Late payment interest
by David Carter on 21 September 2011
Businesses, whether limited companies, partnerships or sole traders, have the right to add late payment interest to overdue invoices, yet many do not. The reasons are twofold – either they don’t know they can, or they do know, but are concerned about damaging client relationships.
However, I do wonder whether clients might start to pay up a little sooner if they were being penalised for non-payment from an early stage. It would certainly send out a clear message that the creditor is serious about pursuing the debt. In terms of damaging client relationships, you do have to question whether you want to be working with habitual late payers in any case.
What businesses may charge
There is a statutory entitlement to charge interest on business debts under the Late Payment of Commercial Debts (Interest) Act 1998, as amended by the Late Payment of Commercial Debts Regulations 2002.
The creditor can charge interest at 8% above the Bank of England base rate (currently 0.5%) from the date when the debt becomes due. If no payment due date was specified, the default period is set at 30 days.
The Bank of England base rate will be the fixed “reference rate” that covers the six month period in which the debt became late. The Bank of England base rate on 31st December will be the reference rate for debts that become late between 1st January to 30th June, and the base rate on 30th June will be the reference rate for 1st July to 31st December.
The creditor can also add a one-off charge for debt recovery compensation:
- £40 for debts up to £1,000
- £70 for debts up to £10,000
- £100 for debts above £10,000
Six years to claim
In England, Wales and Northern Ireland, the creditor has six years in which to claim late payment interest and compensation, even if he is no longer supplying that client. In Scotland it is five years.
Interest accumulates on a daily basis.
How to claim
This is a statutory right and therefore the creditor does not need to go to court.
The creditor will need to write to the client and advise them that they are claiming interest and compensation on the late payment under the late payment legislation, giving details of the claim. It should not be invoiced and VAT is not chargeable.
The creditor can still claim even if there is no contract in place with the client. For future business, the creditor can add the following text to contracts, order forms and invoices: “We understand and will exercise our statutory right to claim interest and compensation for debt recovery costs under the late payment legislation if we are not paid according to agreed credit terms.”
However, if there is a contract that makes provision for late payment interest, then the statutory right to interest and compensation will not apply.
Judgment interest
Once an unpaid debt is taken to court and a judgment is awarded, judgment interest will then be incurred by the debtor, instead of the late payment interest. If late payment interest and compensation charges have been claimed from the debtor, these will be included in the judgment along with the original debt.
If you’d like to find out more, please have a look at my article on judgment interest.
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