On 1 November 1998 the UK Government introduced The Late Payment of Commercial Debts (Interest) Act 1998 (LPCDI). This allows businesses in the UK to charge interest (and compensation costs) where a customer is late in paying bills.
Although the legislation came into force over 10 years ago, many businesses will be unaware of it. The Government introduced the LPCDI because late payment of invoices has been a long-standing problem in the UK and many businesses, especially smaller companies, have experienced problems when their customers delay payment for long periods. A particular complaint was that the slow payers have often been much larger companies, deliberately delaying payment to smaller businesses.
Now under LPCDI, all commercial traders can claim interest from each other. Where the parties agree on a rate of interest for late payment (contractual interest) the Act will not apply. When default occurs and the rate/period agreed is not considered to be a “substantial remedy” the Court will give the aggrieved party more.
The late payment interest is calculated by taking the official dealing rate of the Bank of England at the start of a six month period. This will be made a fixed “reference rate” for the subsequent six months. In other words the base rate at 31 December will apply from 1 January to 30 June following, and the rate at 30 June will apply from 1 July to 31 December following.
The interest on late payment is Bank base rate plus 8%. At present (2011) this is equivalent to 8.50%. Depending on the age of the debt and the movement in base rate, the rate may vary.
A claim for “reasonable” compensation can also be obtained from the debtor for collection costs (in addition to Court fees if you sue and win).You are entitled (but not obliged) to claim compensation from the debtor for debt recovery costs subject to this scale:
Up to £999.99 – £40.00
£1,000 – £9,999.99 – £70.00
£10,000 or more – £100.00
Many businesses are reluctant to use the LPCDI and demand interest on overdue invoices for fear of upsetting their customers and jeopardising future business. But there are a number of ways in which the legislation can be applied, and one or more of these could be appropriate for your business as follows:
1. As a deterrent
You could consider adding wording to all relevant correspondence to warn customers or potential customers that you may use the Late Payment law to collect interest and compensation. You might include such wording on quotations, order acknowledgements, invoices and reminder letters.
2. As a threat
As part of your internal credit control procedures, you might notify your customers that you will make use of the legislation if you do not receive payment. You could even calculate the amount of interest and warn them how much it will cost.
3. As part of a claim
If you decide to pursue your customer through the Courts, you are probably no longer concerned about your relationship with them and losing their business. You might as well add a claim for the maximum amount of interest and compensation costs. This will give them an incentive to pay sooner rather than later.
4. Retrospectively
The LPCDI is not limited to simply collecting interest on outstanding current invoices. You can also use it to claim interest on invoices that have been paid, but were paid late. You can go back up to six years. You may choose to wait until the customer has ceased to be a customer or you are being forced to take legal action anyway and then send them a demand for all the interest / compensation on all of the invoices that they failed to pay on time.