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Late payment legislation

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In 2002 legislation was introduced that supplemented existing laws in allowing businesses in England and Wales to add interest and claim compensation for invoices that are not paid on time.

Please note that although the legislation in Scotland, Northern Ireland and other EU member states is similar there are some differences and it is worth seeking appropriate advice first if you are chasing a debt from one of these countries.

The legislation is a statutory right, although your contract may override the legislation if it states an agreed ‘contractual interest’ amount to add to unpaid invoices. Essentially though, if there is no mention of contractual interest in your contract for services the legislation will apply.

The supplier (you) can choose to use this legislation on any invoice that is overdue for payment – it is not compulsory, but can help to prevent frequent unpaid invoices. If there is no credit period in the contract for services the legislation assumes that the credit period is 30 days from either the delivery of the service or the date of the invoice (whichever is later).

Once this time period has passed you have the right to add interest to the invoice and claim compensation. Ideally you should set this out in writing (you do not have to create an invoice), informing the agency or end client:

  • That you are using the late payment legislation, and therefore will be adding interest and/or compensation to the unpaid amount
  • The amount owed, and what it is owed for (quoting the original invoice number will assist in this)
  • State to who the debt should be paid to, by what date and by what method

How do I work out what rate of interest to charge?

To simplify this, the legislation states that you need to add 8% to the Bank of England base rate (the base rate is referred to as the ‘reference rate’ in the legislation). The reference rate is created at the start of a six month period twice a year. Therefore, the reference rates are:

The Bank of England base rate on 31st December will be the reference rate for:

1st January to 30th June

The Bank of England base rate on 30th June will be the reference rate for:

1st July to 31st December

For example, if you are chasing an unpaid invoice dated 14th August, you would add 8% to the reference rate on the 30th June.

The Better Payment Practice Group releases a press statement every six months with the interest rate to be applied using the legislation. Alternatively you can check the Bank of England website to find the reference rate on the 30th June or 31st December.

Interest is calculated as simple and not compound. The calculation is therefore:

Debt x interest rate x the number of days late
                                                     365

n.b. VAT is not chargeable on the interest

If you receive part payment of the invoice this will be used to pay the interest first – interest stops being accrued once payment is made in principal (i.e. once payment has been made but not necessarily cleared).

How much compensation can I claim?

How much compensation can be added depends on the size of the debt. This is:

Size of unpaid debt

Sum to be paid to the creditor

Up to £999.99

£40

£1,000.00 to £9,999.99

£70

£10,000.00 or more

£100

Compensation can only be added once, and if you wish to claim for additional costs and/or for using debt collection firms you need to take the matter to the small claims court.

I do not feel that this will cover the frustration and effort – can I charge more interest or compensation?

In order to do this you need to have it stated in the contract for services from the outset, you cannot simply demand any chosen amount, for example charging interest at 30%.

However, if you feel that you will also have other costs, for example from using debt recovery agencies, you need to pursue this through the courts.

What if they refuse to pay the interest and/or compensation?

If you are adding interest and compensation as dictated in the late payment legislation then the purchaser must pay it – it is a statutory right and its introduction was to deter frequent late payments. If the purchaser is solvent then a County Court office will be able to assist you in recovering any unpaid interest and/or compensation amounts, including describing the procedure and filling out the necessary forms.

Can I get a debt recovery firm to chase payment for me?

Yes – you can transfer any part of the debt (i.e. the initial sum, just the interest or both) to a third party. If you do this you should inform the agency or company in writing.

I am awaiting payment on more than one invoice – can I only claim compensation once?

You can claim interest and compensation for each separate invoice.

How do I record the interest in my accounts?

Your accountant should do this for you but just in case, the late payment interest is chargeable as ‘interest received’ and the compensation is recorded as ‘other income’. Both of these are taxable.

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