Charging interest on late payments

The right of any business to claim interest on unpaid bills from customers and clients is enshrined in both UK and European law.

The The Late Payment of Commercial Debts (Interest) Act 1998 and regulations made in 2000 and 2002, mean that all businesses have a statutory right to claim interest from their clients or customers who don't pay their bills on time.

But 

• How is interest calculated? 
• When is a payment deemed to be late? 
• And when should interest be charged?     

The calculator  here.in conjunction with this guide, can work out how much you should charge and when.

When is a payment late?

When you enter into a contract with a client or customer, one of its key clauses will be the payment terms. Typically, the contract will specify after how many days from the date of invoicing the payment should be made. In some rare cases, it will state how many days after performing the service or getting a signed timesheet the client must pay.

The law says that, in the absence of agreed terms between the supplier and customer the payment terms are assumed to be 30 days from invoice.

This means that if you send an invoice dated the first of the month, the payment should be expected to arrive by the 30th day of that month. Some clients will try and flannel you by saying it's '30 working days', but according to the law there is no doubt – 30 calendar days it is.

What interest can be charged?

Interest can be charged on an overdue payment from the day after the last day that it should have been paid. So, using the example above, if the invoice was dated the first of the month and the terms are 30 days, then you can start charging interest from the 31st day, which could be the 31st of that month or the first of the next.

From the time that payment on the invoice becomes due, the interest will start to accrue on the principal debt owed to you by your customer  based on a formula of the 'reference rate' of the Bank of England plus 8%.

The interest calculated is simple - not compound - interest according to the following formula:

Debt x interest rate x (the number of days late/365) = interest

Interest is charged on the gross amount of the debt including VAT, but VAT is not charged on the interest.

If you'd like an example, though, here you are:

Say you are owed £851.06 plus VAT of £148.94 for goods, which makes a nice round sum of £1,000. 


You invoiced your customer this sum on 1st May on 30 day terms, meaning the customer must pay £1,000 by or on 30th May. Failure to do so means you can start charging interest from 31st May.

Let's say the customer has not paid by 29th June, which is 30 days after the debt should have been paid. You can then charge 30 days interest.

If the 'reference rate' of the Bank of England is 0.5%, then the total interest is 8.5% (reference rate plus 8%). To calculate the interest on the late payment:

£1,000 x 8.5% = £85 (the interest to be paid in a year)

£85/ 365 = 23.3p (the daily interest)

23.3p x 30 days = £6.99 (the interest owed to date on 30 days)

For the average business, owed several invoices over three months old or more, this sum starts to add up. For your customer it adds up too, hopefully providing them with the incentive to pay the money they owe you without further delay.

Make sure everything is in writing

To be sure that the legislation works completely in you favour and there is no chance of the customer getting off on a technicality, ensure that your paperwork is squeaky clean. This means:

• Agree payment terms in writing
• Include interest charges, and the intention to claim them, in the payment terms
• Ensure timesheets, delivery notes etc are correctly signed off, to avoid disputes
• Ensure there is no reason for customers o dispute invoices
• Make sure that your terms clearly state the time period in which the customer must raise a dispute (otherwise they could buy themselves time by waiting until the invoice is due for payment before disputing it)
• Inform the customer in writing when the debt is due that action will be taken and interest charged.

Case law now works in your favour when invoices remain unpaid. Customers can no longer hide behind minor inconsistencies or errors in invoices and refuse to pay their suppliers – the courts will give them short shrift.

But this does not mean you should be anything less than totally efficient and professional in your paperwork and debtor management, particularly as the next stage of chasing late payments is to start debt recovery proceedings.

Be reasonable...

Although the law allows you to start charging interest immediately, remember that genuine errors and oversights do occur, and that accounts departments are made up of fallible people.

So rather than being heavy-handed as soon as payment is due, it is always best to start the process with a friendly telephone call to the client or agent, followed up with a polite and friendly letter.

Further advice on using the Late Payment of Commercial Debts (Interest) Act 1998 is available from Business Link and The Better Payment Practice Campaign.