Late creditor payments

How to claim the interest due.

Three stages of implementation

• The Act initially came into force on 1 November 1998 and allowed small businesses (50 or less employees) the right to claim interest for late payment from large businesses (over 50 employees) and public sector organisations.
• However, from 1 November 2000, small businesses have also been able to claim statutory interest from other small businesses.
• From 1 November 2002, all businesses, including public sector organisations, have been entitled to claim interest from any other business or organisation, (including small businesses).

The legal status of the small business is irrelevant, and so includes sole proprietors, partnerships, limited companies and limited liability companies.

A late payment is defined as where the agreed credit period given by the supplier to the purchaser has expired. If no credit period has been specified by the supplier the Act specifies a default period of 30 days after which interest will accumulate. The 30 day period runs from either:

• The delivery of the goods or the performance of the service, or
• The day the purchaser receives notice of the debt.

However, if a contract between the parties specifies that there is no credit period, the main debt will be due as soon as the goods are delivered or the service has been performed. Where payment is required in advance of the goods being delivered or the service being provided, the Act states that the right to claim interest only begins from when part of the goods are delivered or part of the service is performed.

If the contract between the parties states that the whole price must be paid in advance the statutory interest period runs from the day after the goods are delivered or the service performed.

If the contract states that payment is to be made by instalments, statutory interest runs from the day after an instalment is due.

If there is no specified credit period, but the previous practice has been that payment is made 30 days after the end of the month that the invoice is received, interest will begin to run on the day after the 30 days. If there is no specified credit period and no previous practice, the default credit period is 30 days.

The interest rate under the Act is the Bank of England base rate at the end of the day in which payment becomes due (currently 4.5 per cent) PLUS 8 per cent, making a total interest rate of 12.5% at the time of writing.

Claiming interest

The supplier can simply notify the purchaser orally that interest will be claimed, although it is advisable to put it in writing instead. A letter should include the following points:

• Amount owed, including the total interest accrued at date of the letter
• The continuing daily interest rate
• The original invoice details
• Full name and address to whom payment should be made
• Method of payment

Regulations introduced in 2002 provide for additional compensation arising out of late payment. Essentially this means that a lump sum of £40 is payable on debts under £1,000, £70 is payable on debts between £1,000 - £10,000, and £100 is payable on debts over £10,000.

If while the supplier is waiting for payment the base rate changes, the amount of interest needs to be apportioned to take account of the change in the base rate.

If the purchaser pays part of the debt owed, the part-payment will first go to reduce the amount of interest owed and then the main sum owed.

Businesses in England and Wales (or their receivers or liquidators) have 6 years in which to make a claim for interest.

If the purchaser disputes the original invoice or the interest, the matter may, like other disputes, end up in the County Court.

The supplier can also sell or transfer the debt to a third party, though the supplier should inform the purchaser in writing that the debt has been transferred.

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