Stop Treating Late Payments as “Normal”
In the UK, many small business owners operate under the assumption that late payment is simply the “cost of doing business.” They wait 60, 90, or even 120 days for an invoice to be settled, all while feeling they have no recourse other than to continue sending polite emails.
The truth is, the UK government provides a powerful mechanism to protect you: the Late Payment of Commercial Debts (Interest) Act 1998.
This legislation was designed specifically to protect smaller businesses from being used as informal, interest-free banks by larger companies. If your client is a business and they have missed your agreed-upon payment deadline, you are legally entitled to charge them for the inconvenience.
Understanding Your Legal Rights
If you are a business and you have supplied goods or services to another business, you have a statutory right to claim the following when a payment becomes late:
- Interest: You can charge 8% plus the Bank of England base rate in effect on the most recent 1 January or 1 July prior to your invoice date.
- Fixed Compensation: You can also charge a one-off fee for the administrative cost of chasing the debt ranging from £40 to £100 based on the value of the debt.
Crucially, you do not need a clause in your contract to charge this interest. It is a statutory right. However, if your contract specifies a different basis for calculating interest or a different amount of fixed compensation, your contract takes precedence.
What You Can Claim: The Breakdown
1. Calculating Statutory Interest
The interest is calculated daily. The formula is as follows:
“(Debt × (Base Rate + 8%)) ÷ 365 × Number of Days Late”
Example: If you are owed £5,000 for 60 days, and the relevant Bank of England base rate is 5% (meaning that the relevant statutory rate is 13%):
- £5,000 × 0.13 = £650 (annual interest)
- £650 ÷ 365 = £1.78 per day
- £1.78 × 60 days = £106.80 in total interest
2. The Fixed Compensation Fee
This is a fixed “penalty” fee you can charge per invoice:
- Debt up to £999.99: £40
- Debt between £1,000 and £9,999.99: £70
- Debt over £10,000: £100
How to Mention Interest in Your Communications
Many business owners worry that mentioning interest will sound aggressive. The trick is to treat it as a financial fact rather than a threat. In your formal follow-ups, consider including a sentence such as:
“Please be aware that under the Late Payment of Commercial Debts (Interest) Act 1998, I am entitled to charge statutory interest at 8% above the Bank of England base rate, plus fixed compensation costs, for invoices that remain unpaid beyond the agreed terms.”
Often, simply referencing the Act is enough to prompt a client to prioritise your invoice. It signals that you understand your rights and are no longer willing to wait indefinitely.
Automate Your Recovery
Calculating interest manually for multiple invoices can be time-consuming and prone to error. You need to get the math exactly right to ensure your claim remains legally sound.
This is exactly why Beforeclaim.co.uk includes an automated calculator. When you draft your Letter Before Claim on our platform, our system automatically calculates the interest and statutory compensation owed to you based on the applicable Bank of England base rate and the number of days the invoice has been outstanding.
By including this calculated figure in your official letter, you are not just asking for payment; you are presenting a formal, legally backed demand.
Important Considerations: “The Implied Contract”
While you have the right to charge interest, ensure your house is in order:
- Have proof of the agreement: Save the initial email or contract where the scope of work and payment terms were agreed upon.
- Clear Invoices: Ensure every invoice clearly states your payment terms (e.g. “Payment due within 30 days”).
- Don’t Overreach: Only charge what you are legally entitled to. Excessive or “made up” penalties can be viewed unfavourably by a judge if the dispute escalates to court.
Frequently Asked Questions
Can I charge interest to individuals (consumers)?
No. The Late Payment of Commercial Debts (Interest) Act 1998 applies strictly to Business-to-Business (B2B) transactions. If you are dealing with a private individual, the rules are different.
Do I have to charge the interest?
You don’t have to, but you should keep it as an option. It is a powerful tool to encourage late payers to settle.
Can the client refuse to pay the interest?
If the invoice is clearly overdue and interest has been calculated correctly in accordance with the Late Payment of Commercial Debts (Interest) Act 1998, they are legally liable for it.
Conclusion: Take the Lead
When a client holds onto your payment, they are essentially taking money out of your pocket. By using your statutory rights to charge interest and compensation, you are simply asserting your right to be treated fairly.