Common misconceptions about the late payment legislation
Do I charge compensation each time I chase the outstanding debt?
No, compensation is only charged once per outstanding debt, not each time it is chased.
Can I charge individuals statutory late payment interest?
No, the legislation only applies to business to business transactions.
If a debt was incurred prior to the 7th August 2002 can I claim compensation?
No, the compensation element only applies to contracts dated on or after 7th August 2002.
If a business is consistently paying late for the service we provide them, can we start to charge interest even though we did not agree that we would at the start of doing business with them?
It is not necessary for you to have notified your customer at the start of your relationship with them of your intention to charge late payment interest and you do not have to refer to it in your contract. However, it is advisable [but not obligatory] that you amend your terms and conditions and make reference to your statutory right to interest in future contracts, as this may act as a deterrent against late payment.
Does the right to compensation mean I can pass on the cost of my debt collector to my late paying customer?
No, under the terms of the late payment legislation, businesses can claim interest and compensation for debt recovery costs, this does not mean you can pass on all the costs of the third party collector. It works on a sliding scale depending on the size of the debt.
In March 2013, the revised legislation entitles creditors to claim further recovery costs on top of the interest and compensation. For example, the cost of using a solicitor or debt recovery business can be added to the claim.
|Size of the unpaid debt||Amount to be paid to the creditor|
|Up to £999.99||£40|
|£1,000 - £9,999.99||£70|
|£10,000 and above||£100|
Do I add VAT when charging interest?
No. Businesses using the late payment legislation should calculate the amount of interest using the debt + VAT but do not add VAT onto the interest itself.
How do I know what rate to charge?
All businesses can charge interest at a rate of 8% above the late payment reference rate.
The Bank of England base rate on 31 December, is the "reference rate" for debts becoming overdue between 1st January to 30th June each year.
The Bank of England base rate on 30 June, is the "reference rate" for debts becoming overdue between 1st July to 31st December each year.
How do I deal with collecting late payment interest when the invoice has been partially settled?
In legal terms, interest continues at the 'daily rate' on the whole of the outstanding debt. Charging interest is designed to be a spur to payment. You should use the interest charge to encourage the debtor to pay on time i.e. explain to the debtor that they can avoid these extra costs if he/she pays according to terms.