Good cash flow management is essential to any business. Used wisely, Late Payment legislation can help you with cash flow management.
Late Payment legislation was introduced in 1998 to encourage a culture of prompt payment. Evidence suggests that late payments are a major continuing problem. A survey by the Federation of Small Business in March 2015 found that 43 per cent of firms have waited over 90 days beyond the agreed payment date before they got the money they were owed.
New rules were brought in during 2013, but the level of awareness about how to use the rules still appears to be low. Businesses may fear upsetting their customers and jeopardising future business, but used wisely the rules can help your business.
What can you claim for?
If you are in business (no matter what your legal structure) and have supplied goods or services for business purposes (i.e. B2B and not to an individual consumer) you can claim interest on late payments at 8% plus the Bank of England current base rate (0.5%), so 8.5% in total.
You can claim interest for the period starting from the date on which the invoice should have been paid, and ending on the date it was actually paid.
For example, if your business were owed £1,000:
Annual interest would be £1000 x 8.5% = £85
Divide that by 365 days, daily rate = £0.23
So a payment which is 60 days after the due date, 60 x £0.23 = £13.80
You can still claim the interest, even if the payment has since been made outside the permitted period. You have up to 6 years to make your claim (So you could go back 6 years from now and claim on payments that were made late – something to think about perhaps if you have no ongoing relationship with the customer).
When do payments become overdue?
Public authorities must always pay within 30 days of either (a) the date of receipt of invoice or (b) the date of delivery of goods or service (if later). ‘Public authority’ for these purposes includes schools, academy trusts, NHS trusts, housing associations, clinical commissioning groups and council-owned companies. Public authorities are not allowed to set a longer period. They may specify a process for verification of invoices, but this must be made explicit in tender documents or contracts and cannot exceed 30 days, unless expressly agreed. New public procurement legislation has recently included a legal requirement for all new public contracts to include 30-day payment terms for all the sub-contracts in the supply chain.
Commercial customers – if the contract doesn’t specify a period, a default period of 30 days from delivery or receipt of invoice applies (and interest runs thereafter).However, if the contract does allow a longer time for payment, 60 days is the maximum and statutory interest starts to run from 60 days after delivery, unless the customer can argue that an extended period is reasonable and fair in all the circumstances and in accordance with normal commercial practice (a high hurdle to overcome in practice).
If the contract says payment will be by instalments, you can claim statutory interest on each instalment that is paid late. If a payment is made upfront before delivery, the interest will run as from the date on which all the goods or service have been delivered.
You can also claim compensation for recovery costs.
As well as the interest, the law allows you to claim a fixed sum for each invoice paid late, depending on the amount.
Below £1,000 £ 40 per invoice
£1,000 – £9,999.99 £ 70 per invoice
Over £10,000 £100 per invoice
If you take the debtor to court, you may also recover additional costs of recovery above these sums.
How do you claim?
You could send a new invoice, but in fact all you are required to do is write to the customer and tell them what is due:
- Amount of interest, compensation and costs
- What it relates to – state the invoice number(s)
- How they can make payment
You don’t need to send a prior warning letter. You charge interest on the gross amount of the debt (including any element of VAT, but you do not pay VAT on the interest).
Are there any exclusions?
- If the amounts are disputed, the customer is still expected to pay any amount that is undisputed, while the issues are resolved.
- If there is real doubt about the amount due, you may not be entitled to claim until the position has been clarified.
- Consumer Credit Agreements and mortgages are not covered.
How can you take steps to protect your position?
- Check your terms and conditions – what do they say about due date for payment?
- What do they say about interest on late payment – don’t set a lower interest rate than the 8.5% you are entitled to by law.
- Include a clause entitling you to charge ‘indemnity costs’ for recovering any sums not paid by the due date. This will increase your chances of getting more of your costs back if the dispute goes to court.
- Circulate updated terms of business to all those affected.
- Watch out for purchase orders which seek to impose the customer’s terms and conditions over yours – e.g. if they attempt to deprive you of a remedy by setting a low rate of interest – they may be struck down as void.
- Tell your customers on your quotations, orders and reminder letters that it is your policy to make full use of the Late Payments legislation: “Please note we will exercise our statutory right to claim interest and compensation for debt recovery costs if we are not paid according to agreed credit terms.”
- Remember the best way to secure timely payment is to agree clear terms in advance of the transaction and to invoice promptly and accurately.
- Send your invoices electronically with confirmation of receipt or post them with a proof of posting certificate (free) or recorded delivery, so that you can prove the date of despatch.
Late payments continue to be a hot political issue. The amount tied up in late payments runs into billions and acts as a drag on the economy. Further legislation is expected which will oblige public authorities and larger businesses to publish regular statistics on their payment records, thereby allowing persistent late payers to be named and shamed.