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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. www.elxtr.com 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. 1 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. 2 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 elXtr is a leading digital hub for legal and business solutions, powered by the award-winning lawyers at LHS Solicitors LLP. © 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. 3