23rd November 2023
Being paid late for services or goods is one of the biggest frustrations for businesses – and has a knock-on effect on cash flow throughout the supply chain.
Left over from European legislation, and remaining in law post-Brexit, the Late Payment Act – whose full name is The Late Payment of Commercial Debts (Interest) Act 1998 – allows businesses to claim interest, compensation and debt recovery costs if another business is late paying for goods or a service.
Despite its usefulness, the Act is woefully under-used by businesses – so here’s what you need to know.
When does the Late Payment Act apply?
The Late Payment Act applies to contracts between businesses for the supply of good and services. The Act will imply terms where they haven’t been agreed at the time of the contract, specifically, payment time frame, interest on late payment, a compensation fee and recovery of some charges. It is designed to be the standard for payment terms, and to protect businesses even when specific payment dates have not been set.
The Late Payment Act terms will not be implied into a contract if your contract terms have already stipulated a contrary interest rate or your contract is with a consumer rather than a business.
What does the Late Payment Act allow me to do?
The provisions mean that using a professional to recover even small debts can be financially viable and helps take the sting out of the pain of late payment.
How much interest can be charged?
The interest charged can be substantial – the Act allows you to charge 8% above the Bank of England base rate. The interest is calculated and added on top of the debt, and claimed from the debtor party.
Again, be aware that this is the default if no other rate of interest was specified in a contract – if you’ve agreed a different rate of interest, then you’ll be bound by that.
Compensation and recovery charges
As well as charging interest, the Late Payment Act allows a business to charge the debtor a fixed compensation fee to reflect the hassle and harm to a business which has done a good job but has payment unjustifiably delayed.
The amount varies according to the size of the debt and is charged per late paid invoice:
In addition, if you incur legal fees in recovering a debt, the Act also allows a business to claim ‘reasonable costs’, ultimately the amount can be determined by a judge but is usually negotiated between the parties.
Do I need a solicitor to use the Late Payment Act?
The Late Payment Act is designed to be accessible to all businesses, large and small, and to be as easy as possible to use.
Any business can use it, calculate the interest owed and the compensation fee. There are several online calculators that can help calculate this for you.
Many businesses choose to use a specialist debt recovery solicitor, especially if their efforts to recover a debt fail, or there are several late payments to recover.
This can have several advantages. Firstly, a legal letter of claim can be a powerful tool for achieving payment and asserting the debtor’s obligations under the Late Payment Act.
Secondly, it can take away a lot of the administration and time spent in staying on top of amounts owing, accurately calculating interest, and ensuring payments are made.
What can my business do to protect against late payments?
What if I fail to recover a debt using the Late Payment Act?
If all else fails, then you may need to take action to recover the debt, and a specialist lawyer can support you with this. The Thrings Debt Recovery team can help – find out more here.
The Thrings Commercial team supports businesses or all sizes in protecting their employees, reputation and finances – services include the drafting and reviewing of contracts, and debt recovery. For more information, see here.