Taking advantage of late payment legislation
What is considered a late payment by the law?
UK businesses can automatically claim interest on late payments under the law. If payment has not been made within 30 days of receipt of an invoice by your client - or 30 days following delivery of goods or provision of services if later - this will be considered a late payment for purposes of the legislation. In addition to being entitled to claim statutory interest, you can also claim money for debt recovery costs.
It should be noted that a longer payment period - beyond the statutory 30 days - can be agreed between two businesses, but if it is longer than 60 days it must be expressly agreed and should not be “grossly unfair” to the supplier.
What is the statutory interest rate on late payments?
The statutory interest rate for late payments on business to business transactions is 8% above the Bank of England base rate. A lower interest rate can be negotiated between businesses but there must still be a “substantial” contractual remedy or else the statutory remedies can be imposed regardless of any separate agreement. If you are dealing with public authorities, the statutory rate of interest must be used.
What can I claim for debt recovery costs under the legislation?
There are certain fixed sums which you can charge a business which has failed to pay its debts on time, in addition to claiming statutory interest. £40 can be automatically charged in respect of late payments worth under £1,000; £70 can be charged for late payments worth between £1,000 and £10,000; £100 can be charged for any overdue amounts in excess of £10,000. As a supplier, you can additionally claim “reasonable” costs involved in recovering the debt.
Practice vs. Theory
Although the legal system attempts to prevent the late payment of debts which puts many SMEs in a difficult position and even sometimes leads to bankruptcy, in practice it’s very difficult to enforce the legislation. This is because small businesses with a particularly important client will often be very reluctant to impose late payment fees for fear of losing a crucial business relationship. In this case, gentle reminder letters can often be effective and avoid the formality of statutory demands.
A variety of documents which may help with late payments can be downloaded from our Business Documents Folder. Click on any relevant templates in the list, below, for further information.