Often when businesses have people who owe them money, they may not be aware of their right under the law to charge interest when such debts are paid late. As a result they can lose out on additional monies which they would otherwise be entitled to.
This statutory entitlement comes from the Late Payment of Commercial Debts (Interest) Act 1998 and it allows you to claim 8% per annum above the base rate as set by the Bank of England.
Aside from benefiting a business by virtue of the extra monies such an entitlement may bring, the threat of claiming interest for late payments can also be a useful tool to encourage early payment by a customer/client. Many businesses include this information on their invoices or in their contracts as it is best to make clear that they will seek to exercise this right should a payment not be made on time.
When is a payment late?
A payment is considered late when the period agreed between the creditor and the debtor comes to an end or, if there is no such period, the ‘default period’ runs out.
Usually a payment period will be agreed between the parties either in writing or orally. There is no difference whether it is oral or written, as long as there is evidence as to what was agreed.
Alternatively, if no agreement was stated, it could seen to be agreed as a result of a standard practice arising out of the way the business and that customer/client have dealt with each other over a reasonable period of time. This can include consistent payments at the end of each month, or payment on delivery etc.
If there is no payment period agreed between the parties or arising out of their actions, then a ‘default period’ of 30 days starts on the later of either the business delivering up the goods or service to the debtor or on providing the debtor with notice of the sum owed. Once that default period runs out, the payment then becomes late and interest can be charged.
Where parties agree to payments by instalments, then the creditor is entitled to claim interest on each instalment separately if and when they are paid late.
Where parties have agreed that payment is to be made upfront, then interest can only be charged from the date when the goods are delivered or the service is performed.
Process of Claiming Interest
Once a payment is late the business can write to the debtor setting out the money owed and the fact that they are entitled to seek interest against them. One should set out the interest owed up to the date of the letter and the ongoing daily rate. As a result of being confronted with this, many debtors will make sure to pay sooner rather than later, in an effort to reduce the amount of interest they will have to pay.
Should they still fail to make payment, the business may wish to take the matter to Court by issuing proceedings against them. In those circumstances the creditor would include the interest accrued and still seek interest from the date of issue until the date of payment at the specified daily rate.
Late Payment of Commercial Debt Regulations
In addition to the statutory rate of interest, a business is also entitled to charge the debtor a fixed sum as compensation for the costs of having to collect the debt. This is set out in the Late Payment of Commercial Debts Regulations 2002 and is based on the amount owed. Currently it stands at:
- £40 for a debt less than £1,000.
- £70 for a debt of between £1,000 – £10,000
- £100 for a debt of more than £10,000.
Other forms of Interest
An alternative to claiming statutory interest is for the parties to have a contractual interest term in their contract. This allows the creditor to claim a specific amount of interest if the debtor is late in paying. Whilst this can be useful, one should be wary of the amount of interest set in a contract, as if it is too high, then the customer/client could claim that it was an unfair term of the contract and is therefore invalid.
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