henry VIII powers it gives to the Secretary of State. New Section 2G, inserted by Clause 18, permits a wide array of unilateral actions, including the ability of the Secretary of State to restrict the disclosure of information and exclude specific disputes. I understand that the former could be used to protect smaller businesses, but it could also be used to protect the poor practices of larger firms, so I would welcome some clarity on this. Similarly, I wonder whether the Minister could specify in which circumstances the Secretary of State would consider excluding disputes. This has the potential to be very wide-ranging, so some specificity would be appreciated. Indeed, if the Minister is able to give that clarity today, can he say why the specific measures are not in the Bill?

My noble friend Lord Leigh’s points about the UN goals and large companies’ practice with regard to forcing their suppliers to address these complex rules were of merit and worthy of further discussion. I look forward to the Minister’s views on them.

Overall, we have some concerns, but this Bill marks an important step in the right direction for this Government’s industrial strategy. It is orientated towards helping small businesses survive and thrive, and I look forward to working with noble Lords on both sides of the House in the coming weeks.

Lord Sharpe of Epsom (Con)

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My Lords, I thank my noble friend Lord Holmes of Richmond for introducing this debate. I welcome all noble Lords back for what will, I am sure, be a productive Committee stage.

I shall begin with Amendment 1. I understand the principle behind my noble friend’s approach. The Bill performs a balancing act, relatively successfully, between good payment practice and regulation. In achieving the former, we have to be careful not to overstep into the latter. It is my interpretation that new Section 2B, to be inserted by Clause 1, already succeeds in ensuring that both parties to a contract are made aware of the payment terms in the four cases that are accounted for. For that reason, I am hesitant to support requiring the purchaser to give instruction on how a payment notice should be given. However, like the noble Lord, Lord Fox, I ask the Minister first to outline what the Government regard as best practice for issuing notices under the Bill, which may very well include the Small Business Commissioner making it extremely clear what they think are the right best practice terms for issuing these notices.

I am much more supportive of my noble friend’s Amendment 9, which would prohibit the increasing of a verification period after the day on which the Bill is passed. The Bill is about increasing payment efficiency; ensuring that the verification of a payment does not take longer than was previously necessary is obviously a core part of achieving that.

Alongside my noble friends Lord Hunt of Wirral and Lord Leigh of Hurley, I have added my name to Amendment 10 in the name of the noble Lord, Lord Fox. It is eminently sensible that an intermediary should not be used to delay or circumvent payment terms; in other words, an intermediary should be used as an intermediary. Ensuring that payments go through third parties swiftly and efficiently, and that the payment is not treated as complete until it reaches its final destination, is surely the key to improving payment practice. I hope that the Minister will agree in his response.

The Parliamentary Under-Secretary of State, Department for Business and Trade (Lord Leong) (Lab)

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My Lords, first, I thank all noble Lords for their contributions to this short debate; I thank in particular the noble Lords, Lord Holmes and Lord Fox, for their Amendments 1, 9 and 10. I pay tribute to the noble Lord, Lord Holmes, for all his work in the area of AI and digital technology, which we welcome. I recognise that these amendments were tabled in a constructive spirit, seeking to ensure that suppliers are paid promptly, with which we do not disagree; to ensure that payment processes are clear; and to ensure that purchasers cannot use contractual mechanisms to delay payment unjustly. Those are their aims, which the Government share.

Amendment 10 would create a new legal requirement for intermediaries, including online marketplaces, to send payments to a supplier within certain time limits. I understand the concern underlying the amendment. Where a small business sells through a platform or marketplace, it is important that the money due to that business is not held unnecessarily. However, that is neither the purpose nor the structure of the Bill. The Bill focuses on late payments under commercial contracts for the supply of goods and services. It strengthens the consequences that arise where qualifying commercial debt has been created and where payment is overdue. It sets clear limits on payment terms between suppliers and purchasers, and strengthens the framework for interest enforcement and accountability. Those protections already apply where there is a relevant commercial contract between a supplier and a purchaser, including where the supplier is ultimately paid via an intermediary.

However, where a platform or marketplace is merely holding, processing or transmitting funds between others, the Bill is not intended to regulate the wider intermediary relationship. Accepting this amendment would, therefore, move the Bill into a different area of regulation. It would establish a new statutory regime for online marketplaces and payment intermediaries, rather than maintaining the Bill’s clear focus on commercial payment practices between suppliers and purchasers. As such, although I respect the intention behind Amendment 10, I do not believe that this Bill is the appropriate legislative vehicle for it.

Amendment 1, tabled by the noble Lord, Lord Holmes, seeks to ensure that purchasers provide suppliers with greater clarity on how notices under the new Section 2B are to be served. I understand the practical purpose of the amendment. Suppliers need to know when they have properly notified a purchaser of the amount that is due. Purchasers also need clarity so that payment processes are efficient and unnecessary disputes are avoided. However, I hope to reassure noble Lords that the Bill is already sufficiently clear on this point.

Lord Sharpe of Epsom (Con)

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My Lords, I will begin by picking up where I left off in group 1, by briefly touching upon Amendment 7 in the name of my noble friend Lord Holmes of Richmond. Just as we should not define a payment as complete until it has passed through an intermediary and reached its final recipient, nor should it be considered complete until the supplier has received all owed funds. I therefore support my noble friend’s amendment.

I completely understand the strength of the arguments that were made just now by the noble Baroness, Lady Bowles of Berkhamsted, on her Amendment 52. In particular, she raised a very interesting point about the likely deterrent effect on small businesses bidding for some of these longer-duration contracts. I suspect that more work needs to be done on that very subject to find out exactly what the scale of the problem might be. For now, while we think we should, of course, pay due regard to the ability of small businesses to make payments, we do not think they should come at the expense of other businesses receiving them. Making payments, of course, may create cash-flow issues, but exactly the same can be said about not receiving them or receiving them in instalments, as this amendment suggests. We therefore prefer the blanket payment period regardless of business size, as the Bill already suggests, while also acknowledging, as I have said, that we should be looking into this in more detail.

Moving on to the actual length of payment periods, I suspect that the argument for shorter payment periods will continue to rear its head through the passage of the Bill. I will therefore begin by making His Majesty’s Opposition’s position clear. We would like to see a move to shorter terms but, given the fact that businesses have been told that a 60-day limit will be implemented and have begun to prepare for that, that is what we plan to support. For that reason, I cannot support my noble friend’s Amendment 2. Although a shorter payment term is desirable, it would currently be too much of a jump to reduce this to 30 days immediately. The impact assessment suggests that the difference between SMEs using 60-day and 45-day payment terms is roughly 360,000 businesses. I suspect that this number would be significantly larger for those using 30-day terms. These businesses need time to transition, which is why I support the principle behind Amendment 11 from the noble Lord, Lord Fox, which would require the transition to a 45-day term over a five-year period.

We can debate the exact number of days and the length of the transition period, but I expect that we all want this to move in the same direction. For that reason, I hope the Minister can commit to, at a minimum, reviewing the length of private sector payment terms over a set number of years.

Amendments 3, 5 and 25 in my name all probe the same point. What is the status of a payment that is delayed past the maximum threshold, not due to a fault of the purchaser? My amendments offer two examples. First, it is not uncommon for businesses to make their payment runs at the end of the month. These are often then processed over the next few working days, meaning that they are received several days after month end. This is a scenario that Amendments 3 and 5 account for. We do not want to see the payment terms increased, but we also do not want businesses sacrificing efficiency and shunning payment runs because there is a chance that banks will be slow in processing them and the purchaser will be charged interest. Can the Minister confirm that interest will not apply in such cases? Amendment 25 offers another example: that of delays due to public holidays. Can the Minister also assure the Committee that such delays pushing payments over the 30 or 60-day period will not be subject to statutory interest?

Amendments 4 and 8 are also in my name and those of my noble friends Lord Hunt of Wirral and Lord Leigh of Hurley. They seek to probe the status of nationalised bodies simply to seek clarification as to which entity status they will fall under—private or public bodies. Given the pertinence of British Steel, and potentially now Thames Water and whichever other companies the new Prime Minister takes a disliking to, I hope the Minister can provide an answer at the Dispatch Box today.

Speaking of Thames Water, Amendments 42, 43 and 100 raise an issue regarding businesses placed under special administration regimes and similar statutory moratoria. I very much thank the Lanes Group for highlighting this for us. Supply made after a special administrator’s appointment is ordinarily payable as an expense, but no provision currently requires payment within any defined period. Suppliers to SA regimes cannot terminate for the insolvency and cannot make continued supply conditional on payment of arrears, so it is unclear whether the payment terms in the Bill survive such a moratorium. Amendment 42 would ensure that such provisions continue past entering administration.

Amendment 43 is based on much the same premise: suppliers cannot make continued supply conditional on the payment of arrears, and payment protection under the Insolvency Act 1986 applies only prospectively. This amendment would ensure that the receivable’s ability to withdraw supply is once again protected. The sums owed would be restricted to undisputed sums and could be subject to caps and eligibility limits set by regulations.

Amendment 100 would require a review of this process as a whole. It is apt, when we have been considering the nationalisation of certain companies and will soon be considering placing others under special administration, that there should be a review of how associated businesses are impacted by these measures and how the system operates as a whole. I hope the Minister agrees that now is a good time to undertake such a review.

Finally, Amendment 51 would prevent a party to a contract forcing another party to use payment methods other than those that are contractually specified. My noble friend Lord Leigh of Hurley has done much to highlight this, but we do not want to see smaller businesses bullied into using cryptocurrency—the example that my noble friend gave—just because it suits a larger business partner. I hope the Minister will agree with this and the many other points raised.

Lord Leong (Lab)

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My Lords, I thank all noble Lords for their contributions and amendments in this group. The Government share the objective of fair payment rules and are committed to ensuring that businesses, especially SMEs, are paid promptly. The 60-day period was set following extensive consultation with industry, with more than 850 responses across all sectors and business sizes. The Government consider the 60-day cap to be a balanced and proportionate approach.

As I mentioned at Second Reading, there is no reason why businesses cannot pay before 60 days and I think most do. I am sure that noble Lords here who have businesses pay much earlier than 30 days; the Department for Business and Trade—now called the Department for Business, Innovation, Science and Trade—pays 99% of its bills within 30 days. We are trying to encourage behavioural and cultural change, and 60 days is a maximum. I am sure that most businesses pay within that period.

