In the UK, businesses have the right to charge late payment interest on overdue invoices. This right is enshrined in the Late Payment of Commercial Debts (Interest) Act 1998, which provides businesses with a mechanism to claim interest, compensation, and reasonable costs for the late payment of debts by other businesses. This legislation aims to encourage prompt payment and provides a deterrent against late payments, which can significantly impact cash flow, particularly for small and medium-sized enterprises (SMEs).
Here at Shergroup, and through our sister law firm, Shergroup Legal, we have a mechanism to help businesses collect in Late Payment interest in a clear process. The purpose of this blog is to set out the detail so you can see how you can improve your terms of business with customers and claim back this statutory amount of interest and compensation.
Understanding the Legislation
Under the Late Payment of Commercial Debts (Interest) Act 1998, if a business does not receive payment on time, it can charge:
- Statutory interest at 8% above the Bank of England base rate.
- A fixed sum for the cost of recovering the late payment.
- Reasonable costs of recovering the debt if they exceed the fixed sum.
These rights apply automatically and do not require a specific term in the contract, although parties can agree on different terms, provided they are not grossly unfair to the creditor.
What Constitutes a “Debtor Business”?
To claim late payment interest, the entity owing the money must qualify as a “debtor business.” A debtor business is typically defined as:
1. Any UK-Based Business Entity |
This includes limited companies, partnerships, and sole traders. Essentially, any organization that operates commercially within the UK can be considered a debtor business if they have entered into a contract for goods or services.
2. Public Authorities |
These include local councils, NHS trusts, and other public sector bodies that engage in commercial contracts for goods or services.
3. Contractual Obligation |
There must be a contract (written or verbal) for the supply of goods or services. The debtor business is the party that has received goods or services and has failed to make payment within the agreed terms or within the default 30-day period if no specific terms are stated.
How to Charge Late Payment Interest
1. Determine the Interest Rate |
The statutory interest rate is 8% above the Bank of England base rate. Calculate the amount owed by applying this rate to the outstanding balance from the date the payment became overdue.
2. Calculate Compensation |
In addition to interest, you can claim a fixed sum as compensation for the debt recovery cost. This ranges from £40 to £100, depending on the size of the debt.
3. Send a Formal Notice |
Inform the debtor business of the late payment charges, including the interest and any compensation. This is typically done through a formal notice or an updated invoice.
4. Include in Your Terms |
To avoid disputes, include a clause in your contracts about late payment interest and charges, even though the statutory right applies regardless.
Practical Example |
If a business has issued an invoice for £1,000, due within 30 days, and the payment is delayed by 60 days, the business can charge:
- Statutory interest: Assuming the Bank of England base rate is 0.5%, the annual interest rate would be 8.5%. For 60 days, this would amount to approximately £14.
- Compensation: For a debt of £1,000, the fixed sum compensation would be £40.
Total amount owed by the debtor business would be the original invoice amount (£1,000) plus the interest (£14) and compensation (£40), totalling £1,054.
Summing Up
Charging late payment interest is a right afforded to businesses under UK legislation, providing a deterrent against late payments and helping maintain healthy cash flow. By understanding what constitutes a debtor business and the steps to claim interest, businesses can better manage their accounts receivable and reduce the impact of late payments. For any specific situations or disputes regarding late payment interest, seeking legal advice is advisable to ensure compliance with the legislation and contractual terms.
Struggling with late payments? Don’t let overdue invoices impact your cash flow. As seen on “Can’t Pay? Take It Away“ and “Call The Bailiffs“, Shergroup has the expertise to help you enforce your right to claim late payment interest and recover what you’re owed. Contact us today to take action and ensure your business gets paid on time!
For further guidance on enforcing payment of overdue invoices, Shergroup offers expert advice and support. Contact us to learn more about how we can assist in recovering what you are owed by calling us on 0203 588 4240 or emailing us at [email protected]
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