The Late Payment of Commercial Debts (Interest) Act 1998 has two purposes. Firstly, to compensate creditors for the late payment of debts. Secondly, to deter late payment. It only applies to the commercial supply of goods and services where you don't have a provision for interest in your Terms of Business.

In brief, it enables you to claim interest and compensation for invoices that are not paid on time. Interest can be claimed at 8% over base together with compensation at the rate of £40 - £100 per invoice.

When you can claim

You can claim Late Payment Interest and Compensation if:-

• You have supplied goods and services
• Your buyer bought for business purposes
• The contract is not a consumer credit agreement
• The contract does not contain a provision for interest on overdue invoices (or any other substantial remedy for non payment)

The interest you can claim

You can claim interest at 8% over Bank of England Base Rate (at the previous 31st December or 30th June).

You can claim interest on invoices that were not paid within the credit period but have since been paid. Interest can be claimed for the period starting with the date the invoice should have been paid and ending with the date it was actually paid.

You have up to 6 years to claim the interest.

The compensation you can claim

You can claim compensation for every invoice that was not paid within the credit period. You can claim compensation even if the invoice has now been paid. Remember, you have up to 6 years to claim the compensation!

The amount of compensation you can claim is:-

You can find a useful guide here.

Inform your customers you will be claiming late payment interest and compensation

You don't have to tell your customers that you will claim Late Payment interest or compensation if they fail to pay on time before they have actually breached your payment terms. However, it may be beneficial for your cash flow to tell them in advance of your intentions, should payment be made late. You could put warnings to this effect on your invoices; your statements and in your terms of business.

Change your terms of business to claim late payment interest and compensation

You are not entitled to late payment interest and compensation if your terms of business already provide for interest on overdue invoices. So, you may want to change your terms of business and rely on the Late Payment legislation. If you do, make sure your customers know. You should:-

• update all documents on which your Terms and Conditions appear.
• circulate your customers with the revised Terms and Conditions.
• advise your customers when the revised Terms and Conditions will come into effect.

N.B. Existing contracts will continue to be governed by the Terms and Conditions which applied at the time they were entered into.

How to claim late payment interest and compensation

As soon as a payment is overdue you can, if you wish, claim the compensation and, in due course, interest. You don't issue an invoice for either the compensation or interest. You just write and tell your customer the amount due.

When you claim compensation and/or interest, it would be helpful to tell your customer :-

• How much interest and compensation is owed
• What it is owed for e.g. give the invoice number for the principal debt
• How payment should be made:
  • To whom
  • By what date
  • To what address and
  • By what method

However, you don't need to have sent any previous warning letter to your customer to claim interest or compensation in an LPD or proceedings.

If you can't send an LPD because your contract contains a provision for interest, you could claim contractual interest in your LBA.

What happens if there's an argument over what's due?

Sometimes there is genuine doubt about whether an invoice is for the correct amount. Where the customer admits that a certain amount is payable, the court expect them to pay the amount they agree is due and not wait until all the issues have been dealt with. You are entitled to late payment interest and compensation on amounts the customer admitted were due but just didn't pay until all queries were resolved.

Sometimes an invoice depends on a calculation. For example, it may be based on timesheets and hourly or daily rates. If the invoice is wrong but the customer has the information to work out the correct amount, the customer is expected to do the calculation and pay accordingly. You will be entitled to late payment interest and compensation if they don't.

If there is real doubt about the amount of the invoice, or a real dispute as to whether the money is due, you will not be entitled to late payment interest until the position has been clarified.

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