Late payment law – free help for businesses

Introduction to Late Payment Law

Late payment of bills has been a long-standing problem in the UK. Many businesses, especially smaller firms, have experienced problems where their customers delay payment for long periods. A particular complaint has been that the slow payers have often been much larger companies, deliberately delaying payment to smaller businesses.

The Late Payment of Commercial Debts (Interest) Act 1998 came into force on the first of November 1998. It has since been amended to bring it into line with a recent european directive (2000/35/EC).

If you run a business in the UK this legislation allows you to charge interest where a customer is late in paying their invoices. This has the potential to be an important part of your debt collection process.

This site also provides a late payment calculator that you can use to work out how much interest you can claim on an outstanding debt.


Commercial (B2B) debts only

It is important to realise that this legislation only applies to a commercial debt. The debt should be one that has arisen in the course of business. Both parties should be businesses, commercial entities or public sector organisations. This means if you have a private customer (a consumer), you usually have to rely on a contract clause to charge interest for unpaid debt.

Note: this does not mean that both parties have to be Limited Companies. A self-employed person/free-lancer/sole trader would be considered to be a business.

Examples of debts not covered would include: An employee who was owed unpaid wages. There would be other employment legislation that would be more appropriate. A business chasing a consumer for an unpaid bill or bounced cheque.

Working out the credit period

The credit period that applies to the contract is:

1. Whatever has been agreed in the contract between supplier and customer. There is however a proviso that this period must be reasonable.

The parties are free to agree any credit period that they wish. However, the legislation requires that this be ‘reasonable’. A clause added by the purchaser that set a very long period of credit might well be considered unreasonable. If it were considered unreasonable then the default period of thirty days applies instead.

2. Otherwise, whatever is the norm for that business sector or has been the established convention.

The Act recognises that many businesses have a long-standing practice of paying/being paid at the end of the month following the one in which the invoice was produced (effectively betwen 30 and 60 days credit). In this case the credit period is as per this convention.

3. If neither 1 or 2 apply, and no credit period has been specified then it defaults to thirty days.

Calculating the rate of interest

Interest rates are set to a standard rate for each six month period. The periods run from the 1st January to the 30th June and from the 1st July to the 31st December for each year. The rate is set as 8% above the Bank of England’s base rate, at the start of each period.

The parties can agree a different rate of interest or an alternative remedy for late payment. In the case of interest, this is usually then known as ‘Contractual Interest’. However, the Act requires that the agreement must provide for a ‘substantial remedy’. Purchasers are not allowed to force suppliers to accept a low or nominal rate of interest, as a way of getting round this Act. Any such clause is likely to be struck out, in which case interest can be claimed at the rate described above.

Calculating the amount of late payment compensation

In addition to interest the supplier may also charge an amount to compensate for the costs of collecting late payments. The amount of compensation that can be claimed is determined by the amount outstanding as follows:

Amount OwedCompensation
up to 999.99 pounds40 pounds
1000 to 9999.99 pounds70 pounds
10000 pounds and over100 pounds

This site also provides a late payment calculator that you can use to work out how much interest you can claim on an outstanding debt.


When you can use the Late Payment legislation

Many businesses are reluctant to use the Late Payment legislation as a routine part of their credit management procedures. There is a fear of upsetting their customers and jeopardising future business. There are, however, a number of other ways in which the law can be applied and one or more of these could still be appropriate for your business.

Legal notices as a deterrent

Consider adding wording, to all relevant correspondence to warn customers or potential customers that you may use the Late Payment Law to collect interest and compensation. You might include such wording on quotations, order acknowledgments, invoices and debt collection letters.

Legal notices as a threat

During your normal credit management process you might notify customers that you will make use of the legislation if you do not receive payment. You could even work out the amount (using our calculator) and warn them how much it will cost.

Late payment as a cause of action as part of a court claim

If you have decided to take a customer to court, you probably are no longer worried about losing future business from them. In which case you might as well add a claim for interest. It gives them an incentive to pay sooner rather than later.

You can also add a claim for interest on older payments that were paid late (see below).

Using late payment legislation for previous (old) debts

The legislation is not limited simply to collecting interest on outstanding overdue debts. You may also use it to collect interest on debts that have been paid but were paid late. You can go back up to 6 years (5 in Scotland). However you cannot go back before the date when the legislation was introduced.

You might choose to wait until the customer has ceased to be a customer or you are being forced to take legal action anyway; and then send them a demand for all the interest/compensation on all of the invoices that they failed to pay on time.

Further Information on Late Payment legislation

The legislation

Copies of the Late Payment Act and subsequent changes (statutory instruments) can be viewed on the HMSO web-site.

Courts

Our other web-site – JustClaim contains a simple guide to using the courts to pursue unpaid debts.

Alternatively, visit The Court Service’s own web-site. They now run an on-line service for making money claims (look for money claim on-line).

The Court Service also provide a leaflet specifically for small businesses wishing to recover debts; The Courts Service leaflet: A guide to debt recovery through the county courts for small businesses (Leaflet Ex350) .

Other

To find out what interest rates were in force on a given date, visit the Bank of England web-site.