Can we charge interest on late payments?

Late payment is a problem for all. But if we are owed money, then late payment of commercial debts legislation may help us to claim interest and costs, and deter customers from delaying payment.

Update August 2016: UK interest rates were cut to 0.25% so the default intrest rate we can charge will be 8.25%.

Can we charge interest on late payments?

This is not specifically a digital business issue. But late payment is a problem for all and more especially for start-ups. If we are owed money, then late payment of commercial debts legislation may help us to claim interest and costs, and deter customers from delaying payment.

1. Which contracts are covered?

For contracts with other businesses (including sole traders, freelancers etc.) and with public authorities, EU rules (as implemented in the EU member states) provide a right for all businesses to charge interest and debt recovery costs on late payments. This relates to supply of goods and services, with a few exceptions e.g., consumer credit agreements, mortgages and other security contracts. Contracts with consumers are not covered.

2. When does a payment become late?

If nothing is stated in the contract, then 30 days are the default payment terms. So statutory interest normally starts to accrue 30 days after the latest of:

  • the date the relevant part of the contract is performed (i.e., goods are supplied or the service is provided);
  • the date the customer is notified of the amount due or that the amount due is payable (in practice the date of receipt of invoice); and
  • the day after the day of completion of any permitted period for verification that goods/services confirm to the agreed standards.

3. We agreed longer payment terms – do they override these rules?

With public administrations the 30 days is always the limit. With other businesses we can agree up to 60 days, or even a longer period provided this is not “grossly unfair” for the supplier. Unfortunately this takes some of the teeth out of the system in the UK potentially leaving a door open for longer terms – in France for example the statutory payment periods are generally mandatory and failure to comply may in addition be punishable by fines.

4. Our contract does not provide for interest on late payments – can we still charge something?

Yes. If nothing is said in the contract then statutory interest can be charged (currently base rate plus 8%). This starts immediately the debt becomes overdue. Of course, in ongoing relationships often we may not want to insist on this. But the strict position is that you don’t have to get to court to add these amounts to the unpaid amounts.

5. Our contract provides another amount for late payment interest – does that override the right to statutory interest?

Yes, potentially it does, as long as what is agreed in the contract is a “substantial remedy”. It can be less or more than the statutory amount. But if it is not sufficient to be “substantial” then it could be unenforceable (so the amount needs to be sufficient to compensate the supplier for the cost of being deprived of the payment – and to deter the customer from paying late).

6. What about debt recovery costs?

A small fixed debt recovery compensation amount and, for contracts made after 16 March 2013, additional reasonable debt recovery costs, can be claimed in addition to interest.

7. Our contract is governed by a non-EU legal system – can we still rely on these provisions?

No, if the choice of law is binding then you are also bound by the rules on interest under that system. However, note that if the contract has a “significant connection” to the UK or the rules of international law would result in the law of a UK country applying, then statutory interest and other rights set out here can still apply. On the other hand, even if the contract indicates a choice of e.g., English law, this in itself is not sufficient to ensure these rules apply, unless there is a significant connection between the contract and England, or the contract would be governed by English law in any event.

These rules are quite underused. However, they should be a part of good credit control practices and always raised with late payers as a carrot and stick. If on the other hand we wish to agree payment terms of more than 60 days then we should review the justifications for this – they may in fact not be enforceable and interest will accrue anyway.

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