Summary
- The Late Payment of Commercial Debts (Interest) Act 1998 gives you automatic rights to charge 8% above the Bank of England base rate on overdue invoices.
- You can claim fixed compensation for debt recovery costs: £40 for debts under £1,000, £70 for £1,000-£9,999.99, and £100 for debts over £10,000.
- These rights apply automatically to business-to-business transactions; you don’t need special contract terms to invoke them. However, the Act only applies where the contract does not provide a substantial remedy for late payment.
- Most SMEs never claim statutory interest or recovery costs because they don’t know these rights exist.
- Adding these charges to demand letters and invoices transforms them from requests into legal notices that command attention.
James owns a plumbing business in Bristol. Last year, he completed £15,000 worth of work for a commercial property developer. The invoice went unpaid for 120 days. When he finally received payment, he accepted the £15,000 and moved on, relieved to close the file. What James didn’t realise: he was legally entitled to roughly £400 in statutory interest plus £100 in debt recovery costs. He left £500 on the table because he didn’t know it was his to claim.
The legislation Nobody Talks About
The Late Payment of Commercial Debts (Interest) Act 1998 created automatic rights for businesses to charge interest and compensation on late payments (where the contract does not provide a substantial remedy for late payment). The Act doesn’t require you to include special clauses in your contracts or negotiate terms with customers. The rights apply by default to every business-to-business transaction in England and Wales unless your contract specifies a ‘substantial remedy’..
This matters because most small businesses operate on standard invoices without detailed payment terms. You send an invoice, the customer pays or doesn’t, and you assume your only option is to chase or pursue legal action. The 1998 Act gives you a middle ground: financial consequences that accumulate automatically and can be claimed without court proceedings.
The statutory interest rate is the Bank of England base rate plus 8%. With the base rate currently at 4.0% (as of 16th October 2025) that’s 12.0% per annum. Compare this to typical commercial interest rates of 2-4% and you understand why Parliament set it high; the rate is meant to be punitive, not merely compensatory. It’s designed to make late payment expensive enough that businesses choose to pay on time.
How the Numbers Actually Work
Let’s apply the formula to real situations. Suppose you invoice £5,000 with 30-day payment terms. The customer pays 90 days late, meaning the debt was overdue for 60 days. For this example, let’s imagine that the base rate is 4.75% (as it changes every so often) giving a statutory rate of 12.75%.
The calculation: £5,000 × 12.75% × (60 ÷ 365) = £104.79 in interest. You can also claim £70 in debt recovery costs because the debt falls between £1,000 and £9,999.99. Your customer owes £5,174.79, not £5,000.
For a £12,000 invoice paid 120 days late with 30-day terms (meaning 90 days overdue), the numbers grow more substantial: £12,000 × 12.75% × (90 ÷ 365) = £377.05 in interest plus £100 in recovery costs. Total owed: £12,477.05.
The interest compounds if the customer continues not to pay. Every additional day increases the amount owed. This creates real incentive for settlement; debtors watching the number climb understand that delay costs money.
The Fixed Compensation Nobody Claims
The debt recovery costs deserve separate attention because they’re straightforward yet rarely invoked. The amounts are fixed by late payment legislation: £40 for debts up to £999.99, £70 for debts between £1,000 and £9,999.99, and £100 for debts of £10,000 or more. These aren’t estimates or maximums; they’re fixed entitlements you can claim.
Importantly, these costs are compensation for recovery work, not actual expenses. You don’t need to prove you spent £70 chasing a £5,000 debt; the Act presumes you incurred costs and sets the compensation amount. This eliminates disputes about whether your time was actually worth that much or whether you really sent those reminder letters.
Why Most Businesses Don’t Claim
The primary reason is that many business owners don’t know they can invoke the above rights. Even among those aware of statutory interest, many assume it requires special contract language or legal proceedings to claim. It doesn’t; the rights are automatic.
Another barrier is relationship anxiety. Business owners worry that charging interest and recovery costs will damage customer relationships. This fear is sometimes justified but often overblown. Professional customers understand that late payment carries costs; it’s part of commercial life. The ones who react badly to legitimate statutory charges are usually the ones causing payment problems anyway.
Finally, many SMEs simply forget to calculate and claim. You send an invoice, it goes unpaid, you chase it, eventually it gets paid, and you move on. By the time the money arrives, you’re focused on other priorities. Building systematic processes that automatically calculate and add statutory charges solves this problem.
How to Actually Claim These Rights
The first step happens before the invoice goes overdue. Your original invoice should state clearly: ‘Late payment interest and compensation charges apply in accordance with the Late Payment of Commercial Debts (Interest) Act 1998’. This sentence isn’t legally required, but it reminds customers that consequences exist.
When payment becomes overdue, send a formal letter using the Debt-Claims Solicitors portal within 7-14 days. The notice should specify the amount owed, the payment due date, the number of days overdue, the statutory interest rate, and the calculated interest amount. Include the fixed debt recovery cost. Provide a new total and a deadline for payment.
Our portal takes you through everything step-by-step, and your letter is checked before it is sent to the debtor.
When Contracts Override Statutory Rights
The 1998 Act allows contracts to override statutory rights if they provide a ‘substantial remedy’. This means if your contract includes a higher interest rate or better terms, those apply instead.
Most SME contracts either don’t mention interest at all or include vague language about ‘interest may be charged’. These weak provisions don’t constitute substantial remedies, so statutory rights apply. Only contracts with clear, specific interest rates that are a substantial remedy, override the Act.