Lord Leong (Lab)

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I am sure we do; I will speak to officials and make sure I share that information with all noble Lords.

This represents a significant strengthening of existing law, where payment terms of more than 60 days are often imposed on suppliers. Some smaller businesses argue that 60 days remains too long, while some larger businesses express concerns about the impact of maximum payment terms on working capital and established commercial arrangements. The 60-day period therefore represents a carefully considered balance between those competing concerns.

Amendments 2 and 11 would reduce payment periods either by creating a statutory expectation that the maximum period will be tightened in future or by reducing the cap for non-public authority purchasers to 30 days. Reducing the maximum period to 45 or 30 days may not work effectively across all sectors, particularly those with complex supply chains. Amendments 3 and 5 would move in the opposite direction, extending the maximum period to 35 days for public authorities and 65 days for other purchasers. The Government cannot support these changes either. The Bill’s 30-day period for public authorities is aligned with wider public procurement rules; extending those periods would weaken the Bill’s ambition and delay payments to suppliers, including small businesses.

Amendment 7, in seeking to define payment more clearly by reference to funds being received, could result in purchasers that have done their best to pay on time being punished for issues that are out of their control—for example, when a payment instruction has been made on time by the purchaser but is subsequently delayed by banking processes outside the purchaser’s control. The Government believe that the Bill provides sufficient clarity and improvement of payment practices, taking into account the need for businesses’ flexibility on how payments are made.

Lord Leong (Lab)

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I am grateful to the noble Lord for bringing that specific example. I need to be very specific about this, because it refers to a particular organisation; I need to get my facts correct and will write to him.

Lord Leong (Lab)

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My Lords, I will now introduce government amendments in my name. Turning first to the amendments to the Procurement Act 2023, I hope noble Lords across the Chamber will agree that the Government and the wider public sector must set a good standard for good payment practice. If we expect businesses to pay promptly and fairly, public authorities must lead by example. The Government’s clear policy is that, in contracts where a public authority is a purchaser, payment terms should not exceed 30 days. That is already reflected in Cabinet Office guidance, but the current wording of the Procurement Act 2023 could allow an invoice to provide for a later date for payment. This could enable contracting authorities to agree a due date that results in a payment term longer than the 30 days intended by the Bill. While we do not believe that this is happening in practice, these amendments bring the Procurement Act 2023 more into line with the Bill and require payments made by public authorities to be made within 30 days of the receipt of an invoice by them. These amendments also ensure that all those subcontracting within public procurement supply chains, including regulated below-threshold contracts and related subcontracts, are subject to the same 30-day payment terms. The amendments also make minor consequential changes to other provisions of the Bill for the purposes of consistency and clarity.

These amendments also provide specific provisions within the Procurement Act 2023 for public construction contracts. As noble Lords are aware, the Bill already aligns late payment policy, including maximum payment terms, with the construction industry’s established statutory payment regime and specific terminology under Part 2 of the Housing Grants, Construction and Regeneration Act 1996, which I shall now refer to as the construction Act. It is therefore appropriate to also align public construction contracts to ensure consistency between the legislative regimes of the construction Act, the Procurement Act and the Bill. Corresponding amendments are also made to the Construction Contracts (Northern Ireland) Order 1997.

Construction contracts subject to the Procurement Act payment terms have an implied maximum payment term of 30 days. However, currently, there is no explicit reference to the payment notice system or payment triggers for construction contracts under the construction Act within this legislation. It is therefore currently unclear on the trigger points for the maximum payment terms and on how implied payment terms from the Procurement Act interact with the scheme for construction contracts. The intended amendments will set this maximum payment term at 30 days from the due date to the final date for payment. In the rare occurrence that the payment term is not provided or a contract term allows for a payment later than the permitted period, the maximum implied period of 30 days would apply. This will provide clarity for construction contracting parties in relation to payment terms within construction contracts or subcontracts that are subject to the Procurement Act and ensure maximum payment terms of 30 days for construction contracts where a public authority is the client.

Finally, I turn to the five amendments concerning provisions relating to the Small Business Commissioner. All five are minor and technical amendments that clarify drafting and ensure consistency of approach. The amendments support the legislation’s overall objective, which is to provide a clear, practical and enforceable regime that strengthens payment discipline, improves suppliers’ confidence and ensures that smaller businesses are not left to bear the cost of poor payment practices.

Taken together, these government amendments do three things: they reinforce the 30-day standard for public contracts, provide clarity for public construction contracts, and ensure that the Small Business Commissioner provisions work as intended. They are therefore targeted, practical and consistent with the central purpose of the Bill. I beg to move.

Lord Sharpe of Epsom (Con)

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My Lords, I am also grateful to the Minister for his comprehensive explanation. I am pleased that this tidying-up exercise, if you will, around existing legislation is happening, because that forms the basis of all the amendments in the group that we are about to debate, which are all mine, which I am now very confident the Minister will accept.

I have two brief questions. New Section 68B, to be inserted by Amendment 41, provides for an appropriate authority to make regulations altering the maximum payment term. It would be useful to know why the Government believe that power to be necessary and in which circumstances they might use that power.

I have further questions about Amendment 102, which permits the Chancellor of the Duchy of Lancaster to make consequential amendments by regulations, as well as the Secretary of State. For what purpose have the Government made that amendment? Why does the Cabinet Office need to be able to make such amendments? Is it not sufficient for the Secretary of State at the department for business and whatever else it is called these days to make such regulations? I will be grateful to the Minister for answers.

Lord Leong (Lab)

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My Lords, I thank the noble Lords, Lord Fox and Lord Sharpe, for their contribution on these amendments in my name. It is best that we get any legislation right in the first place, and I appreciate the support given to the Government on these amendments. There is a lot of tidying up and, as the noble Lord, Lord Sharpe, said, it is best that we address it now, which we are doing.

The noble Lord made a point about the Chancellor of the Duchy of Lancaster. Procurement falls within the Cabinet Office, so the responsibility lies with the Cabinet Office. I will need to get back to him on his earlier question about the public authority.

The amendments reinforce the principle that the public sector should lead by example in prompt payments, provide much needed clarity on construction contracts within the scope of the Procurement Act and make a number of minor but important improvements to the Small Business Commissioner provisions. Taken together, they enhance the effectiveness of the Bill, improve consistency across related legislative frameworks and provide greater certainty for businesses and public authorities alike.

Lord Leong (Lab)

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My Lords, that would be inconsistent with the Bill, because the Bill sticks at 30 days for public authorities. We are trying to tidy this up. Any provisions that provide an extension for more than 30 days for public authorities will not happen. That is why we are sticking to 30 days for public authorities.

Lord Leong (Lab)

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I will do that.

Lord Sharpe of Epsom (Con)

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My Lords, it is a pleasure to introduce group 4, which primarily covers the important issue of the definitions of different sized businesses. Before I open that debate, I will touch on the other amendments in this group.

Amendment 18, which was signed by my noble friends Lord Hunt of Wirral and Lord Holmes of Richmond, probes the expected impact of exempting upward payments from the new payment terms. As a preliminary question, what economic impact do the Government specifically consider new Section 2E(2) will have? The Government’s argument is that the Bill will prevent the late payments that cost the United Kingdom £11 billion and cost small businesses almost eight days a year in chasing overdue invoices, yet they are exempting upward payments, including those from micro and sole undertakings, to small businesses. I understand that smaller businesses often appear more vulnerable and will often have tighter margins and a smaller cash flow, but that does not mean that the supplier, especially if it is also a small business, can necessarily take the hit of an indefinite or delayed payment term.

More broadly, the purchaser almost always has the power in a contractual agreement. They are the ones who hold the capital. Exempting upward payments merely because the purchaser is smaller will exempt contracts that really should fall under the scope of the Bill.

That brings me to the most long-standing issue this group addresses, which is the definition of businesses. There are currently at least six different definitions in law of business sizes. There are the Companies Act 2006, the Enterprise Act 2016, and the Small Business, Enterprise and Employment Act 2015. Standard settlers use the definition “less complex entities”, while this Bill uses the Procurement Act 2023, alongside giving the Secretary of State powers to make definitions.

We are not arguing that discretion is not needed in separate areas of policy, but it is widely thought that we have reached the point of confusion. At the very least, any new definition created under this Bill should not differ from any pre-established definition; that is the argument that Amendment 22 is attempting to make.

In a more ideal scenario, Amendments 20, 21, 23 and 101 attempt to offer a new standardised definition of business sizes that we believe more accurately represents the nature of today’s economy. Currently, the most used definitions in the Companies Act use a numerical number of employees as a factor in defining the size of a business. The amendments in my name, alongside those of my noble friends Lord Hunt of Wirral and Lord Holmes of Richmond, aim to replace this nominal headcount with a full-time equivalent number of employees.

I offer just one important example of the importance of this change. In doing so, I thank UKHospitality for its campaign on this issue. Members of the hospitality industry often hire more than the threshold 50 or 250 employees at their venues or events, but do so on shorter, low-hours contracts. While they may therefore have an employee count well over the threshold, it often does not reflect the amount of work that is being done by these employees. We believe that the Government should be able to offer a more nuanced system that more accurately reflects the amount of labour that a business employs.

Finally, exacerbating this amalgam of definitions is the lack of public information about which business falls where. Restricting the definitions of businesses is important, but I pre-empt that the Minister will argue that this Bill is not the vehicle for that discussion. In a sense, he is quite right. Under new subsection (7) in Clause 3, the Secretary of State could define small businesses as those with £100 million turnover. It would not matter if businesses did not know which partners fell under this definition. This is hyperbole, but it illustrates the point that, without some form of database through which businesses can see who falls under which payment term in this Bill, definitions have little meaning. At the very least, businesses will be forced to complete the administrative work themselves.

In speaking to industry representatives in preparation for this Bill, there has been general consensus that Companies House is not fulfilling this role. The Bill aims to create more symmetry between different-sized businesses, yet that cannot be achieved if there is obscure or asymmetrical information. Can the Minister confirm today that he will look into the efficacy of Companies House and, if need be, provide additional support for businesses so they do not have the burden of defining businesses themselves placed upon them? I beg to move.

Lord Leong (Lab)

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My Lords, I thank all noble Lords, and thank the noble Lords, Lord Sharpe and Lord Hunt, for tabling these amendments.

