Many businesses lose out because they don’t know, or don’t understand, their statutory right to claim interest if debts are paid late
Your entitlement to claim statutory interest on your debts
Encourage early payment, and improve your cash flow, by using your statutory right to claim interest for late payment of debts. It’s a good idea to include a statement on order forms, applications for credit, confirmations of an order, invoices and contracts, making it clear you will exercise this right if payment is not made on time.
What does late payment mean?
A payment is late if either the payment period agreed with the debtor or, if there is none, the ‘default period’, has run out.
A payment period can be specifically ‘agreed’ in writing or orally (it doesn’t matter which, as long as you can prove what was agreed). Or it might be ‘agreed’ because a standard practice has developed with a customer, eg that they pay your invoices at the end of the month in which they are delivered. In either case, a payment becomes ‘late’ the day after it should have been paid.
If there isn’t an agreed payment period, a payment is late once the ‘default period’ has run out, ie if it has not been paid within 30 days after either:
- you have delivered your goods, or provided your service, to the debtor; or
- you give the debtor notice of the amount you are owed
whichever is later. In all cases, you calculate interest from the day after the period for payment runs out.
Payment by instalments and payments ‘up front’
If your contract says payment will be by instalments, you can claim statutory interest separately on each instalment paid late.
If you have agreed that a payment be made ‘up front’, before you have delivered your goods or service, statutory interest on that payment runs from when all the goods are delivered or the whole service is performed.
How to claim interest on a debt
As soon as payment is late, send your debtor a written notice that you are going to claim interest under the Late Payment of Commercial Debts (Interest) Act 1998. Include the same information you provide on your invoices - and specify the interest owed to date, and the ongoing daily rate, to concentrate their mind:
- the debt owed
- the amount of interest on the debt at the date of the notice
- the current daily rate at which interest is clocking up
- the work you have done (include the original invoice number)
- how and when to pay
How much interest can I claim on a debt?
You can claim the Bank of England base rate, plus 8%. Use the base rate in force at the end of the day:
- on which the contract says that payment is to be made
- if the contract does not stipulate a date for payment, at the end of the last day of the default period
It doesn’t matter if the base rate has changed between that day and the time you are eventually paid.
The base rate is published in The Financial Times and on the Bank of England website where you can also find historical rates. See an example of how to calculate statutory interest on the GOV.UK website or use a statutory interest calculator like the one on the Pay on time website (registration required).
You can also charge a fixed sum to compensate you for costs of collecting the debt (the Late Payment of Commercial Debts Regulations 2002):
- £40, for a debt less than £1,000;
- £70, for a debt of £1,000 or more but less than £10,000;
- £100, for a debt of £10,000 or more.
Calculate interest on an overdue invoice
Use this free, late payment interest calculator on the Small Business Commissioner's website to work out how much interest and compensation you can charge on an unpaid invoice.
Claim interest on a case by case basis
Charging interest isn’t compulsory. Consider carefully whether you will claim interest from all customers - but letting a customer get away with late payment rarely helps your business relationship, as it can lead to a lack of respect for your service generally.
Claiming contractual interest
Rather than claim statutory interest, you could put a contractual right to interest in your trading terms. If you do, and the interest you claim is substantial, the contractual rates apply instead. But beware the rights of consumers - there are limits on the contractual interest you can charge.
If in doubt, take legal advice.