Debt & Late Invoices

Cornwall Solicitors: DEBT & LATE INVOICES [ or how you might be owed over £20,000 by former customers tax free ]

Late payment of bills has been a long-standing problem in the UK. Many businesses, especially smaller firms, have experienced problems where their customers delay payment for long periods.

Slow payers are often larger companies, deliberately delaying payment to smaller businesses.

The Late Payment Act sets out to assist businesses faced with late payment problems by adding a number of rules to contracts between businesses.

The Late Payment of Commercial Debts (Interest) Act 1998 came into force on the first of November 1998. It has since been amended to bring it into line with a recent european directive (2000/35/EC]
This act only applies to invoices that have arisen in the course of business. Both parties should be businesses. So B2B but this does not mean that both parties have to be Limited Companies. A self-employed person/free-lancer/sole trader is a business.

The parties are free to agree any credit period that they wish. However, the legislation requires that this be ‘reasonable’. A clause added by the purchaser that set a very long period of credit might well be considered unreasonable. If it were considered unreasonable then the default period of thirty days applies instead.

Otherwise if there is no agreement then 30 days is the default or the norm for that business sector or has been the established convention.

But the Act recognises that many businesses have a long-standing practice of paying/being paid at the end of the month following the one in which the invoice was produced (effectively between 30 and 60 days credit). In this case the credit period can be this.

What happens if your invoices are paid late? 8% above base penalty interest applies!

Interest rates are set to a standard rate for each six month period. The periods run from the 1st January to the 30th June and from the 1st July to the 31st December for each year. The rate is set as 8% above the Bank of England’s base rate, at the start of each period.

The parties can agree a different rate of interest or an alternative remedy for late payment. In the case of interest, this is known as ‘Contractual Interest’. However, the Act requires that the agreement must provide for a ‘substantial remedy’. Purchasers are not allowed to force suppliers to accept a low or nominal rate of interest, as a way of getting round this Act. Any such clause is likely to be struck out, in which case interest can be claimed at the rate described above.
Are there any other penalties? Yes . Up to £100 per invoice paid late as follows:

  • Amount Owed Compensation
  • up to 999.99 pounds 40 pounds per invoice
  • 1000 to 9999.99 pounds 70 pounds
  • 10000 pounds and over 100 pounds

Many businesses are reluctant to use the Late Payment legislation as a routine part of their credit management procedures. There is a fear of upsetting their customers and jeopardising future business. There are, however, a number of other ways in which the law can be applied and one or more of these could still be appropriate for your business.

Consider adding wording, to all relevant correspondence to warn customers or potential customers that you may use the Late Payment Law to collect interest and compensation. You might include such wording on quotations, order acknowledgments, invoices and debt collection letters.

During your normal credit management process you might notify customers that you will make use of the legislation if you do not receive payment. You could even work out the amount (using our calculator) and warn them how much it will cost.

If you have decided to take a customer to court, you probably are no longer worried about losing future business from them. In which case you might as well add a claim for interest. It gives them an incentive to pay sooner rather than later.

You can also add a claim for interest on older payments that were paid late as the legislation is not limited simply to collecting interest on outstanding overdue debts. You may also use it to collect interest on debts that have been paid but were paid late. You can go back up to 6 years (5 in Scotland). However you cannot go back before the date when the legislation was introduced.

You might choose to wait until the customer has ceased to be a customer or you are being forced to take legal action anyway; and then send them a demand for all the interest/compensation on all of the invoices that they failed to pay on time.

Our average claims for small businesses is over £20,000 per case- work out on your former customers how much they owe you.
At £40 per invoice paid late over 6 years it soon adds up. It is only 7 invoices per week to the customer over 6 years.

If you have debt that needs collected and are unaware of this act and how to claim your statutory late payment business compensation please call us on 01872 302342 for a confidential chat.