This creates an opportunity for negotiation. When drafting contracts with new customers, you can specify terms that exceed statutory minimums. For example, stating that interest accrues at base rate plus 10% (rather than the statutory 8%) gives you stronger protection. Customers rarely object to these clauses during contract negotiation; they only become contentious when invoked.
The Psychological Effect on Debtors
Including statutory interest and recovery costs on demand letters changes their psychological impact. A letter saying ‘please pay £5,000’ is a request. A letter saying ‘you owe £5,149.28, comprising £5,000 principal, £79.28 interest, and £70 recovery costs, with interest accruing at £1.74 daily’ is a legal notice.
The specificity matters. Round numbers feel negotiable; precise calculations feel authoritative. Customers who might ignore a general reminder often respond to detailed breakdowns showing accumulating costs. The message shifts from ‘we’d like payment’ to ‘here’s what you legally owe, and it’s growing’.
This approach also demonstrates professionalism. Customers understand they’re dealing with a business that knows its rights and will enforce them. That reputation carries into future transactions; customers who’ve seen you claim statutory charges tend to pay subsequent invoices on time.
Common Mistakes to Avoid
- First mistake: miscalculating interest. The Debt-Claims Solicitors portal calculates the interest owed automatically.
- Second mistake: forgetting to update the total. If you send a demand letter stating the customer owes £5,149.28, including interest calculated to today, but payment arrives two weeks late, the amount owed has grown. Calculate anew each time you communicate about the debt.
- Third mistake: applying statutory rates when your contract specifies different terms. Always check your contract first; if it provides a substantial remedy, use those terms instead.
The Wider Industry Impact
If more SMEs claimed statutory interest and recovery costs, the late payment culture would shift. Currently, many large businesses operate on the assumption that late payment carries no real consequences. They treat supplier invoices as interest-free overdrafts, paying when convenient rather than when due. This behaviour persists because most suppliers never invoke their statutory rights.
Widespread claiming would change the economics. Finance directors at large firms would face regular statutory interest charges appearing in accounts. These costs would accumulate into material amounts, prompting board-level attention. The reputational damage of being known as a company that routinely incurs statutory charges would add pressure. Payment performance would improve not from goodwill but from self-interest.
This isn’t theoretical. Sectors where statutory claims are common see better payment behaviour. Construction, for example, has strong payment enforcement traditions; contractors routinely claim interest and costs. Payment terms in construction average shorter than in sectors where statutory rights are rarely invoked.
The Connection to the 2025 Reforms
The UK Government’s new late payment reforms strengthen these existing rights. The Small Business Plan includes mandatory interest charges for late payers, building on the 1998 Act’s foundation. Understanding your current statutory rights positions you to maximise the benefits when the new rules take effect.
The reforms also promise better enforcement. Currently, claiming statutory interest and recovery costs relies on your initiative; there’s no automatic mechanism. The new system may include features that calculate and apply these charges systematically, particularly for registered late payers. Getting comfortable with claiming now prepares you for a future where these practices become standard.
The Bottom Line
James in Bristol left £500 on the table because he didn’t know his rights. Multiply that by thousands of SMEs and millions of late payments, and you understand why £11 billion drains from the economy annually. That money belongs to businesses that earned it; it shouldn’t require detective work to claim.
The Late Payment of Commercial Debts (Interest) Act 1998 gives you tools. Statutory interest at 8% above base rate isn’t a favour; it’s your legal entitlement. Fixed compensation of £40-£100 aren’t optional extras; they’re amounts the law provides automatically. These rights exist whether you invoke them or not. The only question is whether you’ll use them.
Every invoice you send represents work completed, value delivered, and money earned. When customers pay late, they’re borrowing your money without permission. Statutory interest and recovery costs are the rent they owe for that borrowing. Claim it. You’ve already done the work that matters; claiming what you’re owed is just paperwork.
The 1998 Act has existed for nearly three decades. It’s not new, experimental, or controversial. It’s established law. So, don’t be afraid to calculate the interest, add the recovery costs, send the demand, and collect what’s yours. Your business will be stronger for it, your cash flow healthier, and your customers better trained.
FAQs
Do I need to include statutory interest terms in my contracts for them to apply?
No. The Late Payment of Commercial Debts (Interest) Act 1998 implies these rights into every business-to-business contract automatically unless your contract specifies a substantial remedy. You can claim statutory interest and recovery costs even if your original invoice or contract made no mention of them.
How do I calculate the exact interest amount on an overdue invoice?
Use the formula: Amount owed × Statutory rate (base rate plus 8%) × (Days overdue ÷ 365). For example, a £5,000 invoice 60 days overdue with a base rate at 4.75% equals £5,000 × 12.75% × (60 ÷ 365) = £104.79. Always use simple interest, not compound, and calculate to the specific day.
Can I claim compensation multiple times if I send several reminder letters?
No. You can only claim compensation per invoice once.
What happens if my customer refuses to pay the statutory interest and recovery costs?
First, respond in writing, citing the 1998 Act and explaining that these are statutory rights don’t require customer agreement. If they continue refusing, you can either accept the principal amount only or pursue the full claim through County Court proceedings, where judges recognise statutory charges as legitimate debts.
Are statutory interest and recovery costs I receive taxable income?
Yes. HMRC treats statutory interest and fixed recovery costs as taxable income. You must declare them on your tax return in the year received. Keep separate records distinguishing principal payments from interest and recovery costs to simplify tax reporting and ensure accurate declarations.
