The Late Payments of Commercial Debts (Interest) Act 1998 was originally devised as a way of ensuring small businesses are not left out of pocket by late payments, and sets out the entitlement to charge a statutory rate of interest on any overdue invoices.
Since its introduction in November 1998, however, the Act has changed in a number of specific ways, with varying degrees of subtlety, so it’s no longer enough to look at the original wording of the Act – it’s well into its second decade now, and you need to make sure you know how it applies to the present day.
What does it cover?
In 2002, the Late Payment of Commercial Debts Regulations amended and supplemented the original Act, with slight changes to the coverage small businesses are entitled to.
Before that change, small businesses were initially only entitled to charge interest to parts of the public sector, and to large firms – but in recent years the scope has also included other small business debts, effectively meaning any outstanding balance can accrue interest, regardless of who owes it to you.
The legislation covers England and Wales, with close equivalents in Scotland and Northern Ireland, but these should be approached separately where relevant.
What does it provide?
Under the legislation since 2002, small companies can charge interest on amounts outstanding that are owed to them by other small businesses, large firms or the public sector.
In addition, you can make reasonable charges for any debt recovery costs that you incur while chasing a non-paying business customer.
If you agreed a date for payment at the outset of your business with the client, you can charge interest from the following day onwards; if not, the legislation assumes a ‘normal’ payment window of 30 days.
How can I make a claim?
In principle, you have six years to claim for interest on a late payment, but the longer you wait, the less chance there is that you will be successful.
You can charge 8% above the Bank of England base rate, which for the case of this legislation is set once each six months as the ‘reference rate’ on December 31st and June 30th.
Multiply the total debt by this percentage, and multiply that figure by the number of days the payment was late, then divide by 365 to get an annualised total.
You can make a written demand for the interest you consider to be due to you, and pursue the claim in the County Courts if your debtor does not pay.
How can I avoid a claim?
As a purchaser, it is up to you to make sure you comply with any payment terms that you agree to – and if you don’t agree, don’t conduct the business.
In general, you can avoid interest claims by querying any disputes immediately, and especially by querying the interest charge if you believe it is excessive or inaccurate.
Most of all, you can avoid paying interest on your invoices simply by settling them in full before the deadline – the best way to avoid litigation and extra charges.
For more information about the Late Payments of Commercial Debts (Interest) Act 1998 and its amendments, you can find lots of free information at www.payontime.co.uk
If you already have an overdue client and want some professional help recovering the debt, try Safe Collections, a debt recovery specialist.