Unpaid invoices: what the Late Payment Act lets a business add

The Late Payment of Commercial Debts (Interest) Act 1998 applies to contracts for goods or services where both the supplier and the customer are acting in the course of a business. If the contract says nothing about late payment, the Act implies a term letting the supplier claim interest and compensation on any invoice paid late. Many owner-managers know the Act exists but never use it, often because they are unsure what they can claim. The amounts are set by law and do not depend on proving actual loss.

The three things you can add

1. Statutory interest at 8% a year above the Bank of England reference rate. The reference rate is the base rate in force on 31 December, for debts falling due between January and June, or on 30 June, for debts falling due between July and December. Interest is simple, not compound, and runs daily from the day after payment was due.

2. Fixed compensation for each invoice paid late: £40 where the debt is under £1,000, £70 where it is £1,000 or more but under £10,000, and £100 where it is £10,000 or more.

3. Reasonable recovery costs above the fixed sum, where the fixed sum does not cover what you actually spent recovering the debt, such as collection or legal fees.

Base rate moves during the year, so look up the reference rate that applies to your particular debt rather than using today’s rate. If no payment date was agreed, payment is due 30 days after the later of delivery and the customer receiving the invoice.

When the contract says something different

The parties can replace the statutory scheme with their own contract term, but only with one that gives a substantial remedy for late payment. A term setting a very low rate, or saying no interest is payable at all, may be treated as no substantial remedy, and the statutory interest then applies instead. A term giving a realistic rate, one that reflects the cost of being kept out of the money, will normally stand. Check your own terms and your customer’s purchase terms, because the court will apply whichever terms actually formed the contract.

Separately, an agreed payment period of more than 60 days between businesses can be challenged if it is grossly unfair to the supplier. The government has consulted on further changes to the late payment rules, so check whether any new requirements have come into force.

“The amounts are set by law and do not depend on proving actual loss.”

A worked example

These numbers are for illustration only. Suppose your company invoices a customer £5,000 on 30-day terms, and payment arrives 60 days after it was due. Assume, purely for the example, that the reference rate for the period was 4%, giving a statutory rate of 12% a year.

A year’s interest on £5,000 at 12% is £600, which is about £1.64 a day. Over 60 days that comes to £98.63. Because the invoice is between £1,000 and £10,000, the fixed compensation is £70. The customer therefore owes £5,168.63, plus any reasonable recovery costs above the £70 that you can show you incurred.

Claim interest and compensation in writing, setting out the calculation, before taking any further step. Some businesses choose to waive the extras to keep a valued customer. That is a commercial decision, but it is worth knowing the figure you are giving up. Samuel and Daniel handle debt recovery for businesses.