Table of Contents
In Short
- Large businesses must report their payment practices, providing transparency on payment terms and late payments.
- Your business can claim statutory interest on late payments under the Late Payment of Commercial Debts (Interest) Act 1998, if no other remedy is specified in the contract.
- To reduce the risk of non-payment, ensure clear payment terms, conduct customer due diligence, and use contractual protections such as interest clauses.
Tips for Businesses
To reduce the risk of late payments, ensure your contracts include clear payment terms and deadlines. Carry out due diligence on customers, asking for deposits on large projects and offering early payment discounts. Keep records of all communication and consider adding an interest clause to encourage timely payments.
Late payments can seriously affect your small business and are a key risk your business should take steps to mitigate against. The law provides certain helpful protections for businesses to help protect their cash flow and reduce financial risk. For example, legal rules require certain large businesses to report on their payment practices and legal rights, allowing a business to charge interest if a customer pays late. This article introduces laws on reporting payment practices and statutory interest and explores key practical and legal steps your small business can take to help reduce non-payment risks.
What are the Payment Reporting Obligations for Large Businesses?
If your business supplies goods or services to very large companies, you may worry about whether they will pay you on time.
The law requires certain companies formed under the Companies Act 2006 (or earlier UK legislation) and LLPs registered under the Limited Liability Partnerships Act 2000 to report on how they pay suppliers. A business must report if, on its last two balance sheet dates, it exceeded at least two of the following thresholds: £36 million in annual turnover, £18 million in balance sheet total (the total value of its assets), or 250 employees.
Large businesses subject to these rules must publish reports using the government’s online portal at least twice per financial year, in relation to ‘qualifying contracts’. Simply put, reports on qualifying contracts must include narrative descriptions of standard payment terms, the time to pay invoices, processes for resolving payment disputes, and information on percentages of late payments made.
These rules aim to increase transparency and can help smaller suppliers assess payment risks. Late payment can be a serious issue, disrupting cash flow and rising costs. By requiring large businesses to publish data on their payment behaviour, this law can help your business identify potential red flags before you agree to supply.
Use this checklist to ensure your supplier contracts contain all necessary terms.
Your business can use this helpful information to search for information from potential customers and assess any risks. Companies can review the reporting guidelines to understand the full scope of the reporting rules and what they cover.
When Can Your Business Claim Statutory Interest on Late Payments?
If a customer pays late and your contract does not include an interest clause, the law may still give you the right to charge interest. The Late Payment of Commercial Debts (Interest) Act 1998 gives a business the right to charge statutory interest when it supplies goods or services to another company.
This right applies if your contract does not include another clause that offers a substantial remedy for late payment. If the act applies, your business can charge 8% interest above the Bank of England base rate. You can also charge a fixed sum for the cost of recovering the late payment. The act does not apply to consumer contracts or certain excluded agreements.
Although statutory interest can help your business recover costs and encourage faster payment, you should check whether the rules apply to your contract and seek legal advice if unsure whether you can claim it.
While statutory interest may help in some situations, it does not apply to every contract. If the act does not apply, your business cannot rely on it to charge interest. Your company should consider including an interest clause in its contracts to give you more certainty.
Continue reading this article below the formHow Can Your Business Reduce the Risk of Non-Payment?
Despite these legal protections, non-payment remains a critical risk for small business suppliers. Cash flow is vital for businesses to keep paying their costs and trading.
Not all your business customers will need to report on their payment practices, so it is crucial to protect yourself further.
Steps
There are various proactive steps your business can take to manage payment risk. Taking steps such as the following may help protect your cash flow and reduce the chance of unpaid invoices:
- check a customer’s financial background before agreeing to deliver work to them, e.g., using credit reports, online searches, and Companies House filings as part of due diligence before you start any work;
- Watch for warning signs, such as late deposits or poor communication on payment issues;
- include clear payment terms in your contracts, including deadlines and procedures for resolving non-payment disputes;
- ask for deposits or staged payments to manage cash flow on large projects;
- offer early payment discounts to encourage prompt settlement;
- include contractual protections that allow your business to suspend work or cancel the contract if the customer misses payments, as well as interest rights;
- send invoices promptly and keep track of payment due dates;
- send reminders before and after the due date to chase overdue payments;
- keep a record of all communications with the customer around payment, which could serve as strong evidence in the event of a dispute; and
- be flexible and try to negotiate a payment plan, e.g. instalments, if the customer struggles to pay on time. This could help keep the customer and avoid a more costly non-payment dispute.
Legal Assistance
Your business can speak to a lawyer for legal advice on the risks you face in your particular business and industry and how best to contractually protect yourself. A commercial lawyer can help you review and draft contracts, strengthen payment terms, and protect yourself.
Key Takeaways
Getting paid on time is essential to a small business’s financial health. UK law protects you by requiring certain large companies to report on their payment practices and giving you the right to charge interest on late payments. However, your business should take further proactive steps to reduce non-payment risk. This includes implementing robust contracts with clear terms, keeping records, and conducting due diligence to assess potential customers’ non-payment risk.
If you need legal advice on protecting your business through firm contracts, our experienced contract lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0808 196 8584 or visit our membership page.
Frequently Asked Questions
Payment reporting is a legal requirement for certain large UK companies and LLPs. Those in scope must publish key information about their payment terms. They must submit reports at least twice yearly and publish them through the government’s portal. You can check the government portal before working with a large business with a payment reporting obligation.
Your business can take various steps. For instance, you can use written contracts with clear payment terms, check your customer’s financial background, request deposits, include interest clauses, and rely on your legal rights where needed.
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