Compensation for Late Payments
You can ask our solicitors online for legal advice on compensation for late payments charges using the question box on the front of our website or the following free legal advice guide may answer your questions.
Late payments can cause multiple problems for businesses. The Late Payment of Commercial Debts (Interest) Act 1998 along with more recent legislation through the Late Payment of Commercial Debts Regulations 2002 and 2013 grant businesses certain rights in relation to claiming compensation for late payments in the form of interest.
Within this legislation there are three main stages:
#1 Initially the Act was introduced in November 1998 where small businesses (classed as any company with fewer than 50 employees) could claim compensation for late payments interest which were owed by large businesses (those with more than 50 employees) in addition to public sector organisations.
#2 From November 2000, changes were implemented which allowed small businesses to claim statutory compensation for late payments from other small businesses.
#3 A further change was made in November 2002 which allowed all businesses including those in the public sector to claim interest from any business or organisation.
The legal status of a small business is irrelevant and would also apply to sole traders, partnerships, limited companies and limited liability entities.
What is a Late Payment?
Late payments are those which are still outstanding after an agreed credit period issued by a supplier has elapsed. If a credit period has not been stipulated then the Act will automatically assign a 30 day period when compensation for late payments interest will start to be accrued. The 30 days will begin either after the goods have been delivered or service has been provided, or the day the purchaser receives the invoice or notice to pay.
In situations where a credit period is not stated, the debt will become due as soon as the products have been delivered or the service has been provided.
If a contract is created between two parties which states that the price must be paid in advance, the statutory interest period will begin the day after the goods were supplied or service delivered.
Where an arrangement has been made to make payment in instalments, the interest will commence the day after an instalment is due.
In circumstances where credit periods have not been stipulated, but previous conduct has suggested that payment is made 30 days after the end of the month when the invoice is received, compensation for late payments interest will start on the day after the 30 day payment period.
The Amended Late Payment Regulations 2013
In 2013, the Late Payment Regulations were amended in several ways:
- When a debt is owed, the creditor can request that the debtor pays compensation for late payments interest in addition to reasonable costs incurred by the creditor to recover the amount of money owed if prompt payment is not received.
- A business will have 60 days in which to pay an invoice, although the involved parties can agree a term which is longer than this, provided that it is not unreasonable or unfair to the creditor
- A public body or authority will have 30 days to pay. There is no option to negotiate for an extension.
- Creditors are entitled to a Fixed Penalty Charge from the debtor depending on the amount of money that is owed in addition to reasonable costs which will also include legal advice.
The following amounts are allowable:
- £40 charge for debts up to £999.00
- £70 charge for debts up to £9,999
- £100 charge for debts of £10,000 or more
These new regulations introduced in 2013 are only applicable to contracts which ended after 16 March 2013
Furthermore, these regulations are applicable Europe wide.
Under this legislation, compensation for late payments interest is charged in line with the Bank of England base rate which is applicable at the time the debt becomes due in addition to a further 8%. The base rate is fixed on a six monthly basis for the purposes of calculating interest.
Suppliers are able to notify the debtor verbally that interest will be charged although it is strongly advised that if you intend to charge interest this is provided in writing. Written notification to the debtor should include a number of elements including:
- The amount of debt owed including the full amount of interest accrued when the letter was written
- The daily interest rate
- Original details from the invoice, such as invoice number and amount owed
- The full name and address of the person that payment should be made to
- The method of payment
Sometimes in the time that the supplier is waiting for payment, the base rate may change. As a result, the interest charged to the debtor needs to be amended accordingly.
In England and Wales, businesses have a period of 6 years to claim interest on late payments.
Where the purchaser disputes the invoice or the interest, it often ends up being dealt with through the County Court. Suppliers can also sell the debt onto a third party. When this happens, the supplier should always notify the purchaser in writing that the debt has been passed to a third party.
When contracts are drafted, an agreement may be reached in terms of an acceptable interest rate and if this happens, the Act cannot be applied. Larger companies often do this, but if they do the interest rate or compensation for late payment must be substantial. In the law, substantial means:
- An amount of money that will cover the supplier for any loss as a result of late payment
- If it is reasonable to allow the agreement to replace the provisions outlined in the Act.
Small businesses do not have to exercise their right to request interest from debtors. Some businesses avoid seeking interest because it can potentially harm long term relationships with purchasers. If a business intends to apply the legislation and charge interest for late payments, this should be clearly outlined on invoices and on any letters requesting payment when the amount becomes overdue.