Late commercial payments: charging interest and debt recovery

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Interest on late commercial payments

If you are a supplier of goods and services and another business own your unpaid invoices, you can claim statutory interest on the rate of 8% plus the Bank of England base rate and the recovery cost under the Late Payment of Commercial Debts (Interest) Act 1998 (“the Act”)

The Act applies in default when there isn’t any specific clause in the contract about late payment interest and recovery cost. You need to check the contract of sale or contract of services between the purchaser and the supplier.

Late commercial payments

Does my business qualify to claim statutory interest?

The Act applies to a contract for the supply of goods or services where the purchaser and the supplier are each acting in the course of a business. This includes limited companies, partnerships and sole traders.

What day can I start charging statutory interest automatically under the Act?

The day on which the statutory interest will start accruing depends on whether payment day was agreed:

Where there is specific date on the invoice (due date), the day after.
Where there is no specific date agreed, then 30 days after the later of the date:
- Goods or services have been provided.
- Invoice has been issued; and
- Acceptance is given.

Can I claim the cost incurred in recovering the debt?

Good news: the answer is yes.

Once you are entitled to claim statutory interest as per the above point, you are also automatically entitled to claim the reasonable recovery cost. There is a fixed cost that automatically applies to all debts is as follow:

(a) For a debt less than £1,000, the sum of £40;

(b) For a debt of £1,000 or more, but less than £10,000, the sum of £70;

(c) For a debt of £10,000 or more, the sum of £100.

If your reasonable costs in recovering the debt are not met by the fixed sum, you are also be entitled to the difference between the fixed sum and your cost. This usually covers your solicitor’s bill.

Furthermore, if legal proceedings are required, you are also entitled to recover the cost of starting proceedings.

Let’s see a practical example

You are a sole trader who has orally agreed with a limited company to review their website and put some improvements in place to attract more traffic to the website for the total amount of £5,000.

You terminated your services on 1 June 2022 and payment remains unpaid on 30 June 2022. You are entitled to start charging statutory interest from 1 July on.

How do you calculate the interest?

Firstly, you need to check the latest Bank of England bank rate published. On 1^st July 2022, the bank rate was 1.25. Therefore, the statutory interest you can automatically apply to the debt is 8% plus the Bank of England base rate (1.25), which equals 9.25.

In order to obtain the daily interest rate, you need to calculate 9.25% of £5,000 which equals £462.50 and then divide the result between 365: £1.27. The daily statutory interest that is accruing to the debt is £1.27 per day that the debt remains unpaid. You are entitled to this interest automatically.

What happens if the debtor doesn’t pay voluntarily?

If the debtor doesn’t pay voluntarily, you may need to start legal actions to recover the debt. Before starting a legal action, you should send a letter setting out your claim and allow a period to the debtor to response. If no positive response is obtained you can then start legal proceedings.

If you contract a solicitor to recover your debt, you are also entitled to claim the fixed amount plus any reasonable cost for recover the debt which usually cover your solicitor costs.

Next step

If you need assistance in recovering debt from another company, please do not hesitate to contact us for a free initial consultation about the prospects of your case.