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The late payment of commercial debts is a problem that affects many businesses. It can have a negative effect on their cash flow and their productivity. As compensation, The Late Payment of Commercial Debts (Interest) Act of 1998 specifies that those who suffer from late payments have the statutory right to claim interest from those who have paid late. However, there may be some confusion about how a business would go about claiming this sort of interest.

How do you know if you’re allowed to charge interest on late payments?

If a payment is late as defined by the contract and invoice you agreed with the customer, you can claim statutory interest. If you haven’t agreed a payment date, the law states that payment is classed as late if the customer hasn’t paid after 30 days following the receipt of the invoice or you have delivered the goods/provided the service.

Additionally, if provisions for the payment of interest have already been written into the terms and conditions of your business, you are not allowed to charge statutory interest.

Is there a time limit on claiming the interest?

Claims for interest in England, Wales and Northern Ireland must be entered within six years of the original invoice being submitted. Claims in Scotland have a deadline of five years. Once the claim has been sent out, there is a 30-day deadline for businesses in the public sector to pay and a 60-day deadline for business in the private sector.

How is the interest calculated?

The Bank of England fixes its official dealing rate every six months (1st January-30th June and 1st July-31st December), and statutory interest is calculated by adding 8% to whatever the dealing rate during that period is.

For instance, if the dealing rate is 0.5%, the statutory interest rate would be 8.5% of the original invoice total. Use a late payment interest calculator online if you’re not sure how much you should charge.

Do you have to inform the customer you will be charging them interest?

You will have to tell the customer you’re charging them interest, if only because you need to specify the amount you’re charging them if it becomes relevant. You should ensure that the customer knows about your right to charge statutory interest by including a statement to that effect on contracts, invoices and any other written or verbal communication between the two of you.

If you do need to charge late payment interest, you do not need to put in a special claim or apply through the courts. Simply write to the customer with the following details:

  • How much is owed
  • Why it is owed (include the invoice number)
  • To whom the payment should be made
  • How the payment should be made