Help with interest calculation please

My client is a very large professional institute that holds a Royal Warrant.

Original invoice dated 18 Oct 2010 = £626.98

Payment due date = 18 Nov 2010

Contract terms:

“For the Services we provide to you, you will pay us the Price set out in the Contract Document for the Contract, the job or the Number of Agreed Days Work as the case may be, excluding VAT. Payment will be in pounds Sterling plus the appropriate rate of VAT and due and payable within 30 days of receipt of the invoice. Interest on late payment is payable weekly at 8% above base lending rate of the Bank of England from time to time. A compensation charge for debt recovery costs is payable if payment is late.”

Payment made after 80 days on 6 Jan 2011 (i.e. 50 days late or 7 weeks and 1 day late).

I think I am entitled to charge:

Penalty charge £40.00
Weekly interest charge at £53.2933 x 7 weeks = £373.05

Can you please confirm that my sums are correct and that I am entitled to charge a total for compensation, penalty and interest of £413.05?

I have never raised such an invoice before and assume it will be VAT exempt (or charged at 0%). Is that correct?

Thanks in advance for your help.

Stephen

Stephen,

The £40 fee is correct, but your interest seems very high. You are legally entitled to 8% above base rate, (currently 0.5%) per annum, not 8% per week. Use the Interest Calculator page on the Pay On Time website to calculate the exact interest.

payontime.co.uk/late-payment-statutory-interest-calculator

David Andrews wrote:

Stephen,

The £40 fee is correct, but your interest seems very high. You are legally entitled to 8% above base rate, (currently 0.5%) per annum, not 8% per week. Use the Interest Calculator page on the Pay On Time website to calculate the exact interest.

payontime.co.uk/late-payment-statutory-interest-calculator

Thanks for that David.

The client signed the contract that stipulated WEEKLY interest (I've had problems with this client before - once bitten and all that).

As it's weekly interest, are my figures correct?

Thanks in advance for your help.

Stephen

Hi,

Couple of points:

1) The interest figure you quote is actually the annual interest figure. Based on your info the interest figure should be
53.29 x 7/52 = £7.17

2)Regarding contract terms your contract terms seem to supercede the statutory entitlements imposed by the Late Payment Legislation.

3) Your terms include mention of compensation but does not quantify the compensation basis or the compensation amount.

That being the case what do you do if your client pays the interest and disputes the compensation amount.

Put it down to experience and review the wording of your payment terms.

Thanks for that.

Good tip about the wording for the compensation.

Let's say I charge them interest only.

Given that the client has agreed to a contract term of weekly interest are my figures correct?

Put another way, my understanding is that they've agreed to pay 8.5% interest on the invoice amount every week the payment was overdue.

Is that correct?

Stephen

Hi Stephen.

I don't believe that that is a correct understanding of the contract, no.

As your reference is the Bank rate + 8%, and as the Bank rate is per annum, I think the "weekly" interest would be interpreted as interest being calculated weekly at the weekly equivalent of 8% p.a.

An example of what I mean would be a mobile phone company saying they'll charge you for your phone use weekly at the Orange Dolphin contract price + £5. Now the Orange Dolphin contract price is £25 per month - you wouldn't expect to pay £25 + £5 = £30 per week as a result of the wording, would you?

The advantages of you putting in WEEKLY are:
a) You can charge even if the client is only one or two weeks late
b) You can (if you're feeling brave) apply compound interest weekly - in other words, you can charge interest on the unpaid interest too. Be ready to use a spreadsheet though, and expect the company to contest it.

Your most likely outcome, if they agree to pay interest at all (see many posts here about companies that refuse) is that they'll pay what Edward suggested - 7/52 × £53.29 = £7.17

Kind regards,

Al