Download QuickGuide: When and how to add late payment interest

QuickGuide: When and how to add late payment
interest
You’re entitled to be paid for what you’ve done
If your payment terms are fair and reasonable, if you’ve held up your side of the bargain, then you’re in the right. You’re
not there to bankroll or prop up someone else – especially if this comes at the expense of your own cash-flow position.
The key to successfully chasing money you are owed is: don’t delay!
Carrot or stick?
The carrot is generally the best approach in business –
at least when you’re starting to pursue a complaint against
a trading partner or customer – especially if that partner
is someone whose custom you don’t particularly want to
lose. The stick (or threatening) approach should always be
reserved for consideration when all else fails.
So if your reminder letters, emails and/or phone calls bring
no satisfactory payment result, the next step is to send
a letter giving a reasonable deadline for a response and
politely indicating that if payment is not made promptly,
you’ll take formal action to enforce the payment owed to
you. This is often called ‘a letter before action’ – meaning
that it’s the last letter before formal debt recovery or
payment enforcement action is taken by you. It should be
polite, unemotional and clearly set out the steps that the
person or business owing you the debt must now take in
order to prevent you from taking formal enforcement action
that usually has a cost attached.
The other incentive that you may be able to use to persuade
a debtor to settle up promptly in these circumstances is your
ability to charge interest on sums due to you that are not
paid on time – usually called a ‘late payment interest’ charge.
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The law that allows you to charge late payment interest
does not apply when you are selling to members of the
public. It is only available where you are trading with other
businesses who then fail to pay you on the payment date to
which you’ve both agreed in your sales terms or within
a reasonable time.
It’s not an automatic right
Dispelling the myths about late payment interest:
� you have to claim late payment interest – it’s compulsory
� you have to make clear in your contract terms that you’ve
got the right to charge late payment interest.
Neither of the above myths is true. It’s not compulsory to
include the right in your contract terms and even if you have
it there, you’re not obliged to enforce it if someone pays
you late.
What if you do include it?
However, if you do negotiate to include late payment
interest charges in your contract terms, those terms must
provide for a substantial remedy if the customer does then
pay late.
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The easiest way to do this is to include a clause in your
agreement that allows you to recover interest and
compensation under the UK late payment legislation.
The clause can say something as simple as: We’ll exercise
our statutory right to claim interest, compensation and
reasonable debt recovery costs under the late payment
legislation, if we are not paid according to our agreement.
How is it calculated?
1. A debt of £550 is owed to Joe the florist
for flowers delivered for an event hosted by
another business, The Local Estate Agents
Company. The debt has been outstanding for
30 days.
How does it work?
If you’re going to enforce this right, you need to:
1. notify your debtor by letter of the fact that they owe you
money
2. ensure the letter sets out the amount owed and how you
calculated the amount (there is an example below)
3. inform the debtor how they should pay, for example:
the address, the date they need to pay by, to whom the
payment should be addressed, the method of payment
that you’ll accept and your bank details.
What is the statutory rate of interest?
2. The first step is to gross up the debt owed
so that it includes VAT:
£550 plus Vat (20%) = £660
3. Next, Joe needs to calculate the late
payment interest owed. Since the debt is
30 days late then the calculation will look
like this:
a. Joe needs to start by calculating the
annual rate:
The rate of interest is 8% plus the Bank of England base
rate which will fluctuate according to Bank of England
policy.
When is payment late?
Usually the parties will agree a specific period within which
payment should be made, and this can be agreed verbally or
in writing. If the purchaser does not pay within the agreed
period, the payment is deemed late.
If you have not agreed a specific credit period within which
your trading partner must pay you for your products or
services, you should use 30 days as a default period for
calculating the outstanding interest on the main debt.
The 30 days default period usually starts when the goods or
services are delivered or alternatively, when the purchaser
becomes aware of the amount of the debt (i.e. receives your
invoice).
Payment is late when the agreed payment period has lapsed
or when the default period has expired.
You have a maximum period of 6 years to claim the late
payment interest and compensation from the trading
partner who owes you the money.
The legislation does not provide a duty to mitigate the costs
for the debtor. If you do decide not to charge this interest
immediately, it will not affect your right to claim late
payment interest later on, as long as it’s within the 6 year
limitation period.
QuickGuide: When and how to add late payment interest
© LHS Solicitors LLP
£660 x 8.25% = £54.45 (annual rate of
interest (8%) + Bank of England rate
(e.g. 0.25%))
b. Then Joe needs to calculate the daily
rate:
£54.45 / 365 = 15 pence (daily rate)
c. Then finally, Joe can calculate the
interest owed to him over the 30 day
period:
15 p x 30 days = £4.61 (interest owed
to date)
The interest will continue to run until you
have been paid.
Additional compensation – yes, you’re entitled
to this too
A further benefit of this piece of legislation is that you
are also entitled (though again, not obliged) to add a
compensation amount and your reasonable debt collection
costs on top of the interest amount that a late payer owes
you. The objective of the legislation is to compensate
businesses for late payments and to deter late payment.
So where you pay a debt collector to assist you in the
recovery of a debt owed to you, you also claim for their
reasonable costs in chasing the debt down for you.
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How to ensure you’re entitled to this compensation?
How we help
You do not have to do anything to be entitled to claim this
compensation, as the late payment legislation provides this
remedy. It is your decision if you want to charge this or not
and if you waive your entitlement to charge this interest and
compensation on one invoice by agreement, it won’t affect
your right to claim it for future invoices.
But if you do have contractual terms that provides for a
substantial remedy for late payments, then you usually can’t
use the late payment legislation as well.
Need friendly advice right now? No problem.
We’ll take care of it. Contact us on 0345 351 0073
or [email protected]
From now on, your future could be in the expert hands
of our dedicated team and specialist counsel. We’re
ready to help.
How much compensation are you entitled to?
The amount of statutory compensation to which you’re
entitled depends on the amount of the debt owed to you.
Invoice amount
Compensation amount
For invoices up to a value of
£999
£40
For invoices between
£1,000 - £9,999
£70
For invoices over £10,000
£100
QuickGuide: When and how to add late payment interest
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© LHS Solicitors LLP. LHS Solicitors LLP is authorised and regulated by the Solicitors’ Regulation Authority. All information contained in this
document is for information purposes only and not intended to be used as legal advice.
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