A Beginners Guide To Late Payment Laws

If you run a business in the UK, you may have already accepted late payments as a part of doing business. Mainly because it can sometimes feel like you do everything you can to prevent them, but one or two clients always end up paying late, or not at all. But the government recognises this, which is why there are laws to help you. They are designed to compensate creditors for the late payment of debts, and to deter late payments. When you know these laws and your rights under them, suddenly late payments become something simpler to deal with. So today we’re going to give you a very brief overview of the late payment laws, and what they mean for you.

What Are Late Payment Laws?

The Late Payment of Commercial Debts (Interest) Act 1998 has two purposes. The first is to compensate creditors for the late or non payment of any invoices, and the second is to provide a deterrent to clients for paying late. It does this by allowing you, the creditor, to claim interest on the overdue invoices, as well as compensation and reimbursement for reasonable costs of collecting the debt, though the latter only applies if your costs exceed the compensation amount.

Under these laws, you’re allowed to charge interest at 8% over the Bank of England base rate, and claim compensation at the rate of £40-£100 per invoice. So it’s definitely something to consider if you struggle with late payments!

When Do They Apply?

Of course, like all laws, there are some conditions you need to meet before you can claim late payment interest and compensation costs. Luckily they are very broad, and can apply to almost any UK business. Essentially, you can only claim if:

• You have supplied goods and/or services
• Your buyer bought for business purposes
• The contract is not a consumer credit agreement
• The contract does not contain a provision for interest

The key thing here is that these are commercial debts, between businesses.

FAQs

We know the laws around late payment can seem a little complex, and so we wanted to answer some of the most common questions we get here as well:

From when is the interest payable?

Interest is usually due from the date that payment became due. which makes it simple to calculate. However, if there is no credit agreement in place or invoice due date, then interest is payable from whichever of these events occurs latest:

• The date of supply
• The date the buyer was told the amount was due
• The conclusion of any procedure for checking the amount due
• The goods conform to the contract (which can’t take more than 30 days in itself)

There are of course a few exceptions – if you supply to public authorities then interest will be payable after 30 days regardless of credit agreements, and for other businesses it is 60 days, regardless of other agreements.

How much interest can I charge?

It depends. If your contract has a clause about interest, then you must charge interest in line with that amount. If there is no interest clause, then you can charge 8% over the Bank of England base rate per year on any invoice that was not paid by the invoice due date.

What about compensation amounts?

Again, if you have a clause in your contracts about late payments, then you have to charge in line with that amount. If not, then you can charge compensation in line with the regulations. That is:

• For invoices up to £999.99 – £40 per invoice
• For invoices from £1000 – £9,999.99 – £70 per invoice
• For invoices over £10,000.00 – £100 per invoice

Can I charge interest and compensation after the debt has been paid?

Yes, providing that the invoice was not paid within the agreed credit period. Interest can be claimed for the period starting with the date the invoice was due, and ending on the date the invoice was paid.

How do I go about claiming?

You can claim interest and compensation as soon as the payment is overdue, though many people decide to wait until they have taken reasonable steps to collect the debt first. If this isn’t successful, you can claim debt recovery costs to a reasonable amount, instead of compensation. You don’t have to raise an invoice for the interest, compensation or recovery costs, you simply need to write to your customer and tell them what they owe and whether it is due under the Late Payment of Commercial Debts (Interest) Act 1998 or under the terms of the contract. It is also helpful to include:

• How much interest is due and how it is calculated, together with the compensation or recovery costs
• What it’s owed for (including invoice numbers and time periods)
• How the payment should be made, to who and by what date.

You can do this yourself, or you can instruct a debt collection firm or solicitor to do it on your behalf.

At Debtcol we’re always happy to help our customers understand the Late Payment Act and what it means for your business. If brought in at the early stages, we can not only help you manage your late payments, but put systems in place to prevent them and take full advantage of the laws to claim back anything you are owed. If you would like to know more, just get in touch with the team today to book your free consultation.