Get Paid on Time – Now it’s the Law!

A look st hoe the Late Payment of Commercial Debts Regulations 2013 will help small and medium businesses get paid...

Get Paid on Time – Now it’s the Law!

Chasing payments and overdue invoices can be the most time-consuming and frustrating task for any small business. A handful of late payments can mean the difference between a secure bank balance and a serious cash flow problem.

However, protection is now in place, particularly to protect small businesses & suppliers. The ‘Late Payment of Commercial Debts Regulations 2013’ that came into force on the 16th March 2013 is set to encourage prompt payment of all invoices.

The new rules are simple – debtors will be forced to pay interest and reimburse the reasonable recovery costs of the creditor, if they do not pay for goods and services on time.

What does it apply to?

It applies to the supply of goods and services, will impose new time limits to pay invoices and will only apply to contracts made after the 16th March 2013.

What type of contracts does it affect?

Business-to-business contracts:

Unless stated, payment must be made within 30 calendar days after receipt of the supplier’s invoice, receiving goods or services, or verifying/accepting the goods or services.

If the contract contains an express payment term, the parties can agree payment up to 60 days from the date of invoice, receipt of goods or services or verification or acceptance of the goods or services. The parties can agree an extension to this limit and go above 60 days as long as this is in writing and not “grossly unfair”.

What is ‘grossly unfair’?

The 2013 Regulations define “grossly unfair” as anything that is a gross deviation from good commercial practice and contrary to good faith and fair dealing, taking into account the goods and services in question, and whether the buyer has any objective reason to deviate from the standard 60-day period.

If you are a business involved in a commercial transaction with another business, you need to know that:

  • Businesses must pay their invoice within 60 days, unless expressly agreed otherwise and provided it is not unfair to the creditor.
  • Statutory interest rate applies (at least 8% above the Bank of
    England’s reference rate) to the debt unless an agreement has been reached which amounts to a substantial remedy for the late payment of the debt.

Business-to-public authority contracts:

The payment terms for business-to-public authority contracts is the same as B2B, however, public authorities must pay more quickly than businesses. If the contract contains an express payment term, public authorities must pay within 30 days from the date of invoice, receipt of goods or services, or verification or acceptance of the goods or services. There is no possibility to extend this period.

Is the new law compulsory?

It is not compulsory, and is for the supplier to decide whether or not to use the rights now made available.

Do I charge compensation each time I chase the outstanding debt?

Compensation is only charged once per outstanding debt, not each time it is chased.

Can I charge individuals statutory late payment interest?

The legislation only applies on business-to-business transactions.

Can I pass on the cost of my debt collector to my late paying customer?

No, under the terms of the legislation, businesses can claim interest and compensation for debt recovery costs, but this does not mean you can pass on all the costs of the third party collector. It works on a sliding scale depending on the size of the debt.

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

Do I add VAT when charging interest?

No. Businesses using the late payment legislation should calculate the amount of interest by using the debt plus VAT but do not add VAT onto the interest itself.

How do I know what rate to charge?

All businesses can charge interest at a rate of 8% above the late payment reference rate or the banks base rate.

Steps to take to protect your business:

  1. Review your standard terms and conditions of sale or purchase. Check that they include a payment period that exceeds 60 days. If yes instruct your legal advisor to amend the business terms & conditions.
  2. Explain payment procedures fully to your customers.
  3. For SMEs who supply goods & services, take advantage of the new regulations, and within the business terms & conditions expressly request payment within 30 days.
  4. Take time to read the payments terms of new contracts. Raise any objections at any early stage to avoid disputes after the business transaction has been completed.
    Remember to make it clear to your customer what your credit terms are, and if you have a persistently late paying customer, make sure that they are aware of your rights under the new regulation – it is there to protect you, so use it.

Wax Noor, Senior Solicitor at fixed price, full service law firm, Brilliant Law, discusses the best way to protect your business when cash flow is affected by overdue invoices.

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