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For any business to thrive, maintaining a consistent cash flow is imperative. However, late payments can significantly impact your business's financial stability. To avoid this, you must be aware of your legal rights as a supplier when it comes to managing overdue invoices. This article aims to highlight the rights of a supplier under the Late Payment of Commercial Debts (Interest) Act 1998

By understanding these rights, you can take appropriate action to ensure prompt payment and maintain a healthy cash flow for your business.

What is the Late Payment of Commercial Debts (Interest) Act 1998?

The Late Payment of Commercial Debts (Interest) Act 1998 (the Act) provides businesses with the statutory right to charge interest and a fixed administration fee on overdue invoices. 

The Act can only apply under the following circumstances:

  1. There’s a legally binding contract in place between the two businesses.
  2. Each party must be a business when entering into the contract (under the Act, professionals and public bodies are included in the definition of a business). The European Court of Justice has stated that statutory interest should apply to transactions undertaken within a “structured and stable commercial activity, even if that is not a party's main economic or professional activity”. Evidence such as both parties entering into the contract under professional/company names and the issuing of invoices will be evidence of a B2B relationship.
  3. The payment is for the supply of goods and/or services. Money, land, and choices in action (such as shares or business debts), as well as employment and security contracts, are excluded.
  4. The consideration part of the contract must be money, i.e. the customer pays the supplier for goods and/or services received.

Does the Late Payment of Commercial Debts (Interest) Act 1998 apply to international contracts?

Although the Act applies in England, Wales, and Northern Ireland, if an international contract deems the law of one of these States to govern the agreement, the Act will only apply if the contract has a significant connection with one of the aforementioned jurisdictions. If the contract has strong connections with the UK, the Act may apply even if the parties have expressly stated that the law applying to the agreement is that of another country.

What are The Late Payment of Commercial Debts Regulations 2013?

The Late Payment of Commercial Debts Regulations 2013 aims to protect small suppliers, particularly in industries like construction, from facing cashflow problems due to late payment of invoices. 

To achieve this goal, the Regulations introduce specific time limits for payments on B2B invoices. For instance, if the contract is silent on payment terms, the customer must pay within 30 days of receiving the invoice, obtaining the goods or services, or accepting them. 

Additionally, parties can agree on 60-day payment terms, which can be extended if it’s in writing and not deemed "grossly unfair." The term "grossly unfair" is defined as a deviation from good commercial practice and contrary to good faith and fair dealing.

How to calculate interest on late payment of commercial debts?

Firstly, you must look at the contract and establish whether the payment is late under the Late Payment of Commercial Debts Regulations 2013. If the answer is yes then the statutory rate of interest under the Act is 8% above the Bank of England’s base rate

For example, if a buyer owes you £1,000 and the Bank of England base rate is 0.5%:

  • The annual statutory interest on this would be £85 (1,000 x 0.085 = £85)
  • You then divide £85 by 365 to get the daily interest: 23p a day (85 / 365 = 0.23)
  • After 50 days this would be £11.50 (50 x 0.23 = 11.50)

Is there VAT on late payment of commercial debt fees?

The Act allows you to charge a fixed sum for the cost of recovering a late commercial payment. This is in addition to any interest.

The amount you are entitled to charge depends on the debt amount:

  • Debt up to £999.99 - £40
  • £1,000 to £9,999.99 - £70
  • £10,000 or more - £100

If the agreement was entered into on or after 16 March 2013, you also have an implied contractual right to be paid the reasonable expenses related to recovering the debt, for example, the costs of a debt collection service or Solicitors fees, less the fixed sum. 

Get legal assistance from LawBite

LawBite has a wealth of experience working with startups and small businesses to drive their commercial objectives. If you need advice concerning the late payment of invoices, you can book a free 15 minute consultation with one of our expert commercial lawyers, or call us on 020 3808 8314.


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In closing

Nothing in this article constitutes legal advice on which you should rely. The article is provided for general information purposes only. Professional legal advice should always be sought before taking any action relating to or relying on the content of this article. Our Platform Terms of Use apply to this article.

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