The Late Payment of Commercial Debts (Interest) Act was introduced in 1998 with a view to encouraging businesses to pay their suppliers on time. As a deterrent to late payment the Act (as amended in 2002) introduced an implied term in all business to business contracts requiring the late payer to pay statutory interest and compensation. The interest was designed to compensate the business for the missing cashflow and the compensation for the additional costs associated with credit control and debt recovery.

Statutory interest is calculated at a rate of 8% above the Bank of England base rate with a reference rate taken from the Bank of England on 31st December and 30th June each year. The current rate is 8.5% which is the lowest since the introduction of the Act as the rate has reached as high as 13.5%. Statutory compensation is calculated at a rate of £40, £70 or £100 per invoice for invoices up to £1000, more than £1000 but less than £10,000 and invoices over £10,000 respectively.

Businesses are often reluctant to use the Act where there is an ongoing relationship between the business and its customer for fear of damaging the relationship. Where the business relationship has come to an end, however, the Act can be used to claw back costs associated by the late payment. When bringing claims for unpaid invoices businesses often limit this to the invoices in question but a claim can, in fact, be bought for statutory interest and compensation due for the last 6 years. Very often this can amount to a substantial sum. For example if the monthly turnover for the customer was £2500 and the customer historically paid invoices 30 days late then, applying an average interest rate of 12% the business could claim £1175 statutory interest for invoices paid late over the last 6 years. Let's assume that the £2500 monthly turnover is made up of an average of 5 separate invoices a month of less than £1000 each. The business would, in addition, be able to claim £14,400 statutory compensation making a total, post termination claim of £15575.

It is not only trading businesses that can benefit from claims under the Act. Late payment is often a contributory factor in the failure of businesses leading to either corporate or individual insolvency. A liquidator or trustee in bankruptcy can, therefore, use the Act to collect additional funds so as to maximise the return to creditors in the insolvency. In nil asset cases the Act can in fact provide means of collecting in funds following a late payment audit of the last 6 years of the businesses’ sales ledger for the benefit of creditors.

Debenhams Ottaway have pioneered the use of the Act as a method of making debt recovery self funding and even profitable - click here for more information . For further advice on the application of the the Act or for assistance in recovering late payment charges please contact Luke Tucker Harrison on 01727 837161 or via email to lth@dolegal.co.uk.

If you would like assistance in preparing a late payment claim by way of an audit of activity on your sales ledger over the last 6 years then please contact Peter Rogol of Goodman Jones Chartered Accountants via telephone to 0207 874 8809 or via email to peter.rogol@goodmanjones.com.