Amendment 18 concerns specific exemptions from 60-day maximum payment terms. The Bill will allow contracts to be exempt where the purchaser is a smaller party. It is also the Government’s intention, subject to consultation, to exempt contracts to import or export goods or services from maximum payment terms. These exemptions will support businesses in the UK. The exemption for smaller purchasers, where the larger supplier agrees, will support supply chains where goods are slow moving or niche and where market power sits with the supplier, such as independent booksellers. During the late payment consultation, retail businesses told us that, without this exemption, smaller businesses would struggle to stock their stores appropriately. Where the purchaser is a smaller party, the power dynamic will not lead to unfair payment terms being imposed on suppliers. The exemption is a proportionate mechanism to support smaller businesses.

Amendments 20 and 23 focus on the definitions of business sizes, which are important for the size-based exemption set out in the Bill. The definition of business sizes will be clearly defined in secondary legislation following consultation. The Government want to ensure that thresholds are appropriate and avoid unintended consequences. We recognise the intention to provide consistency across the statute book, and noble Lords and I have had many conversations on this. However, these amendments would unduly constrain the flexibility needed to ensure that this regime operates as intended. These amendments would require the Secretary of State to adopt an existing definition of size of undertaking designed for different purposes, or to introduce a single definition across different pieces of legislation. This is not the approach taken in this Bill. New Section 2E will provide the necessary delegated power to define micro, small, medium and large undertakings for the purpose of exempting certain contracts from new Sections 2B and 2D. These will be subject to consultation and parliamentary approval.

In relation to the Small Business Commissioner, Amendment 101 would

“amend the definition of a small business in the Enterprise Act 2016”

by setting fixed statutory thresholds based on employee numbers and turnover or balance sheet total in primary legislation. The Enterprise Act 2016 already includes the definition of a small business and the Secretary of State has an existing delegated power to make further provisions about the definition in regulations, subject to parliamentary approval. We believe that the regulations are the appropriate place for that detail rather than the Bill.

We do not propose changing the definitions of small or larger businesses to refer to full-time equivalent instead of headcount. These definitions have been in place since the establishment of the Small Business Commissioner and are consistent with the definitions in the wider Bill, which the commissioner is to enforce. Changing this would result in further compliance costs for businesses and be complex to administer. I understand the concerns raised by particular industries, such as hospitality, and would be happy to ensure that the commissioner works with these groups to support businesses to understand how the new measures will impact them. The Government’s view is that the level of detail proposed is better suited to secondary legislation. Furthermore, it would remove the Government’s flexibility to adjust thresholds in future.

Different aspects of payment legislation, where it is related to exemptions from maximum payment terms or the Small Business Commissioner’s power, require definitions that reflect commercial realities and changing payment behaviours. Rigid definitions developed for other purposes risk undermining the Bill’s objective. The Government intend to draw on existing frameworks and keep definitions simple and effective. However, we must retain the ability to depart from them where necessary so that the regime operates fairly and definitions can evolve alongside policy objectives. A one-size-fits-all approach risks unintended consequences.

Finally, Amendment 99 would require the Government to establish and continually update a database of businesses affected by the Act. This would create a significant administrative burden and be difficult to maintain as business circumstances change. We do not consider a statutory register to be a proportionate means of supporting compliance.

Lord Sharpe of Epsom (Con)

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My Lords, I am grateful to the Minister for his explanation and for the context around some of the amendments that he has provided. I thank all noble Lords who spoke in the debate, especially my noble friend Lord Holmes. I will be brief in response.

I totally accept that the Government do not want to use this Bill, which they rightly want to get through the House quickly, for a protracted debate about business definitions, which obviously would spill across several different pieces of legislation. However, I hope that the Government at least accept or acknowledge that this is becoming a growing concern. It is a confusing picture, as I think all noble Lords would acknowledge. I urge the Government and the Minister to at least consider Amendment 22, which would ensure that this problem was not made worse by this otherwise very sensible legislation.

I accept what the noble Lord, Lord Fox, said. We are trying not to propose solutions but to probe the Government’s intentions, and the Minister has gone some way to setting those out. We are also trying to highlight the fact that the nature of employment and small businesses is in itself changing, and therefore some of the more rigid and perhaps elderly definitions are no longer necessarily fit for purpose.

I appreciate the Minister’s responses regarding the exemption on upward payments and a business database. The context there was useful. On that, I would greatly appreciate it, if he has any information regarding the projected economic impact of this policy, if he was willing to write to me about it.

I hope the Minister will take our suggestion away before Report. As I outlined in my opening speech, this is a good opportunity to use data that is already held by the Government to help businesses be more efficient and competitive. I hope that after the Recess we can reconvene and take this issue further and continue our discussions.

It was remiss of me not to thank the Minister for his offer of the Companies House meeting, which he made the other day in private. I meant to do that but totally forgot. I thank him, and yes please. I beg leave to withdraw the amendment.

Lord Sharpe of Epsom (Con)

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My Lords, I am very grateful to the noble and learned Lord, Lord Thomas of Cwmgiedd, for introducing his amendment. I cannot really improve on what has already been said, except to say that this issue has been raised with His Majesty’s Opposition in the run-up to this Committee stage. It is right that, should technology permit it, import and export trade contracts should be treated the same as domestic documents. That may not be feasible now, but the noble and learned Lord’s amendment provides what seems to me a reasonable timeline to get to that point.

Lord Leong (Lab)

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My Lords, I thank the noble and learned Lord, Lord Thomas, for tabling Amendment 19, and acknowledge his advocacy in relation to e-invoicing and electronic trade documents. However, the intention to exempt imports and exports from maximum payment terms through secondary legislation is crucial to supporting UK businesses. Whether helping British manufacturers import materials and parts or allowing British exporters to compete in overseas markets where longer payment terms are common, we do not want to undermine the ability of UK businesses to trade competitively by limiting this potential exemption through Amendment 19.

The delegated power in new Section 2E(4) allows Ministers to make exemptions where payment practices vary across sectors and to respond to changing market conditions. It will be used sparingly in a targeted and evidence-based way and ensures that the regime can adapt, while still improving payment practices and protecting smaller suppliers. Removing or unduly constraining the flexibility would risk unintended consequences for businesses, particularly in sectors with more complex supply chains or commercial arrangements where longer payment terms can be mutually beneficial. Retaining this power ensures that the regime can be adapted where necessary while still delivering the Bill’s core objective of improving payment practices and protecting smaller suppliers.

The Government want to tackle and end scenarios where businesses unfairly use their larger size and power to impose unfair payment terms on smaller businesses. In the limited circumstances covered by the exemption, we do not consider that such imbalance leads to unfair outcomes, and an exemption from maximum payment terms could benefit the purchaser and the supplier.

I remember the days when I worked in my dad’s import and export business, the days when you used trust receipts and bills of lading—I am sure noble Lords will remember those—and let us not forget telex machines either. We have come a long way. I remember also the days when you had to write up or type up your invoices and send them to your suppliers by post. These days we have platforms that do a lot of invoicing electronically. One has also to appreciate that businesses come in all shapes and sizes and while bigger companies have more sophisticated systems in place, smaller businesses may not. We need to be respectful of some businesses that may not have sophisticated systems.

As noble Lords will know, the Government are moving towards e-invoicing and, I hope, over time more and more business will be conducted electronically and we will not really need the noble and learned Lord’s amendment. For this reason, I ask him to withdraw Amendment 19.

Lord Leong (Lab)

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I appreciate what the noble Lord has just said, but it is important that the scope of the Bill is targeted at UK businesses and small businesses. A commercial arrangement between a company based in the UK or a business based elsewhere is probably outside the scope of this Bill in that regard.

Lord Sharpe of Epsom (Con)

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My Lords, I thank my noble friend Lord Holmes of Richmond for this amendment. I am sorry that noble Lords have caught me eating a toffee, which was a terrible error.

The ability to charge statutory interest on late payments was established by the Late Payment of Commercial Debts (Interest) Act 1998. That Act, however, introduced that right only as a right to charge, which many businesses may choose not to exercise out of fear of damaging commercial relationships or losing out on contracts. With this Bill, statutory interest becomes an implied mandatory term of a commercial contract. Therefore, the interest will accrue automatically on overdue payments and the burden will not fall on the suppliers to claim that interest.

The amendment from my noble friend seeks to ensure that late payment interest is paid to a supplier within five working days. It further provides that where statutory interest is not paid within that timeframe, the unpaid interest will itself form a part of the qualifying debt and therefore be liable to a further charge of statutory interest. While we support this policy, we must ensure that businesses, particularly SMEs, are given adequate time to adapt to the new regulations.

The impact assessment recognises that small and medium-sized businesses will shoulder

“a higher proportion of net costs”

associated with this policy. It further states:

“The policy does not create specific mitigations for SMEs, rather information will be provided to all business, to support their understanding and complying with the new policy requirements, in line with previous guidance issued on statutory interest”.


Those words might not be particularly comforting for many small businesses that are already struggling. Might I suggest that the Government do a little more to explain precisely how they will support those businesses? What kinds of information will they provide?

I have tabled an amendment to the commencement clause of the Bill, to be debated later, which would prevent that clause being brought into force for one year. That is the kind of measure that will give businesses the time to adapt, understand the new guidance and prepare for the new regime. I hope that when we come to debate that amendment, the Minister will give it serious consideration.

Lord Leong (Lab)

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My Lords, I thank the noble Lord, Lord Holmes, for this amendment. I understand the concern that statutory interest is not always claimed or paid in practice, and I agree that it is important to find ways to make the systems work better for suppliers. However, the Bill already strikes the right balance. It strengthens the existing framework by making the right to statutory interest universal, ensuring it cannot be contracted out of, and underpinning it with significantly stronger enforcement and transparency. This signifies a significant advancement, transitioning from a system where the right exists, but remains underutilised, to one where all suppliers are explicitly entitled to it and are supported in its enforcement.

This amendment would go further by introducing rigid and prescriptive requirements that risk undermining the balanced approach. A fixed five-day deadline for the payment of interest does not accurately reflect the practical realities of commercial and accounting practices and processes; it may pose a risk of technical breach to businesses that are otherwise compliant. The proposed definition of payment as an

“unequivocal and unencumbered use of cleared funds”

could lead to legal and operational uncertainties, diverting attention from timely payment to technical disagreements over banking procedures.

Additionally, classifying unpaid interest as new qualifying debt, which then accumulates more interest, risks creating disproportionately large and growing liabilities. The obligation for directors to report instances of non-payment to the Small Business Commissioner would also introduce supplementary administrative burdens, without a distinct enforcement advantage beyond the provisions already established in the Bill.

