The Late Payment of Commercial Debts (Interest) Act 1998 and Late Payment of Commercial Debts Regulations 2002 and 2013 give businesses the statutory right to claim interest on late payments from other businesses.
Three Stages of Implementation
1. The Act initially came into force on November 1st 1998 and allowed small businesses, (50 or less employees) the right to claim interest for late payment from large businesses, (over 50 employees) and public sector organisations.
2. However, from 1st November 2000 small businesses have also been able to claim statutory interest from other small businesses.
3. From 1st November 2002, all businesses, including public sector organisations have been entitled to claim interest from any other business or organisation, (including small businesses).
The legal status of the small business is irrelevant, and so includes sole proprietors, partnerships, limited companies and limited liability companies etc.
A late payment is defined as where the agreed credit period given by the supplier to the purchaser has expired. If no credit period has been specified by the supplier the Act specifies a default period of 30 days after which interest will accumulate. The 30 day period runs from either:
- The delivery of the goods or the performance of the service, or
- The day the purchaser receives notice of the debt.
However, if a contract between the parties specifies that there is no credit period the main debt will be due as soon as the goods are delivered or the service has been performed.
Where payment is required in advance of the goods being delivered or the service being provided, the Act states that the right to claim interest only begins from when part of the goods are delivered or part of the service is performed.
If the contract between the parties states that the whole price must be paid in advance the statutory interest period runs from the day after the goods are delivered or the service performed.
If the contract states that payment is to be made by instalments statutory interest runs from the day after an instalment is due.
If there is no specified credit period, but the previous practice has been that payment is made 30 days after the end of the month that the invoice is received, interest will begin to run on the day after the 30 days. If there is no specified credit period and no previous practice the default credit period is 30 days.
The Amended Late Payment Regulations 2013
The late payment regulations were amended for 2013 in the following ways:
1. Where a debt is owed the creditor can force the debtor to pay interest plus the reasonable costs incurred by the creditor in recovering the money owed if the debtor fails to pay for goods and/or services on time.
2. Businesses have 60 days to pay, though the parties can agree a longer period to pay, as long as it is not grossly unfair to the creditor.
3. Public authorities or bodies have 30 days to pay, (unlike business-to-business transactions there is no option to negotiate a longer period).
4. The creditor is entitled to a fixed penalty charge from the debtor, depending on the sum owed, plus additional reasonable costs incurred, (this may include legal advice and action). Though the fixed amounts are quite small:
- Debt owed up to £999.99 - £40 charge
- Debt owed £1000 - £9,999 - £70 charge
- Debt owed £10,000 or more - £100 charge
5. The new regulations for 2013 only apply to contracts concluded after 16th March 2013.
The idea is that these regulations apply across Europe. They also recognise that public bodies and authorities can be amongst the worst late payers, and so their payment period is limited to 30 days.
The Interest Rate
The interest rate under the Act is the Bank of England base rate that applies during the period in which the debt falls due PLUS 8%. (The base rate is fixed every 6 months for the purposes of calculating the interest owed. So you should check the "reference rate" in operation on the date that the debt became owed to you. As the reference rate changes every 6 months you will need to apportion the interest owed where the reference rate changes before the debt is paid.)
The supplier can simply notify the purchaser orally that interest will be claimed, though it is advisable to put it in writing instead. A letter should include the following points:
- Amount owed, including the total interest accrued at date of the letter.
- The continuing daily interest rate.
- The original invoice details.
- Full name and address to whom payment should be made.
- Method of payment.
If while the supplier is waiting for payment the base rate (reference rate) changes the amount of interest needs to be apportioned to take account of the change in the base rate.
If the purchaser pays part of the debt owed the part-payment will first go to reduce the amount of interest owed and then the main sum owed.
Businesses in England & Wales, (or their receivers or liquidators) have 6 years in which to make a claim for interest.
If the purchaser disputes the original invoice or the interest the matter may like other disputes end up in the County Court.
The supplier can also sell or transfer the debt to a third party, though the supplier should inform the purchaser in writing that the debt has been transferred.
Contractual Interest or Compensation
Some parties may agree a specific interest rate or compensation in their contract together, if so the Act will not apply. However, to avoid larger companies abusing their bargaining power any agreed interest rate or compensation for late payment must be "substantial", if not the Act will apply instead.
Substantial means that:
- It will cover the supplier for losses incurred due to late payment or act as a deterrent.
- It is reasonable to let the contractual compensation replace the provisions of the Act.
A small business does not have to exercise the right to claim interest and some may not if this risks their existing relationship with the purchaser. However, evidence shows that more small businesses are stating at the time the contract is made that they will exercise their right if payment is late. If a business does intend to use the Act they should state this on all invoices and letters seeking payment.
"We reserve the right to claim statutory interest at 8% above the Bank of England reference rate in force on the date the debt becomes overdue and at any subsequent rate where the reference rate changes and the debt remains unpaid in accordance with the Late Payment of Commercial Debts (Interest) Act 1998 as amended and supplemented by the Late Payment of Commercial Debts Regulations 2002."