Late payments can be a difficult subject to get a handle on. Although the late payment legislation laid out by the government is relatively straightforward, there can still be some confusion about when a payment is specified as being late, how much can be claimed back and what form that compensation would take.
All of the late payment rules for UK businesses are specified in the Late Payment of Commercial Debts (Interest) Act of 1998, modified by the Late Payment of Commercial Debt Regulations (2013). The Act was designed to give small-to-medium businesses the right and the power to charge interest to large businesses and corporations, both in the public and private sectors.
- It deals with three main areas: late payment interest, late payment recovery compensation and reasonable cost reimbursement.
- All of these can be claimed back by a supplier but there is a six-year time limit in England, Wales and Northern Ireland and a five-year limit in Scotland to take into consideration.
- The supplier can claim as soon as a payment becomes late as agreed in a contract. If a payment deadline hasn’t been agreed, the law states that a payment is classified as late 30 days after an invoice is received or the goods/service have been received.
- In the absence of a contract or payment term, and once the claim for interest, compensation and/or reasonable costs has been sent out, public sector businesses have 30 days to make the payment and private sector businesses have 60 days.
Late payment interest
As the supplier, you have the right to claim statutory interest up to the date the invoice was paid. You cannot claim statutory interest if provisions for interest have already been specified in a contract or invoice.
The interest rate is calculated by adding 8% to the Bank of England official dealing rate. A late payment interest calculator online can be used to work out what you’re owed.
Late payment recovery compensation
Acting as a sort of late payment penalty on top of the interest charge, recovery compensation is fixed within the late payment legislation depending on the amount the invoice was for.
|Amount of debt||Late payment costs you can charge|
|Up to £999.99||£40|
|£1,000 to £9,999.99||£70|
Reasonable cost reimbursement
If the reasonable costs of recovering the debt come to more than the compensation you get back, you can claim them if the order was put in after 16th March 2013. Reasonable costs might be classed as fees paid to debt collection agencies, legal representation or loss of revenue as a result of the dispute.
The only issue is that reasonable costs are largely open to interpretation – the amount that someone might pay to recover a debt can be completely different to what somebody else would pay to recover the same debt. In small claims track cases, the court may well consider reasonable legal costs to be the equivalent of the limited fixed costs (listed above) which are allowed.
You will have more chance of getting those reasonable costs back if you have a contractual clause allowing you to recover indemnity costs, so it’s worth including this in your terms of business and any other contractual communications between you and the customer.