Late Payment Law

Usually you can start charging interest from the end of the agreed credit period. If you didn’t agree a credit period, interest will be payable 30 days from whichever of the following comes last:

• The date of supply
• The date the buyer was told the amount was due
• The end of any procedure for checking that goods/services fulfil the contract (this procedure cannot take more than 30 days to complete)

If the Debtor is a public authority, you can start charging interest after 30 days, no matter if a longer payment was agreed and there is no way to extend the 30-day period.

If you supply another business, you can begin charging interest after 60 days even if you have agreed a longer payment date. In this instance, you can agree a longer period before charging interest in order to uphold supplier relationships.

Is there a clause in your contract relating to interest? If so, you must adhere to those terms and conditions. If that isn’t the case, you can act under the Late Payment of Commercial Debts (Interest) Act 1998, which states you can claim interest at 8% over the Bank of England Base Rate each year.

You can also claim interest on invoices that weren’t paid within the credit period but have since been paid. You should calculate interest from the date the invoice should have been paid, to when the invoice was actually paid and you have up to six years to claim interest.

Do you have a clause in your contract about compensation? If so, you must act in accordance to that. If you don’t, you can charge compensation under the Late Payment of Commercial Debts (Interests) Act 1998.

You can charge:

• £40 per invoice for invoices up to £999.99
• £70 per invoice for invoices from £1,000 – £9,999.99
• £100 per invoice for invoices over £10,000

Here’s an example of how to work out how much interest you are entitled to:

If you are owed £5,000 and the Bank of England base rate is 0.25%, the annual statutory interest on this would be £412.50, which is 5,000 x 0.0825 = £412.50.

Divide this by 365 days in the year and your daily interest rate would be £1.13. Then simply work out how many days overdue the invoice is and times it by £1.13.

Adding on your compensation is easy:

• £40 per invoice for invoices up to £999.99
• £70 per invoice for invoices from £1,000 – £9,999.99
• £100 per invoice for invoices over £10,000

You are also entitled to claim any additional reasonable costs incurred which are not covered by the compensation. This is sometimes calculated as a percentage of the debt (between 1-10%) to recognise any time spent internally by the creditor in attempts to collect the balance owed

You can begin the process of claiming compensation as soon as the invoice becomes overdue, followed by interest once the payment is made and you can calculate the interest owed. Then, you can add on the reasonable costs charge incurred for recovering the debt once they are incurred.

Don’t issue an invoice for the interest, compensation or costs, just write a formal letter to your customer outlining the costs. There doesn’t need to be any warning letters, you can just send the letter about the costs. This letter should include:

• The costs that are due
• The invoice number relating to the charges
• How payment should be made including to whom, the by what date, to what address and which method of payment should be used

You are entitled to compensation whatever your collection costs are. That said, if your reasonable costs of recovering the debt equal more than the compensation, you are allowed to claim that too. This might include the cost to your business of your credit control processes and any costs you have incurred from instructing debt collection specialists.

It isn’t necessary to tell your customers that you intend to charge these costs if they fail to pay on time but telling them in advance might encourage them to pay on time. You could add a warning of this nature to your invoices.