Late Payment
Running a business, owed money from another business? Then you have a statutory right to interest and compensation under the Late Payment of Commercial Debts (Interest) Act 1998 (as amended).
There is no obligation to charge interest or claim compensation on a late payment, you just have a legal right to do so. Be aware that the terms and conditions of a given transaction, if agreed, override the legislation.
This text deals only with the legislative defaults and contracts dated from the 7th August 2002 onwards.
A payment becomes late either 30 days after the delivery of the goods or services or 30 days after the date of invoicing, whichever is later.
Interest
Interest is charged on a daily basis. The rate of interest is 8% above the reference rate which is set for six month periods starting on the 1st January and 1st July each year. The reference rate is set to be the same as the Bank of England base rate on the day preceding the start of a six month period.
Example
If the base rate is 4% for the six-month period when the debt became late, then the statutory interest rate is 12% (4% base rate plus 8%).
The debt is £851.06 plus £148.94 VAT = total £1,000.00.
If this debt is 30 days late, then the interest owed is:
£1,000 x 12% = £120 (the annual rate)
£120 ÷ 365 = 32.9p (the daily rate)
32.9p x 30 days late = £9.86 (the interest owed to date)
Compensation
Compensation is a fixed amount depending on the size of the original debt. It is a one off payment per late invoice.
| Original Debt | Compensation |
|---|---|
| Up to £999.99 | £40.00 |
| £1,000.00 to £9,999.99 | £70.00 |
| £10,000.00 or more | £100.00 |
Claiming
When contacting a debtor do not raise another invoice, send a letter or Statement of Account instead. VAT is not charged on the interest or compensation, so raising an invoice without VAT would complicate your VAT accounts. Sending an invoice also makes it harder to send a second or subsequent reminder as each later one would have to reference the others, whereas a Statement of Account can simply be updated. The use of a spreadsheet can automate the maths and make this updating not much more than a push of the “print” button.
The Statement of Account should provide a reference to the original invoice and the amount of that invoice, the amount of interest accrued, the amount of compensation and the balance to date (ie the total amount now owed). Also include the interest rate and the amount of daily interest (the daily rate). More than one debt can be shown on a single statement but all the details of each individual debt need to be included. Indicate that the daily rate is applied to the account for every day the debt remains outstanding.
Should a part payment be received interest continues to accrue at the original calculated daily rate until the debt is completely cleared. You do not need to recalculate the daily rate on receipt of part payments or for changes in the reference rate.
Resources
The Pay On Time website has much more information about the legislation, including details of the rules on debts dated before 7th August 2002, the current reference rate, a subscription interest calculator/tracker, sample letters and much more.
A guide to the legislation, in .pdf format, is available A Users Guide to late payment legislation: The Late Payment of Commercial Debts (Interest) Act 1998, as amended and supplemented by the Late Payment of Commercial Debts Regulations 2002.
Also from the Pay On Time website there is an FAQ that is well worth reading Late Payment FAQ.
There is free basic calculator on the Forum of Private Business Website.