Taken together, these provisions risk creating complexity and uncertainty, rather than improving payment outcomes in practice. The Bill aims to enhance behaviour by establishing clear rights, enforceability and robust oversight, rather than specifying detailed operational rules in primary legislation. I therefore ask the noble Lord to withdraw his amendment.

Lord Leong (Lab)

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My Lords, I thank the noble Lord, Lord Fox, for his Amendment 37, and I thank the Publishers Association for meeting with me. I can be very clear and confirm that the Bill does not substantially alter the contracts in scope of the Late Payment of Commercial Debts (Interest) Act 1998. Where this is the case, the protections offered by that Act will apply to a contract, and where they do not, they will not. The Bill does not alter the effect of existing case law in scope of the Late Payment of Commercial Debts (Interest) Act 1998 where it is found that the mere licence of copyright was not within scope.

Performers, authors, musicians and other creators are often freelancers or very small businesses. They may have limited bargaining power and may depend on timely payment for work created, delivered or licensed. During the Government’s consultation, we heard from authors and musicians who were waiting for many months to be paid. That is precisely the kind of poor payment practice that the Bill is designed to address. Where relevant contracts entered into by small businesses, freelancers or individual creators are for the supply of goods and services, the Bill will ensure that payment is made within the statutory maximum period of 60 days from the agreed trigger point.

However, there may be agreements involving intellectual property rights that are not properly characterised as contracts for the supply of goods or services. Some arrangements may concern the assignment, licensing or exploitation of intellectual property in ways that fall outside the late payment framework. The Government’s position is therefore clear: creators and freelancers should be paid on time where their contracts fall within the commercial payments regime.

Amendment 37 risks blurring established distinctions in contract and intellectual property law and would create uncertainty about which agreements are covered. For that reason, while I understand and sympathise with the intention behind this amendment, I do not consider it necessary or appropriate. Consequently, I ask the noble Lord to withdraw Amendment 37.

Lord Leong (Lab)

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As far as the Bill is concerned, we are not providing any particular exemption to any particular sector. As far as intellectual property law is concerned, there were concerns from the various trade organisations that the Bill may also include the licensing of copyright. That is not the case, because that has been decided by case law under the earlier legislation I mentioned. If a contract says that someone has been contracted to write a particular book, novel or whatever, then that falls within scope of the Bill, but copyright contracts do not.

Lord Leong (Lab)

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I will quickly answer that. If the contract is for a book, and, as part of the contract, the creator is advanced a sum of money with an additional royalty arrangement, then the contract for that sum of money is covered within the scope of the Bill. The payment of copyright is outside the scope of the Bill.

Lord Sharpe of Epsom (Con)

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My Lords, I thank my noble friend Lord Lansley for speaking in this debate and introducing his amendments. Banning retention payments is one of the key changes that this Bill will introduce, but it is also one of the most contested, so I will begin by outlining our general position on these Benches.

We do not in principle oppose this step by the Government. To outline the scale of this issue, which I am sure the Minister will reiterate: 65% of retentions are not released on time and 20% are never recovered. Estimates of retentions lost due to insolvencies range from £0.25 billion to over £1 billion, and one need only look at the scale of the Carillion collapse to see that this is unsustainable. But, past the losses, retentions have been used for means other than what they were intended for. They are now widely used to retain cash flow and, in doing so, they transfer risk and reduce the margins of smaller subcontractors. So change is evidently needed.

While we therefore support the Government, we still must not lose sight of the intended use of retentions. They are supposed to act as insurance against defective work. If they are to be scrapped, we think that something must replace them. As my noble friend Lord Lansley argued persuasively, they provide qualitative assurance. I appreciate that the Government are discussing this with industry and that that they expect the market to find a suitable alternative, but some clarity about what they have in mind would be helpful.

Amendments 46 and 49, in my name and that of my noble friend Lord Hunt, seek to probe two potential alternatives: escrow and staging payments. Most importantly, the Government’s consultation on retention suggested a ban or something very similar to an escrow-type arrangement. Given that they went with the former, can the Minister confirm today at the Dispatch Box that escrows will not be banned by the backdoor?

Amendment 47, also in my name and that of my noble friend Lord Hunt, seeks to probe what the Government are doing to speed up their own transition away from retention payments. Public contracts make up roughly one-third of withheld retention payments, so it is only right that the Government lead from the front and demonstrate that they are driving this change.

Amendment 50 would exempt resident-run and resident-owned property companies from the ban on retention payments. I hope the Minister can confirm that this is already the case, but it is worth reiterating that residents should not fall under this ban on specific construction contracts.

I understand the principle behind the amendments in the name of my noble friend Lord Lansley. On Amendment 44, I will, however, make the same argument my noble friend made earlier about exempting SMEs from payment terms. Just because a small business is more vulnerable to retention payments, it does not follow that there is no risk involved for other businesses. We are therefore not in favour of specific commercial exemptions.

I am sympathetic to Amendment 48, but I would like to hear what the Minister has to say regarding alternatives before we consider watered-down forms of amendments. I hope that he will confirm in his reply that serious alternatives are being considered and that they are sufficient.

Lord Leong (Lab)

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My Lords, I thank the three noble Lords for their amendments in this group and for their contributions.

Taking Amendment 46 first, I reassure the noble Lords, Lord Sharpe and Lord Hunt, that the Bill does not prevent parties in any sector, including construction, making use of payment arrangements through third-party providers. A business may use a bank, payment agent or escrow account or provider to facilitate the transfer of funds from one party to another. Such arrangements can, in some circumstances, support better cash flow management, provide greater transparency and give parties additional confidence in how funds are handled. Nothing in the Bill is intended to prevent the use of those legitimate payment mechanisms. Therefore, Amendment 46 is unnecessary, but I shall make a further point, if I may.

As drafted, this amendment risks unintentionally undermining the policy intent behind the proposed ban on retentions. Its practical effect could be to preserve the option of still using retention clauses, provided that the retained sums are held by third parties. That would run counter to the Bill’s purpose. Retentions have been used in the construction sector for well over a century, but the evidence from consultation, research and engagement with businesses is clear: retentions are neither an effective way to prevent defects or to remedy poor-quality work. In practice, retentions often reduce cash flow for contractors and subcontractors, increase financial risks across the supply chain, and leave businesses exposed to late and non-payment or to the loss of retained sums through insolvency. The Government’s view is that the industry must now move beyond reliance on retentions. Therefore, we are not proposing any exceptions to the ban, nor do we want to permit retention practices to continue in another form.

I recognise the intent behind Amendment 47. The public sector is a major construction client and there is a strong case for it to lead by example. Phasing out retentions in public construction contracts will send a powerful signal, help establish new standards and support a fairer payment environment for smaller businesses. The Government recognise that the public sector has an important leadership role, but we must also recognise the practical realities that construction clients face, whether public or private.

The Bill reflects typical project durations, existing contractual arrangements and the time required for businesses to adjust their commercial models. During the transition period, the Government will work with industry through the Construction Leadership Council and with clients across the public and private sectors, the financial services sector and the supply chain. The purpose of that work will be to improve quality, reduce the level of defects, and help the market to develop alternative forms of surety for clients and the supply chain, whether it is performance bonds or other forms of financial instruments. That is the right way to achieve lasting reform. It gives the sector a clear end point and a realistic path to get there.

I thank the noble Lord, Lord Lansley, for Amendments 44, 45 and 48, and for his constructive engagement with the Bill. I fully understand the concern underlying these amendments. Everyone in your Lordships’ House wants construction work delivered to a high standard. Everyone agrees that defects should be remedied by the party responsible for them. The question is not whether quality matters—it clearly does—but whether cash retentions are the appropriate way to secure that outcome. The Government’s answer is clear: they are not. These amendments would create wide-ranging exemptions from the Bill’s retention provisions. Their practical effect would be to remove or significantly reduce the protection that the Bill is intended to provide for many businesses in the construction supply chain. That would be a serious step backwards. It is designed to protect cash flow, reduce exposure to insolvency risks and end the long-standing practice of withholding money already earned.

If these exemptions are accepted, many of the risks that the Bill aims to address would remain. Businesses would still experience reduced cash flow, retained sums would still be vulnerable to late release, non-payment and loss through insolvency, and clients would still have to incentivise to preserve mechanisms that reduce payments to suppliers rather than adopt better ways of managing quality and defects. That would undermine one of the Bill’s central purposes. If we create broad exemptions now, we risk preserving the very practices that have held us back for so long.

It is important to recall the evidence from the 2018 consultation conducted by the previous Government. Contractors reported significant difficulties in obtaining the release of the second half of the retention at the end of the defects period. The final retention payment was often used as leverage in negotiations over the final amount. That experience demonstrates why seemingly limited retention arrangements can become a source of real commercial pressure. There is also the possibility that if exemptions are introduced, clients might try to extend defects periods beyond the usual 12 to 24 months seen in construction contracts, which could extend the timeframe for withholding funds.

The Government fully accept that quality and defects must be addressed. However, the answer is not to continue withholding cash from supply chains but to improve quality, reduce the incidence of defects, and develop fairer and more effective alternatives to retentions. That is the work we intend to take forward with industry throughout the transition period. The Government’s approach therefore strikes the right balance. It offers a clear incentive for essential reforms, it protects smaller businesses from the cash flow and insolvency risks linked to retentions, and it gives the industry time to adapt to a significant and necessary change.

In relation to Amendment 49, I reassure noble Lords that no provision in the Bill will change the ability of construction clients and firms to agree either staged or interim payments under construction contracts. Therefore, this amendment is unnecessary.

We understand the intention behind Amendment 50, that resident-owned firms undertaking essential remediation work can ensure that the work done is of high quality, but we do not believe that retention ensures this. As Dame Judith Hackitt has noted, the practice is ineffective and undermines the effectiveness of the supply chain, which is why alternatives are required.

Let me respond to the question from the noble Lord, Lord Lansley, on the new homes ombudsman scheme and the code of practice. The Government have already stated their intention to bring forward a statutory new homes ombudsman scheme. Requirements are being developed and the Ministry of Housing, Communities and Local Government may undertake market engagement to assist in further developing this. This would be done transparently via government portals.

With that, I ask that the amendment be withdrawn.

