The proposed new laws will hold larger firms to account and get cash flowing back into businesses, the Department for Business and Trade said.

In addition, new legislation will require all large businesses to include payment reporting in their annual reports - putting the onus on them to provide clarity in their annual reports about how they treat small firms.

This will mean company boards and international investors will be able to see how firms are operating.

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

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

The government says every quarter, 52 per cent of small firms in the UK suffer from late payments, meaning roughly 2.6 million small firms face this issue.

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

“We know how important it is for business owners to have the peace of mind and certainty around their cashflow to keep their businesses alive. Late payments cost businesses tens of thousands of pounds and is one of the biggest reasons businesses collapse.”

A new Fair Payment Code has also been announced replacing the old Prompt Payment Code, and will be open to signatories this autumn.

Businesses will need to prove they have met good payment standards before being awarded official code status.

This will be designed to push businesses to pay faster more often, to be awarded either gold, silver or bronze status.

The Code will also shine a light on those responsible businesses doing the right thing by their suppliers and small firms. 

Emily Stubbs, head of policy at Greater Birmingham Chambers of Commerce, said: "Late payments can play a significant role in contributing to cashflow pressures on small and medium sized businesses.

"Nevertheless, this is a complex issue and consultation on additional statutory measures will be important to unlocking faster payments across the economy as a whole.

"We await further detail on the proposed Fair Payment Code, but the Government must also use the upcoming Budget to address the mounting cost pressures on local businesses if they are to drive investment and economic growth."