The Business, Energy and Industrial Strategy Committee (BEIS) said bad payment practices have contributed to the collapse of many firms and is a drain on the nation’s productivity.
Rachel Reeves MP, chair of the committee said small and medium-sized businesses (SMEs) were vital to local economies and communities.
She said: “But many SMEs are placed in a stranglehold by larger companies deliberately paying late and ruthlessly taking advantage of their suppliers, causing these firms financial instability.
“Unless the Government levels the playing field and acts to bring in a tougher regime for poor payment practices, we choke off the opportunity for SMEs to invest and grow in the future.”
The 'Small Businesses and Productivity' report focused on the potential of small companies to boost national productivity, which is low in comparison to other countries.
“Small and medium-sized businesses have an important role to play in rebalancing the UK economy and spread prosperity more widely and to all parts of the country,” Reeves added.
The Federation of Small Businesses (FSB) described a poor payment culture as "crippling" for many small companies.
Smaller suppliers are disadvantaged by conditions including requirements to offer discounts for prompt payment or being charged fees to remain on a supplier's list, the FSB reported.
It estimated 50,000 businesses could be saved from closure each year if late payments were eliminated.
Previous initiatives to address bad practices were condemned as ineffective by MPs.
Many high-profile companies, including Punch Taverns, have not signed up to the Government’s Prompt Payment Code (PPC).
The voluntary code commits signatories to paying suppliers within a maximum of 60 days, to work towards adopting 30 days as the norm.
MPs have urged the Government to force medium and large companies to sign the code and for the introduction of a strict 30-day deadline for payments to suppliers.
The British Beer & Pub Association contributed to the development of a ‘Be the Business’ app to help pubs improve productivity.
“Productivity is key to the success of the brewing and pubs sector and it is good to see the select committee acknowledge this,” said Brigid Simmonds, BBPA chief executive.
She continued: “The select committee makes it clear that locally available help is vital for small businesses like pubs.
"Engagement with local enterprise partnerships (LEPs) and establishing growth hubs to help pubs and small brewers is vital and only cross-Government strategy and engagement will turn this into reality.”