Lord Sharpe of Epsom (Con)

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I totally understand where the noble Lord is coming from, of course, and I think we have indicated already that we are broadly supportive of the direction of travel. What he is in effect saying is that the suppliers have to behave better, reduce defects and do all sorts of other good stuff, all of which is admirable and worthy, but what are the incentives to ensure that they do? I am sure the noble Lord is familiar with the famous saying of Charlie Munger, who was Warren Buffett’s partner: “If you show me the incentives, I’ll tell you the outcomes”. At the moment there are no incentives, so the outcomes will not be good.

Lord Leong (Lab)

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I think the mere incentive of getting the money earlier will ensure that the service and the quality of work will be done to specification. Otherwise, the claim for compensation will come in, so the whole incentive is to get the work done properly in the first place.

Lord Leong (Lab)

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First, I thank all noble Lords who have contributed to the group of amendments, and I acknowledge the work done by the previous Government in establishing the Small Business Commissioner. We are building on the work done by the previous Government to give the SBC more powers to do the work under the Bill. I listened to the very innovative suggestions from the noble Lord, Lord Leigh. I will definitely bear some of the suggestions in mind when I speak to my officials. I will not guarantee or promise him anything, but I will bring it up.

I recognise the shared objective behind Amendments 59, 66 to 68, 71 and 79. Payment disputes should be resolved quickly, fairly and with proper safeguards. That is what the Bill is designed to achieve. This group of amendments is huge, and I will try to address as many of the questions as I can. If I do not, I promise to go through Hansard and write to noble Lords.

The Bill enables regulations to set time limits for each stage of adjudication, including the adjudicator’s decision, and to make further provisions about investigation. It allows the detail of procedural rules to be informed by consultation and approved by Parliament, and, where appropriate, with the consent of the devolved Governments, it gives the scheme the flexibility to be adjusted, including to set a shorter timeframe than 60 days for an adjudicator to determine a payment dispute, if appropriate. I understand the desire to put firm deadlines and procedural requirements in the Bill, but doing so would risk making the scheme less effective. In particular, requiring both parties to agree to extensions could allow one party to frustrate the process and jeopardise a fair outcome.

Similarly, removing the adjudicator’s ability to give directions or take steps to secure fair adjudication of a dispute would make the scheme more rigid and could prevent adjudicators detailing properly, with complex or incomplete evidence. The Bill already contains important safeguards. Adjudicators must act fairly and impartially, give parties a reasonable opportunity to present their case, and operate within a framework that is set out in regulations and subject to scrutiny.

With regard to Amendments 55 to 57, 62, 64 and 65, the Government’s approach is deliberately targeted. The scheme is intended to address the power imbalance that can arise when a larger business owes money to a small business, including sole traders and the self-employed. It is not designed to duplicate existing consumer protections or create a general commercial dispute resolution service. Extending the scheme more widely would risk increasing complexity and case volumes and weaken the ability to provide a swift, low-cost route for small businesses—the group most affected by poor payment practices. The Bill sets out exclusions and grounds on which the commissioner may decline to adjudicate. The regulation-making powers will simply allow technical and proportionate refinements, informed by operational experience, so that the scheme remains effective.

On Amendment 62, I recognise the importance of transparency where adjudication is declined. The commissioner will usually give reasons to the smaller businesses, while retaining discretion where disclosure would harm commercial relationships or otherwise be inappropriate. For those reasons, the Government believe that the Bill strikes the right balance between clarity, safeguards and the flexibility needed to keep the scheme focused and workable.

On Amendments 69, 74 and 93, the Government are clear that these powers must be matched by the capacity to use them effectively. My department is already working closely with the commissioner to assess the staffing and funding needed ahead of commencement. The Bill also provides a practical mechanism for cost recovery in relation to adjudication so that the burden does not fall solely on taxpayers and larger businesses have a further incentive to resolve disputes promptly and pay suppliers properly. Those arrangements will be set out in regulations, subject to consultation and parliamentary scrutiny. The commissioner’s annual report will continue to provide transparency on staffing, funding and audited accounts.

Lord Leong (Lab)

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I would be happy to follow that up in a further conversation with the noble Lord. I take his point, but we also need to be mindful that there are so many different structures in which a company can operate—a subsidiary here, a domain for UK purposes and so on. Nevertheless, I agree that we need to be very clear about what constitutes a UK trading company and what revenue should be taken into account. I welcome additional engagement with him.

Lord Leong (Lab)

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As I said earlier, we need to have further conversations on that, which I would welcome.

Lord Leong (Lab)

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Declare yourself.

Lord Leong (Lab)

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My Lords, I thank all noble Lords who have contributed on this group of amendments. Let me turn to Amendments 80, 83 and 85. The Government agree that the protections in the Bill must be accessible and effective for all small businesses. We know disparities exist for businesses led by women, ethnic-minority and disabled entrepreneurs. That is why the regulations for the adjudication and investigation scheme will be consulted on carefully.

The regime will be designed and implemented to support all small businesses, including those hardest to reach. The commissioner already provides a wide range of simple, small business-friendly guides to help small businesses understand and use its services, including their legal rights relating to payments. The commissioner also works with a diverse range of business groups, representative organisations and partners to promote its services and improve awareness among small firms. Furthermore, through the SBC’s annual report, the commissioner will report on these activities, including steps taken to ensure services are accessible to all groups. More broadly, the Government are already supporting underrepresented entrepreneurs through wider DBT-backed work. The commissioner will continue to reflect best practice in promoting fair access to its services. For those reasons, we believe these matters are better addressed through implementation, guidance and engagement so the schemes remain practical, proportionate, up to date and responsive.

Amendments 58, 97 and 98 would introduce additional statutory structures and requirements. The combined effect of these proposals would be to place significant new reporting and compliance burdens on businesses, including in areas where data may not be readily available or verifiable, particularly across different supply chains. We must be careful not to impose unnecessary burdens on businesses, especially those already demonstrating good payment practices, when our focus should be on tackling poor performance. We are already introducing new powers in the Bill to enable the Small Business Commissioner to investigate businesses with poor payment practices.

I agree that transparency and data are important. Payment practice reporting data is already published and accessible on GOV.UK. Organisations already use that data to analyse payment performance. The commissioner is also looking at how improved data analytics and AI tools can support its work. On ESG, I agree that payment practices are an important aspect of responsible business behaviour. The Small Business Commissioner is already working to promote cultural change through initiatives such as the Fair Payment Code. However, ESG frameworks are already well developed and continue to evolve, often on an internationally aligned basis. Mandating a specific framework in legislation risks duplication and inflexibility that is best allowed to develop dynamically.

Specifically on Amendment 58, although I understand the intention to prevent payment being withheld because of informal or extra-contractual ESG requirements, the Bill already ensures that payment obligations are clear. This amendment risks causing confusion and making the payment provisions of the Bill less clear.

I thank the noble Lords, Lord Hunt and Lord Sharpe, for raising through Amendments 86 and 87 the interaction between payment practices and the Employment Rights Act. I will resist the temptation to reopen debates that the House has already had in detail on that legislation, including on impact assessments, which have been debated at length. The purpose of the Bill is clear: it is about tackling late payments and addressing the harm they cause to small businesses’ cash flow, resilience and growth. The Small Business Commissioner plays a focused role within that agenda by supporting small firms, resolving payment disputes, and driving improvements in payment practices through adjudication, investigation and enforcement. These amendments would expand that role into reviewing wider employment policy, risking diluting the commissioner’s focus and effectiveness. For those reasons, although I understand the intention of the amendments, I do not consider them necessary or appropriate to this Bill.

On Amendment 81, tabled by the noble Baroness, Lady Kramer, I recognise the importance of the issue she raises. The Bill already provides a framework under which the Small Business Commissioner can receive and act on information from small businesses and third parties, including whistleblowers. Individuals can provide evidence to support the commissioner’s investigations and wider functions. Crucially, the Bill includes strong confidentiality protections. These prohibit the commissioner from disclosing information where doing so could potentially identify the individual who has provided that information, except in limited circumstances, such as where consent is given. In that context, establishing a dedicated office of the whistleblower risks duplicating protections that already exist without clearly addressing a gap in the current framework.

It is important to consider the broader whistleblowing framework that is already in place. Protections for individuals making disclosures in the public interest are set out in the Employment Rights Act 1996. The Government have recently updated that order and are actively considering whether it would be appropriate to include the Small Business Commissioner as a prescribed person. I hope that gives some consolation to the noble Baroness. This is a more proportionate and coherent route to strengthening their protections.

The amendments in this group are well intentioned and I share their ambitions, but the Bill already provides a strong and proportionate framework. Our approach is to deliver improvements in a way that is flexible, targeted and proportionate, avoiding unnecessary burdens on businesses rather than prescribing detailed mechanisms in the Bill. For those reasons, I ask the noble Lord to withdraw his amendment.

Lord Leong (Lab)

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My Lords, I thank all noble Lords for their contributions on this group of amendments. I thank in particular the noble Lord, Lord Holmes, for bringing them forward. I want to be clear: the Government agree that these are matters of importance. It is essential that the commissioner’s work is accessible to all users and that appropriate safeguards are in place where technology, including digital tools or AI, is used in delivering services.

The Small Business Commissioner already operates within well-established cross-government frameworks for accessibility, cyber security and data protection. For example, the commissioner’s website is already fully compliant with the web content accessibility guidelines—WCAG 2.2 level AA—ensuring that its services and publications are accessible to the widest possible audience. The commissioner is subject to strict legal obligations in relation to data protection and cyber security. These frameworks have robust safeguards around confidentiality, access controls and the secure handling of sensitive information.

Lord Leong (Lab)

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First, I thank the noble Lords, Lord Hunt and Lord Sharpe, for this amendment and the noble Lord, Lord Hunt, for his contribution. The Bill will strengthen an existing right that suppliers who are paid interest late enjoy, through Clauses 5 and 6. These clauses will simplify the law on when statutory interest runs and remove the ability for contracts to use an alternative remedy to statutory interest. Clause 4, which this amendment relates to, preserves the effect of Section 1 of the existing Commercial Payments and Interest on Late Payment Act 1998 and implies statutory interest into all contracts to which the Act applies. The amendment brought forward by the noble Lord to require Clause 4 to be commenced within 12 months would not delay the right to statutory interest, as it is already in legislation. I can reassure him that we have considered the impact that strengthening of interest rights will have, as set out in Clauses 5 and 6, and that there will be sufficient time for businesses to adapt their processes before these provisions are commenced. I hope I have reassured the noble Lord and that he will withdraw his amendment.

