Late Payment of Commercial Debts

In order for businesses to run successfully, they need to be assured that amounts owed to them will be paid. They are offered protection through the Late Payment of Commercial Debts (Interest) Act 1998. The act means that creditors can be compensated for any late payments that they suffer, as well as serving to deter people from paying amounts owed late. The act is only applicable to the commercial supply of goods and services if there is not the provision for interest in the company's terms of business.

The following article explains how the law recognises late payment of commercial debts and the authority that it gives to a business to recover sums owed as well as compensation, interest and debt recovery charges.

How does the Late Payment of Commercial Debts (Interest) Act 1998 work?

The Late Payment of Commercial Debts (Interest) Act 1998 means that when an invoice is not paid on time, the creditor can claim interest and compensation for the need to collect the debts. The law acknowledges that there will be expenses for companies having to collect debts owed and as such, these costs can be recovered so long as they are deemed to be of a reasonable level. Creditors are entitled to claim interest at a rate of 8% over base rate. Compensation may also be claimed to the value of £40-£100 per outstanding invoice.

When can a claim be made?

It is possible for a company to claim interest on late payments, debt recovery costs and compensation in the following circumstances:

• When goods and/or services have been supplied
• The buyer purchased for business needs
• The contract between supplier and buyer is not a consumer credit agreement
• The contract between the supplier and buyer is not inclusive of the ability to charge interest on late invoice payments or alternative solutions to unpaid invoices.

What interest can be claimed?

Creditors are authorised to claim interest at a rate of 8% over the Bank of England Base Rate. Interest can be claimed for invoices that were not paid within the payment period stated on the invoice terms but have since been paid. It can be claimed from the date that the invoice payment should have been paid through to the date that the payment was actually received.

Creditors are able to claim interest for a maximum period of 6 years.

From what date is interest normally payable?

Interest usually becomes payable from the last day of the agreed credit period. In situations where a credit period was not agreed, interest becomes payable 30 days from whichever of the following instances occurs last:

• The date that goods or services were supplied
• The date that the buyer was told of the amount payable
• The date that any quality checks or assessments that services and goods meet the standards of the contract are completed. This process cannot exceed 30 days.

For goods or services supplied to a public authority, interest is payable after 30 days, no matter whether an extended payment period was agreed. Extensions on this 30 day period are not authorised and so cannot be observed when dealing with public authorities.

In instances where goods or services are supplied to another business, interest will usually become payable after a period of 60 days, even if a longer payment date was arranged. The payment date can exceed 60 days as long as it is not considered as significantly unfair to the company that supplied the services or goods.

What compensation can be claimed?

Creditor companies are authorised to claim compensation on each invoice that is not paid before the end of the agreed credit period. If the invoice was paid late, compensation could still be claimed for the period between the end of the credit period and the actual date of payment receipt. Companies claiming compensation have 6 years to make their claim.

The amount of compensation that can be claimed depends upon the amount of the invoice, as follows:

• Invoice amounts of up to £999.99 - £40 compensation per invoice
• Invoices of between £1000 - £9,999.99 - £70 per invoice
• Invoices in excess of £10,000.00 - £100 per invoice

Reasonable Costs

Companies are entitled to claim reasonable costs of recovering debts owed to them. Reasonable costs include the expense of credit control action to a business as well as the costs for employing debt collection agencies or legal costs associated with recovering the amounts owed. The company should inform their customers that if invoices are not paid within the agreed payment period, late payment interest, costs for recovery and compensation will be charged and this should serve to help prevent customers from tardy payments. However, companies are not legally obliged to tell their customers that such sums will be charged if payments are late.

How to Make a Claim for Late Payment Interest, Compensation and Debt Recovery Costs

Once an invoice payment becomes overdue, a company is entitled to claim compensation and subsequently, interest and reasonable charges for recovering the amount owed to them. The company does not invoice the buyer for these sums, but is required to write to the customer to detail the amount due. In the letter, it is helpful for the company to confirm:

• How much interest, compensation and costs amount to
• The outstanding invoice details including the invoice number and the original amount owed
• How the payment should be made including the recipient, their address, payment methods and the payment date.

Disputes about Claims

In some instances, invoice queries may genuinely hold up payment times, and this may not be reflective of inability or avoidance of payment and rather is indicative of delays in confirming costs. In these cases, the court would expect the customer to at least pay the amount that they believe to have been correct, rather than withhold any payment until disputes are clarified. The company will be eligible to claim compensation, late payment interest and debt recovery charges for sums that the customer admits are due but refuses to pay because there is a query on an additional balance.

Companies are entitled to claim late payment interest, compensation and costs for all late payment invoices where payment has not been made, and there is no real dispute regarding whether the sum is owed or not.