UK companies will face fines or automatic interest payments if they fail to pay suppliers within 60 days under new legislation set to be unveiled Tuesday. The rules will make the existing Prompt Payment Code mandatory, requiring boards to disclose payment terms in audit reports and outline improvement plans. Late payments cost the UK economy £11 billion annually, contributing to 38 companies collapsing daily.

Initially, the government considered shortening terms to 45 days but faced pushback from major retailers concerned about overseas supplier relationships. The new rules will apply interest at 8 per cent above the base rate on all late payments, monitored by the Small Business Commissioner. Limited exemptions will exist for transactions between large companies, smaller purchasers, and international trade.

Several FTSE 100 companies currently have lengthy payment terms, including Dettol maker Reckitt Benckiser at 125 days and Cadbury manufacturer Mondelez at 104 days. The collapse of construction giant Carillion in 2018 exposed how its 120-day terms were used to prop up cash flow at suppliers' expense. Small businesses rarely charged interest on overdue payments for fear of losing contracts, creating a cycle where big firms effectively used suppliers as 'free credit.'