What is the Late Payment of Commercial Debts (Interest) Act 1998?
The UK was one of the first countries to recognise 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 charge statutory interest and compensation on late payment of commercial debts 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.
How much could you charge?
Under the Late Payment of Commercial Debts (Interest) Act, an interest charge of 8% plus the Bank of England Base Rate can be levied as soon as the debt can be classed as overdue. 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|
When is a debt classed as overdue?
If there is no agreed credit period, then the Late Payment of Commercial Debts (Interest) 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:
- The delivery of the goods or the performance of the service by the supplier; or
- The day on which the purchaser has notice of the amount of the debt.
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. This 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. However, 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 request a call back at a convenient time. Alternatively, use our statutory late payment interest calculator to see how much you are entitled to.