Late Payment of Invoices (2002)

A User’s Guide to late payment legislation – The Late Payment of Commercial Debts (Interest) Act 1998, as amended and supplemented by the Late Payment of Commercial Debts Regulations 2002

How to claim

This section will be divided into two parts, Part 1 explains how to calculate the amount of interest that you are entitled to and Part 2 advises how much compensation you are entitled to for reasonable debt recovery costs. First however:

Do I have to claim immediately?

There is no doubt that the older the debt the less likely it will be paid; however a claim for interest against a late payment does not need to be made straightaway. A supplier has six years in England, Wales and Northern Ireland, and five years in Scotland, in which to make the claim (businesses not based in England or Wales should read Jurisdiction

Receivers or liquidators of a business may pursue its purchasers for interest on late payment going back over this period.

Businesses may also claim interest after they have stopped supplying a purchaser. Purchasers who wish to avoid future claims for interest should pay their bills on time.

The six-year period is derived from case law and the Limitation Act 1980.

This creates a reasonable expectation that it would be possible to pursue and claim statutory interest for late payment up to 6 years (5 years in Scotland) retrospectively, or back to the time when the appropriate legislation came into force, whichever is the shorter of the two periods (businesses not based in England or Wales should read Jurisdiction).

Guidance:

The issue of limitation, not being able to claim retrospectively, will only arise in 2004 in England and Wales because claims for late payment interest under the late payment legislation cannot pre?date the coming into force of the relevant part of the legislation, see the table below.

Can I charge retrospectively on my existing debtors’ list?

Yes. It is possible to claim statutory interest for late payment up to 6 years in the past (5 years in Scotland), or as far back as the appropriate legislation (see table below) is available, whichever is the shorter period.

The earliest date from which a commercial contract can create a claim for interest under the late payment legislation. Who can claim back for that?
From 1 November 1998 Small businesses can claim statutory interest for late payment from large businesses and most of the public sector.
From 1 November 2000 Small businesses can also claim statutory interest for late payment from other small businesses.
From 7 August 2002 Anyone involved in a commercial contract can claim statutory interest or claim compensation arising from late payment.

Part 1 – How to calculate Late payment interest

What rate of interest can be charged?

At the start of a six-month period the official dealing rate of the Bank of England (the base rate) will be made a fixed “reference rate” for the subsequent six months. The table below shows how this works.

  The six-month period
The Bank of England base rate on 31 December, will be the “reference rate” for 1 January to 30 June
The Bank of England base rate on 30 June, will be the “reference rate” for 1 July to 31 December

To determine what interest rate you should use when calculating interest on a late payment, you need to add 8% to the “reference rate” that covers the six-month period in which your debt became late.

How do I find the correct base rate to use?

The correct interest rate to be used can be found by visiting www.payont’ime.co.uk The Better Payment Practice Group will also ‘issue a press release with the base rate to be used for the forthcoming 6-month period. The Bank of England base rate on the 30 June or 31 December can be found by looking in the financial pages of the national press of the appropriate date (libraries will be able to help) or by visiting the Bank of England website at www.bankofengland.co.uk

How do I calculate the interest charge?

The interest owed on a late payment is simple, not compound, interest. It Is calculated like this:

Debt x interest rate x (the number of days late divided by 365)

Do I calculate inclusive or exclusive of VAT?

You charge interest on the gross amount of the debt (including any element of VAT), but you do not pay VAT on the interest.

Example

If the base rate is 4% for the six-month period when the debt became late, then the statutory interest rate is 12% (4% base rate plus 8%)

Debt is £851.06
plus £148.94 VAT = total £1,000

If this debt is 30 days late, then the interest owed is:

£1,000 x 12% = £120 (the annual rate)

£120 / 365 = 32.9p (the daily rate)

32.9 pence x 30 days = £9.86 (the interest owed to date)

When does the interest stop running?

Interest stops running on a debt once the principal has been paid i.e. once payment is received but not yet cleared if relevant. If the purchaser owes the principal and interest, unless payment is accepted on other terms, any part payment of the debt will go to reduce the amount of the interest first.

Part 2 – Compensation arising from late payment

How much compensation am I allowed?

The table below shows how much compensation you are entitled to.

Size of the unpaid debt To be paid to the creditor.
UP to £999.99 £40
£1,000 to £9,999.99 £70
£10,000 or more £100

1 2 3 4 5 6 7

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