The Late Payment of Commercial Debts (Interest) Act 1998 is a very useful piece of legislation for small businesses who cannot afford to offer long periods of credit to its customers and clients.
The act is designed to both deter late payments and compensate companies whose invoices aren’t paid on time, awarding them interest on outstanding debts and fixed amounts of compensation.
Companies have an automatic right to interest and compensation under the act even if payment is just one day late, providing certain conditions are met:
You have supplied goods and services
Your buyer bought for business purposes
Your contract does not specify any conditions for payment or interest on overdue invoices
The contract is not a consumer credit agreement
In other words, provided your invoice only states the payment period (“30 days” etc.) and no other conditions, the act is automatically in force and you can claim under it with no further paperwork or warnings being needed.
Of course you may decide to be more lenient with your clients or customers (or some of them at least!) and not hit them with a compensation demand if they fail to pay exactly on time. You probably wouldn’t like it if you were charged £40 for not quite paying a £50 invoice on time, so you may decide to give your creditors a few reminders first; it’s only polite! But it’s good to know persistent non-payers can be required to compensate you for the hassle of having to repeatedly chase them.
You don't have to tell your customers that you intend to make use of the act, however it may be beneficial to tell them in advance as it may educate them on their responsibilities and encourage early payment, improving your cashflow in the process.
What You Can Claim
Interest can be claimed at 8% over the BoE base rate and applied to the full amount from the date that payment was required according to your terms.
The amount of compensation you can claim is related to the amount of the invoice:
Up to £999.99
£40 per invoice
£1000 to £9,999.99
£70 per invoice
£100 per invoice
Note you don't have to issue a further invoice for the interest and compensation, simply write and tell your customer the amount due.
Importantly you can claim interest on invoices that were not paid within the credit period but have since been paid, so if you have a persistent late-paying customer it would be worth keeping records of when invoices were due and when they were eventually paid, as each one could be worth £40-£100 if you decide eventually to claim compensation, maybe after the business relationship has broken down.
You even have up to 6 years to claim the interest, so keeping careful long-term records could be very worthwhile.
If your client fails to respond to your demands for payment, and you have to resort to debt collection measures, you can also claim “reasonable costs” of recovering the debt.
If your invoices involve a calculation, for example if you submit timesheets or you invoice based on hourly or daily rates, then this can be a source of confusion which leads to delayed payment. The act states that even if the invoice is wrong, if the customer has the information to work out the correct amount, he is expected to do the calculation and pay accordingly, and you are still entitled to interest and compensation if he doesn't.
If there is a real dispute as to whether the money is due, you will not be entitled claim anything until the position has been clarified.