There are two purposes for the creation of the Late Payment of Commercial Debts Act 1998 (also known as the late payment legislation). The first purpose is to compensate creditors where their debts are late being paid.
It also serves to deter late payments. Also, as the official name of the Act suggests, it is only applicable to the commercial supply of services and goods where there is no provision for interest in your Terms of Business.
In short, for those invoices that have not been paid on time, the legislation allows businesses to claim compensation and interest. Furthermore, if orders were placed with you after March 16th, 2013, then you can also claim for reasonable costs incurred in attempting to collect the debt where these figures exceed the compensation.
- How much interest can you claim and from when?
Businesses can claim interest at 8% over the Bank of England base rate, along with due compensation at the rate of £40 to £100 per invoice. Assuming there is an agreed credit period, then interest is payable from the end of this period.
However, if no agreed credit period is in place then the interest is payable 30 days from whichever is later:
- The date goods or services were supplied, or
- The date your customer was told the invoice amount is due.
- The conclusion of any procedure for ensuring that the supplied goods or services are as per the contract – this procedure itself cannot exceed more than 30 days.
If your business happens to supply a public authority then interest charges are payable after 30 days, regardless if a longer period was agreed or not.
Where a clause exists in your Terms of Business, relating to late payment interest, then you have to charge this interest in accordance with the amount stated in your Terms of Business. Further, you have up to 6 years claim the interest.
- Supplying other businesses
If your company supplies other businesses, whatever their sector, then interest will usually be payable after 60 days – even if a longer due date had already been agreed. The only instance where this differs is if a situation arises where a credit period that exceeds 60 days agreed – however this is only allowed if it is not considered grossly unfair to ‘your’ business.
There are also instances where you would not be entitled to costs, compensation or interest payments. One such instance is where your Terms of Business already provide for these on unpaid invoices.
To avoid the above exclusion, businesses would be wise to change their Terms of Business and rely on the Late Payment of Commercial Debts Act instead. If you do this, you should ensure that your customers know, by:
- Update all documents, such as invoices, where your Terms and Conditions appear
- Provide your customers with the revised Terms and Conditions
- Let your customers know when the revisions come into effect
- Keep copies of communication so you can prove that your customers have been informed about the change
It should be noted at this point that your existing contracts will still be governed by the Terms and Conditions that were in place the time they were entered into.
- Final thought
On occasion, the T&Cs may form a part of the contract and provide a comparatively low rate of interest where overdue payments are concerned. If this happens to be the case, a court may decide that the interest rate set out is not high enough and the legislation should apply.
Should that be the case, you will be able to claim compensation, costs and interest under the Act/Legislation and not the lower amounts stated in the contract.