Lord Sharpe of Epsom (Con)

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My Lords, I will speak to this group on behalf of my noble friend Lord Holmes of Richmond, who sends his apologies to the House for his absence today. Before I begin, I note my gratitude to the Minister, who has been incredibly receptive in listening to and addressing our concerns with the Bill. I believe that we have ended up broadly in agreement on the final form that the Bill should take, so I commend him and his officials for the cross-party work they have put in.

My noble friend’s two amendments from Committee seek to address three technical matters. Amendment 1 aims to provide the supplier with guidance on how to submit a notice. Amendment 5 seeks to clarify that a payment is defined as such only when the supplier has clear and unequivocal use of funds. Amendment 10 would prevent the import-export exemption being extended past the implementation of the Electronic Trade Documents Act.

As in Committee, we remain broadly supportive of all three amendments. Amendment 1 reflects the fact that good payment practices can be ensured only if both parties are aware of the maximum payment terms and the supplier has submitted a notice in good time. Amendment 10 reflects a much-raised concern that imports and exports are currently exempt from the Bill. The Electronic Trade Documents Act means that this will not have to be the case, so I hope that the Minister can assure us that there are plans for incorporating import and export into the payment regime upon the full enactment of that Act.

Finally, it is a shame to see that the aim behind Amendment 5 has not been accepted by the Government. The Bill aims to improve payment practices between firms, largely because, currently, too many exchanges are delayed at the expense of the supplier. If a payment is made through an intermediary and remains there for an indefinite period—perhaps beyond the 60-day payment term—and does not fall under the provisions of the Bill, the Bill is of little use to the supplier awaiting payment. Amendment 5 would ensure that payments were considered as paid only when they reached their final recipient. That principle was the reason for the Minister rejecting my Amendments 2 and 4 in Committee: that, regardless of delays, payments should count only when received by the supplier. I hope that the Minister can today confirm that this definition will be made explicit in all cases.

I turn to my amendments. Alongside my noble friend Lord Hunt of Wirral, I have retabled several probing amendments arising out of concerns about the effects of the maximum payment terms. Amendments 2, 4 and 19 are concerned with payments that are delayed by either bank holidays or bank processing times. Amendment 9 probes the economic and opportunity costs of the exemption of upwards payments from payment term restrictions. Amendments 3 and 6 seek to add a definition of nationalised bodies to the Bill, reflecting the fact that, while they will be treated as regular commercial bodies, their business models are self-evidently different and, as such, there is a risk that their payment practices reflect this. These are all questions that we would benefit from seeing answered; however, that does not detract from the fact that we support the general aim of Part 1.

It is also true that the best way of judging the effectiveness of a policy is through analysing its effects in practice. Therefore, I welcome the compromise that the Government have made with the noble Lord, Lord Fox, giving the Secretary of State the powers to shorten payment terms alongside mandating a consultation about the decision. The proposed new clause under Amendment 15 does not commit the Government to any specific action but simply requires a review of the effects of the maximum payment terms and allows for adjustment if necessary. That is a sound, self-correcting approach and I therefore thank the Minister for agreeing to this measure. I beg to move.

The Parliamentary Under-Secretary of State, Department for Business and Trade (Lord Leong) (Lab)

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My Lords, prior to introducing the government amendments, I wish to express my personal thanks for the positive engagement across the House, and particularly to the noble Lords, Lord Hunt and Lord Sharpe, on the Opposition Front Bench, and the noble Lord, Lord Fox, and the Liberal Democrats for their very thoughtful scrutiny of the Bill.

The Bill builds upon the important reforms that were enacted by the previous Conservative Government. The provisions in the Bill have been drafted following extensive consultation with businesses, with more than 850 responses to our consultation, which was undertaken between 31 July and 23 October 2025. We have brought forward a Bill that reflects that consultation.

Our decision to impose stricter maximum payment terms of 60 days received support from 66% of consultation respondents. This is a significant strengthening of current law. No longer will large businesses be able to impose payment terms of over 60 days upon their suppliers. The question remains whether 60 days should be the end of that journey. We have heard loud and clear from smaller businesses that the Government should consider reducing maximum payment terms to 45 days or even 30 days. I have listened carefully to all noble Lords across the House encouraging us to go further on this. I am pleased to say that the Government have tabled amendments to provide a power that may be used in future to reduce the maximum payment terms.

These amendments allow the Government to consult on whether payment periods should be reduced, ensuring that any future decisions are informed by evidence and experience of how the new measures are operating in practice. Furthermore, the Government will not use this power to reduce maximum payment terms for at least five years. I hope noble Lords will agree that this is a sensible change and a balanced approach, maintaining the payment periods consulted on and included in the Bill, providing stability and certainty while businesses adapt to the new reality of 60-day maximum payment terms, and ensuring that there is a clear route to go further in future if the evidence supports it.

I turn to the amendments tabled by other noble Lords. In response to Amendment 2, increasing the maximum payment term for public authorities beyond 30 days would undermine the Procurement Act 2023 and delay payment to suppliers. In response to Amendment 4, increasing the maximum period for non-public authority purchasers beyond 60 days would delay payments to suppliers and move away from the position consulted upon with strong levels of support.

Regarding Amendments 3 and 6, national ownership does not by itself determine the applicable payment regime. Under the Bill, a nationalised body that meets the definition of a “public authority” will be subject to a 30-day maximum payment period. A nationalised body that does not meet that definition will be subject to the 60-day maximum payment period that applies to other purchasers. I recognise the intention and ambition of the noble Lord, Lord Fox, in Amendment 8 to reduce maximum payment terms.

On Amendment 19, the Bill takes important steps by introducing clarity and consistency around payment terms, building on the reforms introduced by the previous Conservative Administration. We are not aware of public holidays being raised as a concern by any businesses or stakeholders during last year’s extensive public consultation.

Amendment 1 is already covered by the Bill. We are setting out clearly the trigger points that can be agreed to start the clock on payment and the implied term if payment is not explicitly made.

Regarding Amendment 5, the Government believe that the Bill is clear. For the purposes of whether a payment has been made on time and when interest on late payment will start, payment will be considered made at the point that funds have been received by the supplier. On both Amendments 1 and 5, the Small Business Commissioner will provide advice and information on compliance with legal obligations on these points. On Amendment 10, I outlined in Committee how the removal of this exemption would place UK businesses at a competitive disadvantage.

Lord Sharpe of Epsom (Con)

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My Lords, as ever, I am grateful to the Minister for his response and, in particular, for the last piece that he mentioned, which is very welcome news, and I appreciate the clarification. As I outlined in my opening speech, a number of questions remain regarding the implementation and operation of maximum payment terms. I accept what the Minister said about consultation. I am generally dubious about the Government’s enthusiasm for consultations, but in this case, it was a good one.

We very much agree with the principle. We still need to see how these measures will actually work in practice. That is why I am very optimistic about Amendment 15. The Government will have an opportunity to revisit these measures, and I hope in doing so that they consult stakeholders and those affected by all the potential issues that this group has raised. I say to the Minister: keep up the good consultation work on this case. I look forward to scrutinising the regulations when they appear but, in the meantime, I beg leave to withdraw my amendment.

Lord Leong (Lab)

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My Lords, I am grateful to the noble Lord, Lord Fox, for Amendment 7 and thank him for it. I recognise that it was tabled in a constructive spirit, and I thank him once again for the engagement we have had on this matter, both in person and by correspondence. The Government share his aims of ensuring that suppliers are paid promptly, payment processes are clear and purchasers cannot use contractual mechanisms to delay payment unjustly. I entirely agree that, when a small business sells through a platform or marketplace, the money due to that business should not be held unnecessarily.

I want to be absolutely clear that the use of intermediaries does not affect a supplier’s right to be paid within 60 days. Chapter 1 of Part 1 ensures that, for business-to-business contracts for the supply of goods or services, the maximum payment time is 60 days. If payment is more than 60 days overdue, the purchaser is in breach of contract and liable to pay interest. The use of an intermediary does not alter this position.

I reassure all noble Lords that persistent attempts to circumvent the maximum payment terms through intermediaries constitute poor payment practice. Under Clause 19, this constitutes grounds for the Small Business Commissioner to investigate and potentially levy a financial penalty on larger businesses that persistently engage in this practice. Under Clause 18, the commissioner will also be able to adjudicate payment disputes where a larger business owes money to a small business, including where the debt arises from the use of an intermediary.

The Bill addresses late business-to-business payments. It is not intended to regulate broader business relationships such as those between retailers using agents to sell goods to consumers or between a platform or marketplace and others when the platform or marketplace is holding, processing or transmitting funds between them. Those are subject to separate regulation. The contracts through which the majority of small businesses trade on online marketplaces are either business-to-consumer or consumer-to-consumer contracts and are subject to consumer legislation. These contracts were outside the scope of our impact assessment and our public consultation.

As tabled, the amendment would therefore not address the issue raised by the noble Lord, Lord Fox. Tackling the issue of late payments outside a business-to-business context would move the Bill into a completely different area of regulation and would require the establishment of a new statutory regime for online marketplaces and payment intermediaries. This would cut across existing legislation, rather than maintaining the Bill’s core focus on commercial payment practices between suppliers and purchasers.

The amendment would also interfere with existing commercial models that operate in the interests of the relevant parties and serve legitimate purpose. For example, where most intermediaries operate a system in which payments are pooled in a small business account and are drawn down by the small business on a regular basis, the amendment would mean that each individual sale, however small, would have to be remitted directly to the small business, significantly increasing transaction numbers and costs and reducing the flexibility of the operating model. Another example is payment providers holding funds for more than seven days to allow for fraud checks or other compliance requirements. The amendment would increase small businesses’ exposure to fraud and undermine the regulatory and legal framework governing payment providers.

However, I understand and share the noble Lord’s concerns about withholding funds from small businesses. I am therefore happy to ask the Small Business Commissioner to review this issue with a view to developing guidance for small businesses so that they understand how the Bill applies to trading activity on online marketplaces. This can build on the guidance that the commissioner produced last year to help small businesses understand why their accounts may be frozen or funds withheld and how they can take action to avoid this. This included a 10-point pledge to online marketplaces and payment providers which was signed and promoted by several major companies. As the Minister for Small Business, I commit to examining how the Government can further support small businesses in addressing this issue faced by those who use online platforms, including engaging with other government departments and regulators where they have responsibility.

For those reasons, and given the commitments that I have made, I respectfully ask the noble Lord, Lord Fox, to withdraw Amendment 7.

