What is the Late Payment of Commercial Debts (Interest) Act 1998?

The UK was one of the first countries to really clamp down on the challenges posed by late payment of commercial debts, which damage the cash flows of suppliers and ultimately threaten their very survival.

The Late Payment of Commercial Debts (Interest) Act was introduced in 1998 to enable small businesses to claim interest for late payment from large businesses with 50 or more employees. In 2000 and 2002, the statute was extended to permit any business to charge interest on any debt that exceeds credit terms, ultimately encouraging prompter payment by customers. It was also extended in 2013 to take into account new rulings under the EU Late Payments Directive.

An interest charge of 8% plus the Bank of England Base Rate can therefore be levied as soon as the debt can be classed as overdue, whilst businesses are also eligible to claim debt collection costs of at least £40, depending on the value of the debt. For instance:

Value of debt Compensation
Less than £999.99 £40
£1,000 – £9,999.99 £70
More than £10,000 £100

 

New rules under the EU Directive also state that “reasonable costs” can be charged to further compensate for the costs of recovering a late payment.

If there is no agreed credit period, then the Act sets a default period of 30 days after which interest can run. This default period does not constitute a statutory credit period. Where no credit period is agreed in a contract, the principal debt will still become due from the moment the goods are delivered or the service performed. The 30-day default period starts running from the latter of the following actions:

In B2B contracts, payment terms for prices that are fixed in the contract may not exceed 60 days from delivery of the invoice, or delivery/acceptance of the goods/services – whichever is latest. However, parties can agree longer payment terms in business-to-business transactions, but only if they are not “grossly unfair” to the supplier. Meanwhile, the payment terms for public sector organisations may not exceed 30 days.

It is important that your terms and conditions and invoice detail your credit control process, which should reference your right to charge interest under the Late Payment of Commercial Debts (Interest) Act.

Whether you decide to enforce these charges in the event of late payment is up to you. It can be beneficial to notify your customer in writing of your rights and intention to do so if the debt remains unpaid in seven days, but each debt should be treated on a case-by-case basis.

If charges are applied, notify your customer in writing and send a new invoice that itemises the revised amount they owe you.

For more information on the Late Payment of Commercial Debts (Interest) Act, please call our team on 0800 9774848 or email collections@hiltonbaird.co.uk.