From 7 August 2002, the Late Payment of Commercial
Debts (Interest) Act 1998 was amended and supplemented to incorporate
the features of European Directive 2000/35/EC on
combating late payment in commercial transactions.
Under the revised legislation, all business owners and managers can
claim reasonable debt recovery costs and can benefit from the simplification
of the calculation of Statutory Interest. Additionally small and medium
sized enterprises can ask a representative body to challenge grossly
unfair contract terms used by their customers which do not provide a
substantial remedy for late payment of commercial debts.
The compensation entitlement varies in accordance with the size of the debt:
| Size of unpaid debt |
Sum to be paid to the creditor |
| Up to £999.99 |
£40.00 |
| £1,000.00 to £9,999.99 |
£70.00 |
| £10,000.00 or more |
£100.00 |
The revisions to the legislation also include the
simplification of the calculation of statutory interest. A reference
rate is now used to determine the late payment interest rate, which is
fixed for a six-month period. The late payment interest rate that applies
in the UK is the reference rate + eight per cent. The new fixed-reference
periods are:
| |
The six month period |
| The Bank of England base rate on 31st December will be the reference rate for: |
1st January to 30th June |
| The Bank of England base rate on 30th June will be the reference rate for: |
1st July to 31st December |
| Period |
Reference Rate |
Interest Rate (Reference rate plus 8%) |
| 1st January – 30th June 2008 |
5.5% |
13.5% |
| 1st July - 31st December 2007 |
5.5% |
13.5% |
| 1st January – 30th June 2007 |
5% |
13% |
| 1st July - 31st December 2006 |
4.50% |
12.50% |
| 1st January – 30th June 2006 |
4.50% |
12.50% |
| 1st July - 31st December 2005 |
4.75% |
12.75% |
| 1st January – 30th June 2005 |
4.75% |
12.75% |
| 1st July - 31st December 2004 |
4.50% |
12.50% |
| 1st January – 30th June 2004 |
3.75% |
11.75% |
| 1st July - 31st December 2003 |
3.75% |
11.75% |
| 1st January – 30th June 2003 |
4% |
12% |
| 7th August – 31st December 2002 |
4% |
12% |
The Better Payment Practice Group have compiled a list of common
misconceptions about the late payment legislation.
The following User’s Guide explains how the late payment legislation
in England and Wales works for contracts made on or after 7th August
2002. To obtain a copy telephone 0870 150 2500 and quote reference URN
02/883 or click below.
Click here for 'A User's Guide to the amended
late payment legislation effective from 7 August 2002'
Common misconceptions about the late payment legislation:
Do I charge compensation each time I chase the outstanding debt?
No, compensation is only charged once per outstanding debt, not each time it
is chased.
Can I charge individuals statutory late payment interest?
No, the legislation only applies to business to business transactions.
If a debt was incurred prior to the 7th August 2002 can I claim
compensation?
No, the compensation element only applies to contracts dated on or after 7th
August 2002.
If a business is consistently paying late for the service we
provide them, can we start to charge interest even though we did not
agree that we would at the start of doing business with them?
It is not necessary for you to have notified your customer at the start of your
relationship with them of your intention to charge late payment interest and
you do not have to refer to it in your contract. However, it is advisable [but
not obligatory] that you amend your terms and conditions and make reference
to your statutory right to interest in future contracts, as this may act as
a deterrent against late payment.
Does the right to compensation mean I can pass on the cost of
my debt collector to my late paying customer?
No, under the terms of the late payment legislation, businesses can claim interest
and compensation for debt recovery costs, this does not mean you can pass on
all the costs of the third party collector. It works on a sliding scale depending
on the size of the debt.
| Size of the unpaid debt |
Amount to be paid to the creditor |
| Up to £999.99 |
£40 |
| £1,000 - £9,999.99 |
£70 |
| £10,000 and above |
£100 |
Do I add VAT when charging interest?
No. Businesses using the late payment legislation should calculate the amount
of interest using the debt + VAT but do not add VAT onto the interest itself.
How do I know what rate to charge?
If the contract with the debtor predates 7th August 2002, then businesses that
are eligible to charge interest can do so at a rate of 8% above the Bank of
England base rate that was in place on the day the debt became overdue. For
contracts dated on or after 7th August 2002, all businesses can charge interest
at a rate of 8% above the late payment reference rate.
The Bank of England base rate on 31 December, is the "reference rate" for debts
becoming overdue between 1st January to 30th June each year.
The Bank of England base rate on 30 June, is the "reference rate" for debts
becoming overdue between 1st July to 31st December each year. Refer to the table above for the latest reference rate.
How do I deal with collecting late payment interest when the
invoice has been partially settled?
In legal terms, interest continues at the 'daily rate' on the whole of the outstanding
debt. Charging interest is designed to be a spur to payment. You should use
the interest charge to encourage the debtor to pay on time i.e. explain to the
debtor that they can avoid these extra costs if he/she pays according to terms.
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