Lord Sharpe of Epsom (Con)

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My Lords, this group of amendments revisits the issue of the definitions of different-sized businesses. I note the new amendment in the name of the noble Lord, Lord Fox, which highlights the same concerns as we raised in Committee.

Those concerns remain. There has been a proliferation of definitions for different-sized businesses to suit a multitude of aims of the Government of the day. Currently, a minimum of six statutory frameworks use materially different-sized criteria, as well as other definitions existing in sector-specific regulations and guidelines. I know that the Minister will agree when I reiterate that this is currently too complex a system. The Government should aim to place as few obstacles as possible in the path of business; that means cutting the bureaucratic paperwork and jargon that firms complete to meet their legal obligations. The proliferation of business size definitions is a case in point. They may not be entirely contradictory, but they are certainly not complementary, and I believe that everyone would benefit from a more streamlined approach.

I entirely accept the Minister’s point in Committee that such a wide reform cannot take place in a Bill with as narrow a scope as this one. However, he should at least commit to restricting the definitions within this Act to those that already exist, to the best of his ability. Such a step clearly has support from all sides of the House. Similarly, given that the Minister has indicated his support for some reform of definitions, can he commit to revisiting this issue with me at a future point? I hope that he can agree to this and I look forward to his response. I beg to move.

Lord Leong (Lab)

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My Lords, I thank the noble Lords for Amendments 11, 12, 13, 14, 35 and 46. I recognise the concerns raised by the noble Lords, Lord Sharpe and Lord Fox, in Committee regarding the number of existing definitions of company sizes on the statute book and their desire for clear and consistent definitions to avoid confusion for businesses. I would like to reassure noble Lords that our intention is to use the company size thresholds set out in the Companies Act 2006 and the Enterprise Act 2016 as the basis for defining company size in the Bill.

However, it is important that we consult with businesses and industry experts to ensure that these definitions are appropriate for the purposes of this Bill. That consultation may indicate that, for the purposes of the Bill, company-size definitions should be revised or simplified. Any modifications to existing definitions will be made only when necessary.

For example, we may choose to simplify definitions to make it easier for businesses to use exemptions, while still using existing definitions as the basis. We may find through consultation that different parts of the legislation require different definitions to ensure precision and effectiveness. For example, we might be required to simplify the size definitions for the purposes of the Small Business Commissioner’s powers, so that they are based solely on headcount. We should not constrain ourselves by introducing rigid definitions now, as this could make the powers and protections afforded by the Bill more difficult for businesses to understand and administer than is necessary.

I also do not consider it necessary to delay the Bill’s commencement pending a further statutory review of definitions used across a range of legislation. The Government are already committed to consulting on any regulations made under these powers and to taking into account relevant existing definitions when developing them. The delegated power in Section 2E will be subject to consultation and parliamentary approval under the affirmative procedure, giving your Lordships’ House the opportunity to vote on the regulations before they are introduced.

In conclusion, the definition of business sizes will be set out in secondary legislation. These regulations will be informed by consultation to ensure that they are appropriate. The Government intend to use the existing definitions as the basis for this Bill and will keep definitions as simple and effective as possible.

I also commit that, before making any regulations in this area, the Government will have regard to the definitions in the Companies Act 2006, the Small Business, Enterprise and Employment Act 2015 and the Enterprise Act 2016. I also commit to meeting up with the noble Lord, Lord Sharpe, to look into these definitions going forward. For these reasons, I respectfully ask that Amendment 11 be withdrawn and that noble Lords do not move the remaining amendments in the group.

Lord Sharpe of Epsom (Con)

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My Lords, again I am grateful to the Minister for his very comprehensive response. I am also grateful to the noble Lord, Lord Fox, for explaining his Amendment 35 and for digging out yet another example of an Act that governs the definitions of small business. Might I suggest to the Minister that, during this consultation, they include a question on how the nature of small business has evolved in the last 10 years? Obviously, there has been a spectacular explosion in e-commerce and other things, which will have a material impact on the types of definition we are talking about.

As I outlined in my opening speech, the current landscape of definition is unnecessarily convoluted—expensively so, as the noble Lord, Lord Fox, pointed out. However, I recognise that this Bill is not necessarily the best vehicle for driving through that reform. I appreciate the Minister’s response on this issue. I will absolutely take him up on his offer of further talks on how we might improve a bit of a messy picture. I think I also heard him say that he is quite keen to find another legislative vehicle where we can address this in the future—if I am making that up, I am sure that he will correct the record.

I beg leave to withdraw my amendment.

Lord Leong (Lab)

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My Lords, I thank the noble Lords, Lord Hunt of Wirral and Lord Sharpe of Epsom, and the noble Lord, Lord Leigh of Hurley, who is not in his place today, for Amendments 20, 21 and 23. I am really grateful to both noble Lords for our recent meeting covering these points, and I hope that the follow-up information which my officials provided has been helpful. I am also grateful to the Insolvency Service for its expertise in supporting our position.

The Bill does not seek to alter the existing statutory framework on insolvency. Regarding Amendment 20, I would first like to clarify the position of suppliers providing goods or services after a company enters a special administration regime. Clause 1 inserts new Section 2B into the Commercial Payments and Interest on Late Payment Act 1998, applying maximum payment terms to relevant payments under contracts within the scope of the legislation. The Bill does not exclude supplies made to companies in special administration. There is an important distinction between pre-appointment and post-appointment debts. Post-appointment supplies remain subject to the Bill where they are otherwise within scope. Payment obligations and statutory interest may continue to apply or accrue. Recovery and enforcement remain subject to any relevant insolvency moratorium and the wider insolvency rules.

By contrast, debts relating to supplies made before the appointment are in a different position. They remain pre-insolvency claims and are dealt with under the established insolvency framework. The Bill is not intended retrospectively to alter their status or priority.

The Government do not consider that entry into a special administration regime should of itself result in a purchaser being treated as a public authority for payment term purposes. Companies in special administration remain commercial entities operating within statutory rules. Special administrators are independent court-appointed officeholders, with statutory duties to manage the businesses within those rules. Applying public authority payment requirements solely because a company has entered special administration could have operational repercussions—for example, by exacerbating cash-flow pressures. Nor do we consider that the Bill should determine whether liabilities are to be treated as expenses of a special administration. Amendment 20 would make qualifying post-appointment sums, including statutory interest, expenses of the special administration. Amendment 21 would similarly elevate certified pre-appointment sums. These would be substantive changes to the treatment and priority of liabilities, potentially affecting other creditors. Such questions are matters for the insolvency framework.

Lord Sharpe of Epsom (Con)

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My Lords, I begin by reiterating my support for the Government’s position on retention payments. We support the right to the free exchange of goods and services and the right of firms to enter into mutually agreed contracts, but it is also clear that retention payments have become misused and are therefore untenable. Some 65% of retention payments are paid back late, while almost 25% are never paid back at all. They have become a tool for big firms to retain cash flow to prop up other ventures while the supplier, often a smaller firm, suffers as a result.

However, we must not lose sight of retention payments’ original purpose. Retention payments as a concept are wholly justified, in that they offer an insurance against defective or untimely work and incentivise the remedying of that. As I am sure many noble Lords would agree, I would hesitate to commission construction work on a private property if I did not have a way to ensure that it was done to an acceptable standard, and we should not expect firms to be any different. Therefore, some middle ground must be reached.

As in Committee, I have tabled, along with my noble friend Lord Hunt of Wirral, two amendments that propose alternatives to retention payments; namely, escrow and staged payments. I am aware that the Minister has outlined that these would be permissible following the enactment of the Bill, but, as far as I am aware, they are currently a small part of the market share of construction insurance. The primary goal of these amendments is to seek clarity from the Minister on what steps the Government are taking to promote these, and indeed other, alternatives. They are consulting with industry; what conclusions have they reached from those discussions? Which other forms of insurance do the Government deem effective, and how are they acting to promote them? I hope the Minister is able to give some clarity from the Dispatch Box on all those questions.

Amendment 24 would exempt resident-run or resident-owned blocks of flats from falling under the retention ban. The Minister has made it clear that this ban is intended to target commercial contracts rather than those of private citizens. Resident-run properties fall into an odd medium in that they are technically commercial properties, but they are run as if they are private. There is clearly a category issue here. Does the Minister accept that these are not run as commercial properties and, if so, does he have the data in front of him on the scale of this issue and whether the incoming ban will pose a risk to the resident-run property market?

Finally, I will touch on Amendments 25 and 26 in my name and those of my noble friends Lord Hunt of Wirral and Lord Leigh of Hurley. These amendments seek to prohibit the imposition of requirements from large to small businesses. In particular, we are concerned about the forced use of specific currencies that advantage the larger supplier, or the imposition of ESG requirements that allow the larger business to meet requirements in its annual reports without having to bear any of the costs. Much of the Bill seeks to support small businesses by placing them on an equal footing. It recognises that there is often an asymmetrical relationship between the buyer and the seller when either is larger. Our amendments simply seek to extend that recognition to these two well-known practices. I hope the Minister will agree with me, and I beg to move.

Lord Leong (Lab)

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My Lords, first, I thank the noble Lords, Lord Sharpe and Lord Hunt, for the amendments in this group.

I will take Amendment 22 first. I reassure the noble Lords that the Bill does not prevent parties in any sector, including construction firms, making use of payment arrangements through a bank or an escrow provider to facilitate the transfer of funds. The important distinction is between a third party facilitating payment of money that is due and a third party holding back that money as security for the supplier’s performance. The former remains permitted, the latter could amount to a retention and would therefore fall within the prohibition. Therefore, Amendment 22 is unnecessary.

The Government’s view, shared by many in the industry, is that construction should move away from cash retentions and towards modern, more secure and equitable forms of surety. We know that there are alternative forms of surety, including performance and retention bonds, already available in the UK which can mitigate risks for clients and firms. There are also alternatives used in other countries, such as warranty bonds, which are very common in Europe and are available in the UK. We will be working with surety providers to ensure that a range of alternatives is available when the ban comes into force.

In relation to Amendment 23, I reassure noble Lords that the Bill does not prescribe when stages or milestones must occur or prevent parties from agreeing interim valuations and payments. It regulates the period within which an amount must be paid once that payment becomes due. Genuine staged and interim payment arrangements will therefore remain entirely permissible. However, describing a withholding of money for work already completed and where payment is due as a staged payment would not prevent it falling within the prohibition on retention if, in substance, the money was being retained as security for the performance of contractual obligations.

