Advice on Late Payment Recovery: Commercial Debt
It is designed to be a deterrent against late payment and applies only to “commercial” debts. This means it can only apply to debts owed to or from an individual if that person was acting in the course of a business.
Where no contractual agreement has been made with regard to late payment you can rely on the legislation to recover some of your costs. If required we can provide further legal advice on how to apply these charges. When sending a letter of claim to your debtor’s we can include the late payment interest and compensation and seek to recover these on your behalf.
If you have made other contractual provision for late payment then you should rely upon this rather than the Late Payment legislation.
With offices in Leeds, Sheffield and York, we can offer our services either on a face-to-face basis, by post or email. Get in touch with our debt recovery solicitors today by calling the number at the top of this page or by filling in the enquiry form and we’ll call you back.
Quick Guide to Late Payment Legislation
What is Late Payment Legislation?
The Late Payment of Commercial Debts Regulations 2013 came into force on 16 March 2013 and amend The Late Payment of Commercial Debts (Interest) Act 1998 implementing the changes required by the 2011 Late Payment Directive. They have been supplemented by the Late Payment of Commercial Debts (No.2) Regulations 2013.
The amended rules only apply to contracts entered into after 16 March 2013. Contracts entered into prior to that date (and after 7 August 2002) will continue to be governed by the previous legislation
Under the old legislation parties can agree the payment date under the relevant contract and if no date is agreed a payment date of 30 days is implied. This 30 day period ran from the later of: the delivery of the goods or the performance of the service; or the day on which the customer has notice of the amount of the debt (e.g. the day the invoice is provided).
Parties are still free to contractually agree a substantial remedy outside the scope of the Act but where statutory interest is accruing under the relevant contract The Late Payment of Commercial Debts Regulations 2013 make the following key changes:
- if no time for payment is stated statutory interest will start to run on outstanding payments from 30 days after the latest of:
- receiving the supplier’s invoice; or,
- receiving the goods or services
- verification or acceptance of the goods or services (where provided for)
- in a business to business contract, the parties may agree a due date for payment of up to 60 days from the latest of the above. The parties may agree to extend the due date for payment beyond 60 days, but this will only be valid if the extension is not “grossly unfair”, it must also be “expressly agreed”.
- in a contract where the customer is a public authority the parties may agree a due date for payment of up to 30 days from the latest of the above events but there is no right to agree an extension.
- where verification and acceptance procedures apply the date from which interest will begin to run cannot extend beyond 90 days after the date of performance of the relevant obligation. The parties can agree up to 90 days in which to verify or accept the contract but if they extend time this far there is no provision for any additional time after the contract has been verified in which to make payment.
Recovery of costs
The £40, £70 or £100 compensation (see below) a creditor is entitled to remains. However, suppliers now have the right to claim the difference between the reasonable costs incurred in debt recovery (e.g. the costs of appointing a debt recovery lawyer) and that fixed sum. Any attempt to exclude either of these costs will be subject to the UCTA test of reasonableness.
The Statutory interest rate remains at 8% above base rate.
In deciding if an extension of time for payment is grossly unfair all circumstances will be taken into account including:
- whether anything is a gross deviation from good commercial practice and contrary to good faith and fair dealing
- the nature of the goods and services supplies; and
- whether the purchaser has an objective reason for deviating from the statutory provisions.
A substantial remedy
Parties will remain free to exclude or vary the right to statutory interest provided there is a substantial contractual remedy for late payment. A remedy will not be substantial if it is insufficient to compensate the supplier for late payment or to deter late payment. This will be a question of fact but considerations will include, industry practice, the bargaining position of the parties and whether the provisions will recompense the supplier for any costs incurred as a result of the late payment.
When can interest be claimed?
Late Payment interest can be claimed whenever payment is “late”:
- if you have agreed payment terms then payment is late the day after the last day of the agreed credit period
- if no payment terms have been agreed then the Act sets a default period of 30 days after which interest starts to run:
The default 30 day period runs from the later of the following:
- the delivery of the goods or the performance of the service; or
- the day on which the customer has notice of the amount of the debt (e.g. the day the invoice is provided).
How to claim interest
Include reference to late payment charges on invoices, order forms, terms of business etc;
Whenever you send payment reminders you should also remind customers that interest and compensation for debt recovery costs will be charged under the late payment legislation;
When payment is late you should inform the purchaser that you are now claiming interest under the late payment legislation, it may be useful to advise the daily rate of interest being applied.
What to claim
Interest is payable at the rate of 8% above the Bank of England base rate set at the start of a six month period, the “reference rate”:
- the Bank of England base rate on 31 December will be the reference rate for the period 1 January to 30 June
- the Bank of England base rate on 30 June will be the reference rate for the period 1 July to 31 December.
- rates can be obtained from the Bank of England website.
From 1 July 2009 to 31 December 2012 the interest rate payable is 8.5%.
How to calculate interest
Interest owed is simple not compound and is calculated as follows:
Debt x Interest rate = Daily rate of interest x the number of days late = Interest owed
Interest is charged on the gross amount of any debt (inclusive of VAT) but you do not pay VAT on the interest.
Compensation arising from late payment is payable based on the following table:
|Size of the unpaid debt||To be paid to the Creditor|
|Up to £999.99||£40.00|
|£1,000 to £9,999.99||£70.00|
|£10,000 or more||£100.00|
Invoice dated 1 January 2012 for the amount of £500 + VAT with today being 6 August 2012.
Total invoice = £600. Reference rate as at 1 January 2012 = 0.5%
£600 x 8.5% = 0.14 (daily rate) x 217 days = £30.38 interest due
Debt plus interest of £30.38 plus compensation of £40 = £670.38 payable.
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