Late Payment of Commercial Debts (Interest) Act 1998

The Late Payment of Commercial Debts (Interest) Act 1998 gives small businesses the statutory right to claim interest on late payments from other businesses.

Three Stages of Implementation

1. The Act initially came into force on November 1st 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.

2. However, from 1st November 2000 small businesses are also able to claim statutory interest from other small businesses.

3. From 1st November 2002, all businesses, including public sector organisations are 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 etc.

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
    The interest rate under the Act is the Bank of England base rate, [At the end of the day in which payment becomes due) PLUS 8%.

    Claiming Interest
    The supplier can simply notify the purchaser orally that interest will be claimed, though 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.

    Other Points
    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 & 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.

    Contractual Interest or Compensation
    Some parties may agree a specific interest rate or compensation in their contract together, if so the Act will not apply. However, to avoid larger companies abusing their bargaining power any agreed interest rate or compensation for late payment must be "substantial", if not the Act will apply instead.

    Substantial means that:

  • It will cover the supplier for losses incurred due to late payment or act as a deterrent.
  • It is reasonable to let the contractual compensation replace the provisions of the Act.

    A small business does not have to exercise the right to claim interest and some may not if this risks their existing relationship with the purchaser. However, evidence shows that more small businesses are stating at the time the contract is made that they will exercise their right if payment is late. If a business does intend to use the Act they should state this on all invoices and letters seeking payment.

    For example,

    "We reserve the right to claim statutory interest at 8% above the Bank of England base rate at the date the debt becomes overdue in accordance with the Late Payment of Commercial Debts (Interest) Act 1998."