The UK has had late payment legislation since 1998 that created a statutory right for suppliers to charge interest on overdue invoices. The original legislation applied to debts owed by large firms and the public sector, but in 2002 the right was extended to debts owed by small companies too.
In addition to charging interest, a late payment fee was introduced towards the costs of recovery of the debt. The fee was fixed depending on the size of the outstanding debt to be collected.
In 2013 the rules were updated. As well as forcing the debtor to pay interest and the fixed fee, the supplier can also get back their "reasonable" recovery costs from the late payer. This development opens up the opportunity to use a debt collection service to recover the debt and add the fee to the amount the debtor needs to pay you so if they pay the whole amount, you effectively get the service for free.
The statutory right to claim interest and compensation is not compulsory and it is for the supplier to decide whether or not to make use of the rights.
Simple (not compound) interest is calculated at the rate of 8% above a reference rate based on the Bank of England base rate. The reference rate is set each six months for the following six months as the base rate on 31 December and 30 June. You choose your reference rate based on the six month period in which the invoice became due.
|Invoice Due Date||Reference Interest Rate||Interest Rate to Apply|
|30/06/2009 - 31/12/2016||0.50%||8.50%|
The simple interest is calculated using the interest rate above and the following calculation.
Alternatively, use our simple late payment interest calculator
In addition to charging interest on late payments, the supplier can charge the debtor for costs associated with recovering the overdue debt. This is made up of two parts, first a fixed compensation charge as follows.
|Value of Unpaid Debt||Compensation Charge|
|Up to £999.99||£40|
|£1,000 to £9,999.99||£70|
|£10,000 or more||£100|
Second, you can claim compensation for “reasonable costs” associated with recovering the late payment that exceed the fixed sum. This could include, for example, fees for a debt collection agency service so you can appoint professionals to spend their time chasing the overdue invoice at no cost to you.
Just because you have the right to apply compensation charges and interest doesn’t mean that you always should. Charging interest and compensation is optional, and may not always be the right choice.
You may have a long-term trading relationship with your customer and decide it’s better to maintain good relations for the future.
It’s not always clear-cut that the fault lies only with your debtor. For example, debtors often claim that they never received the invoice or may have raised a query on the invoice that they feel wasn’t resolved.
Finally, adding compensation charges could just delay your payment further or reinforce opposing positions. Most businesses just want their invoice settled quickly and with minimum fuss so they can move on. Ending up in court adds upfront costs with the risk you may not win these back.
My Credit Controllers’ default approach is to add interest and compensation payments (including our success fee) to the debt to be collected from the outset unless instructed otherwise by the client. However, we recognise that many clients just want the matter settled quickly and with minimum risk, and the option to waive the compensation can be a useful lever to bring things to a swift resolution.
Users guide to the recast Late Payment Directive
The Late Payment of Commercial Debts Regulations 2013
The Late Payment of Commercial Debts Regulations 2002
Late Payment of Commercial Debts (Interest) Act 1998