The right for firms to be paid in staged payments on projects lasting more than 45 days is already enshrined in Section 107(2) of the Housing Grants, Construction and Regeneration Act 1996. The Bill does not amend, qualify or undermine that right. Therefore, this amendment is unnecessary. In implementing the provisions of the Bill, the Government will engage directly and closely with construction industry clients, specialist providers and representatives of smaller firms to provide guidance that legitimate payment arrangements can continue while preventing contractual devices being used to recreate cash retentions under another name.

On Amendment 24, we recognise the understandable intention that resident-led and resident-owned companies should have assurance that building work is completed properly and of high quality, and that defects are remedied without additional costs falling on leaseholders. We do not believe that retentions ensure this. To agree to this amendment would create a broad exemption for construction contracts entered into by resident management and right-to-manage companies. That would leave firms working on those buildings exposed to the risks associated with cash retentions. It could also create uncertainty where different ownership and management structures exist within the same building or development.

In addition, the process required by the Building Safety Act 2022 for delivering work on high-risk building places an emphasis on safety and quality. It includes numerous gateways, information requirements and independent reviews of the building. If clients and firms in their supply chain are meeting the requirements of the Act, there should be no need to deduct retentions. As Dame Judith Hackitt has noted, retentions are ineffective and undermine the effectiveness of the supply chain, which is why alternatives are required. For this legislation to be effective, it must incentivise the industry and its clients to end the practice of cash retentions and to adopt alternative forms of surety, together with improved quality management.

Finally, I address the request made by a number of noble Lords in Committee for further information about the work to develop alternatives to retention. The Construction Leadership Council has now appointed a new industry lead for this area, and we will be increasing our engagement with stakeholders across the industry in relation to alternative forms of surety and quality improvement from September. This will give us plenty of time to address those issues in advance of the introduction of the proposed ban.

Lord Sharpe of Epsom (Con)

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My Lords, I am again grateful to the Minister for his response and, indeed, to the noble Lord, Lord Fox, for his comments. On the ESG impositions and the general risk of coercion of smaller businesses by larger ones, I accept that these are already prohibited by law but I gently raise that the risk of coming forward with complaints of this kind often outweighs the benefits of redress. Essentially, small businesses are being coerced into ESG practices. That is still a problem and one that I hope a Government will address in the future.

I thank the Minister for his outline of the Government’s approach to the retentions issues. I am genuinely optimistic from listening to him, because he has talked about a variety of different products that are available. We have had some briefings on those: performance bonds, retention bonds and, as he mentioned, the warranty bond. They tend to be more common practice in Europe; I think warranty bonds are only offered by a single firm in the United Kingdom at the moment. I hope that the market will provide solutions to this problem, because we think that some form of insurance would be effective and necessary in these circumstances. It cannot really be accepted as a retention payment alternative if it is currently so scarce, so we need to make sure that it is well understood publicly and perhaps mount a campaign with industry to make sure this is very well understood.

I accept the noble Lord’s arguments about the difficulty of creating an exemption for resident-run properties. I will have a think about that further when I have a chance to read Hansard, but he made some good points.

I hope that the Government will be able to update the House in due course on their progress in promoting these various different types of instruments. In the meantime, I beg leave to withdraw my amendment.

Lord Leong (Lab)

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My Lords, once again, I thank the noble Lord, Lord Fox, for Amendments 27 and 34, and the noble Lord, Lord Leigh, who is not in this place, and the noble Lords, Lord Hunt and Lord Sharpe, for Amendments 28 and 29. First, I recognise the constructive spirit in which these amendments have been tabled and the shared objective of ensuring that the Small Business Commissioner’s new functions are timely, transparent and effective.

I agree that payment disputes should be resolved as quickly and efficiently as possible. In line with the construction adjudication scheme, we are considering whether a 28-day limit for the adjudicator to reach a decision, extendable where necessary, would be appropriate. I believe that noble Lords would agree that this time is sensible and reasonable. We will consult on this to ensure the final approach is informed by evidence and stakeholder views. Time limits will be set out in regulations subject to Parliament’s approval. This approach will give businesses confidence that payment disputes will be resolved quickly and efficiently, while maintaining flexibility to refine time limits in the light of feedback and operational experience.

The Government recognise the importance of transparency, and I appreciate the sentiment behind Amendment 28. As a matter of principle, a small business should understand why the commissioner has declined to adjudicate a dispute. However, there may be occasions when disclosing the details of a referral to a larger business could harm commercial relationships or be otherwise inappropriate. As such, we believe such obligation should be subject to further consultation and addressed through regulations.

Regarding Amendment 29, I understand the desire for clarity on how the commissioner will assess repeated poor payment practice, but this is precisely the kind of judgment that should be informed by real experience and evidence and guided by statutory criteria that the commissioner must consider on a case-by-case basis. If we try to prescribe an arbitrary number for vastly different practices, we risk creating an inflexible model that fails in practice and undermines the commissioner’s ability to act.

On resourcing, I hear the concerns raised by noble Lords. I wholeheartedly agree that the provisions in this Bill will be effective only if properly enforced and that the resources available to the Small Business Commissioner are crucial to this aim. I reassure all noble Lords that the Office of the Small Business Commissioner is already being resourced for implementation, that I am the Minister responsible for the Small Business Commissioner and that I will ensure that it has the proper resources. I have recently facilitated a meeting between the commissioner and noble Lords to discuss preparation for the legislation coming into force. I can confirm that the commissioner’s budget has already received an initial 30% boost this financial year and that recruitment is under way for six new members of staff, bringing the existing team to 20. This has already allowed the office to begin building its capability ahead of the new enforcement powers in the Bill.

Lord Sharpe of Epsom (Con)

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My Lords, as we come to the end of Report, I once again place on record my thanks to noble Lords on all sides of the House for their engagement with the passage of this Bill. Up to this point, we have had a very chummy time with a lot of cosy consensus, so noble Lords will be very pleased to know that I intend to introduce a note of disagreement on this amendment.

I begin by stating that I do not disagree with the premise of Amendment 30, in the names of the noble Lord, Lord Fox, and the Minister. Companies should ensure that they have good payment practices and that these are reported, and should be incentivised where necessary. I equally understand the reasoning behind giving the Small Business Commissioner the powers to both oversee and enforce the reporting of payment practices and performances. The office will have a closer knowledge of small business payment practices than regular departmental officials, so it makes sense that it is given this responsibility. The issue is therefore not one of principle but one of proportion.

Two other arms of the Government have the power to fine businesses based on global turnover rather than domestic turnover. They are the Competition and Markets Authority and the Information Commissioner’s Office. These bodies deal with some of the most important and wide-reaching areas of our economy: the former with the upkeep of fair and competitive markets, the latter with the protection of the public’s private information.

Those issues are far greater in scale and gravity than what Clause 24 and the new Section 3A will give the SBC—the Small Business Commissioner—powers over. These powers are not even dealing with payment practices; they are dealing with the reporting of payment practices. Yet the office will be able to fine companies 1%, without even the discretion to fine less than 1%, of global turnover. To His Majesty’s loyal Opposition, this seems disproportionate, to say the very least. We do not believe that this is the right vehicle to address the subject of the profit shifting that the noble Lord Fox mentioned.

One of the key concerns that we have heard from stakeholders during the passage of this Bill is that, while they support maximum payment terms, there will be a transition period to implement the technology and payment systems. This is particularly the case with large multinational corporations. These companies have incredibly complex systems that organise payments across borders, time zones and legal frameworks. It is not outside the realm of possibility that a business such as Amazon, for example, has some teething problems and fails to accurately report payment practices and performance within the UK.

The result would be that the commissioner, based on a failure to report practices within the United Kingdom, would have the power to fine Amazon based on its global turnover. That would equate to more than £700 million for a potential technological error or delay. I do not think that power reflects the duty that we are dealing with.

Lastly, there is the question of incentives. The Office of the Small Business Commissioner justifiably prides itself on saving more money for small businesses than it costs the taxpayer. If value for money is the justification for the office’s existence, its incentive is to use its powers to raise money in order to continue its operation. I am not accusing the SBC of this; I am simply reflecting on the perverse incentives that occur when an arm of government relies on action to justify its continued existence. I do not think, given these natural incentives exist, that we should give any arm of the state the power to tax multinational businesses based on their global turnover for actions within the United Kingdom. We should especially reflect on this when we are not even discussing payment practices; we are discussing the reporting of payment practices.

Given that this amendment has the support of the majority of the House, we will not oppose it, but I would like to place on record my, and indeed His Majesty’s loyal Opposition’s, concern about this measure. It would go some way to allaying my worries if the Minister could outline how many times a fine has been given under the existing Section 3, but I am still concerned that this is a disproportionate step that places far too much power in the hands of an ultimately unaccountable body. I look forward to the Minister’s response.

Lord Leong (Lab)

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My Lords, I thank the noble Lord, Lord Fox, for his amendment regarding turnover and financial penalties. These amendments raise an important question about how turnover should be calculated for financial penalties under the payment reporting regime following an investigation by the SBC. I thank the noble Lord for the constructive discussions that we have had on this issue.

The Government agree that this issue merits proper debate. We want penalties to be meaningful and capable of driving compliance while ensuring that the approach is proportionate, relevant and workable for businesses in scope. The Government support the aim of the amendment, at this stage, to open up the debate on the appropriate basis for calculating turnover. However, I want to be clear that the Government have not reached a final view on the most appropriate approach. The Government will want to engage with businesses, business representatives and other interested parties before determining how turnover should be calculated for these purposes, including—given that the Bill addresses UK payment practices—whether it should be limited to UK turnover or extended more widely.

Further detail on how turnover is calculated will be provided in secondary legislation. That secondary legislation will be informed by a process of consultation to determine how turnover should be calculated. Additionally, that secondary legislation, which will be debated in Parliament, will allow the final position to be properly tested. This approach will ensure that the regime retains the flexibility required to operate effectively and proportionately.

On that basis, I once again thank the noble Lord, Lord Fox, for raising this important issue and for engaging positively with the Government. The Government support Amendments 30 to 32 and 43 to 45, to which I have added my name. Before I sit down, I once again thank all noble Lords, especially those from the Opposition Benches—the noble Lords, Lord Sharpe of Epsom and Lord Hunt of Wirral, as well as the noble Lord, Lord Fox—for their thoughtful and constructive engagement throughout the passage of the Bill. It just shows that we can get things done if we work collaboratively.