Summary
- UK businesses can charge statutory interest on late payments under the Late Payment of Commercial Debts (Interest) Act 1998, currently set at 8% above the Bank of England base rate.
- Businesses can also claim fixed debt recovery costs ranging from £40 to £100, depending on the debt amount.
- Robust payment terms, clear invoicing practices, and prompt follow-up on overdue accounts are the most effective tools for reducing late payment risk.
- This article is a plain-English guide to late payment law for UK business owners, covering statutory rights and practical debt recovery options.
- It has been produced by LegalVision, a commercial law firm that specialises in advising clients on commercial disputes and debt recovery.
Tips for Businesses
Include clear payment terms in every contract, specifying due dates and late payment consequences. Issue invoices promptly and follow up early on overdue amounts. Keep records of all communications. Where payment remains outstanding, consider a formal letter before action prior to pursuing statutory interest or court proceedings.
On this page
- Why Is Late Payment a Problem?
- Late Payment Laws and Measures
- Statutory Interest on Late Commercial Debts
- Challenging Unfair Payment Terms and Practices
- The Fair Payment Code and Small Business Commissioner
- Reporting on Payment Practices
- Prioritising Contracts With Strong Payment Terms
- Should You Include an Interest Clause in Your Contract?
- How Can a Business Reduce Non-Payment Risk?
- Checking Customers Before You Contract
- Following Organised Invoicing and Credit Control Procedures
- Key Takeaways
- Frequently Asked Questions
Late payment occurs when a customer fails to pay an invoice by the agreed deadline, and it remains one of the most damaging financial challenges businesses face today. Left unaddressed, it can cripple cash flow, stall growth, and push otherwise viable businesses towards insolvency. This article:
- explores the problems caused by late payments;
- introduces key legal measures designed to help; and
- provides strategies businesses can use to reduce risk.
Why Is Late Payment a Problem?
Late payments can be heavily damaging for a business, but small and growing companies will often feel it the most. When payments are delayed, it may become challenging for your business to cover vital expenses such as paying your staff wages, rent, and everyday overheads.
Problems with cash flow can also make it harder for a business to:
- invest;
- plan for the future; or
- grow.
Late Payment Laws and Measures
In the UK, there are certain laws and measures to help tackle non-payment issues. Late payment continues to impose high costs on the UK economy and disproportionately disadvantages small businesses with limited bargaining power.
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Statutory Interest on Late Commercial Debts
The Late Payment of Commercial Debts (Interest) Act 1998 gives businesses a legal right to charge interest on late payments in certain circumstances. The Act applies to certain business-to-business contracts for the supply of goods or services.
Where the Act applies, a supplier can charge interest at 8% above the Bank of England base rate. The law grants this right automatically and does not require suppliers to include it expressly in the contract. The Act also allows suppliers to claim fixed compensation for late payment and, in some cases, a reasonable contribution to debt recovery costs.
These provisions seek to discourage late payment and reduce the financial burden suppliers face when chasing overdue invoices.
Challenging Unfair Payment Terms and Practices
Some payment practices may be unfair, particularly where customers impose long payment periods or restrict a supplier’s ability to charge interest.
Put simply, the law allows certain representative bodies to challenge payment terms or practices they see as seriously unfair. This means unusually long payment periods may be challenged if they are considered unfair. If a court upholds the challenge, it can prevent the customer from relying on those terms, offering protection without requiring individual suppliers to bring claims themselves.
The Fair Payment Code and Small Business Commissioner
The Fair Payment Code is a voluntary scheme that seeks to encourage businesses to adopt responsible payment practices and pay suppliers within clear timeframes.
Businesses are able to apply for Bronze, Silver or Gold status, depending on how quickly they pay invoices. Though this code does not create legal rights, it can influence behaviour through imposing reputational pressure.
The Small Business Commissioner supports small businesses that are experiencing late payment issues with larger private-sector customers.
The commissioner:
- offers advice;
- considers complaints about payment practices; and
- publishes reports and recommendations when needed.
Whilst these actions are not legally binding, such attention can urge businesses to settle disputes and improve how they pay.
Reporting on Payment Practices
Certain large companies and LLPs must report publicly on how they pay suppliers. These reports include:
- average payment times;
- standard payment terms; and
- payment policies.
Prioritising Contracts With Strong Payment Terms
A clear and well-written contract is a key method to lower the risk of being paid late, or not being paid at all. Your contract should clearly define:
- when invoices are sent by your business;
- what the payment deadlines are; and
- what happens if payments are late.
Should You Include an Interest Clause in Your Contract?
Although statutory interest under the Act is a useful legal right, it does not apply in all situations. For example, statutory interest may not be available if a contract falls outside the law’s scope or already includes a late-payment provision that provides a substantial remedy.
Adding a clear interest clause to your contract can:
- give you more certainty;
- set out an agreed right to charge interest on late invoices; and
- give you more flexibility.
Statutory interest is simple interest only, but a good contract clause can allow for compound interest, which may better reflect the real cost of late payments.
In practice, including robust contract interest clauses often helps to recieve payments on time. Reminding customers that interest is building under a contract may encourage them to pay without you needing to enforce your rights or take further action.
It may also be that your business customers negotiate to agree to a lower contractual interest rate.
However, it is important that you take legal advice on your specific circumstances and which route may be best for your business.
How Can a Business Reduce Non-Payment Risk?
Legal protections and contracts are important, but taking steps to prevent late payments is essential. Legal avenues for recovering late payments may:
- take time;
- cost money; and
- come with risk.
Businesses can use a range of practical measures to lower the risk of late or missed payments.
Checking Customers Before You Contract
Before working with a new customer, you should conduct crucial financial checks. Looking into a customer’s trading history and running credit checks can help to predict if they will pay on time.
By spotting risks early on, you may want to change payment terms to mitigate risk or just avoid risky customer relationships altogether.
Following Organised Invoicing and Credit Control Procedures
Invoices should be issued promptly and accurately upon delivery of goods or services. Delays or errors can give customers reasons to withhold payment.
You should also keep track of payment dates and have a strong credit control procedure in place. Many businesses use invoicing software to sustain consistent credit control and prevent small delays in payment from escalating.
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Key Takeaways
Late payment is a big problem for UK businesses. The law offers protection through:
- statutory interest;
- transparency rules; and
- certain types of special support.
However, businesses should still focus on contractual protection and practical steps to help prevent payment delays.
If you need help in drafting your commercial contracts, LegalVision provides ongoing legal support for all businesses through our fixed-fee legal membership. Our experienced disputes and litigation lawyers help businesses across industries manage contracts, employment law, disputes, intellectual property, and more, with unlimited access to specialist lawyers for a fixed monthly fee. To learn more about LegalVision’s legal membership, call 0808 196 8584 or visit our membership page.
Frequently Asked Questions
The key law is the Late Payment of Commercial Debts (Interest) Act 1998. It permits businesses to charge interest and compensation when other businesses or public authorities pay late, helping to discourage poor payment practices.
A commercial lawyer can help by drafting clear, strong payment terms that set out when invoices must be paid, what happens if payment is late and whether interest can be charged. Strong contracts can help you reduce ambiguity and deter customers from delaying payment.
You can claim fixed compensation and reasonable debt recovery costs under the Act.
It is a voluntary scheme awarding Bronze, Silver, or Gold status to businesses based on how quickly they pay suppliers.
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