Tackling late payment

By THIS IS MONEY
Updated: 06:23 EST, 19 June 2008

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Since November 1998, small companies have been able to charge business customers interest on debts they pay late, under the Late Payment of Commercial Debts (Interest) Act 1998.

The measure was part of a Government campaign to change Britain's late payment culture, which leads eight out of ten companies habitually to pay their bills late.

Small businesses can be forced to borrow money to keep going while awaiting payment - some even go bust.

The legislation was extended in 2002 to provide more benefits to small business and allow large businesses and public sector bodies to also use the legislation. The law applies to England and Wales only. Businesses in Northern Ireland and Scotland should seek advice there.

Who can charge interest and when?

The legislation was introduced on 1 November, 1998 and this is the earliest date that a small company can charge large companies and public sector bodies interest at 8% over base rate on overdue business debts.

From 1 November, 2000, in addition to the above, small businesses can charge other small businesses interest at 8% over base rate. It is important to remember to use the base rate in force at the end of the day on which the contract says payment is to be made.

A small company is defined as one with 50 employees or fewer; big companies are those with 51 and over, a public sector body is any Government department, agency, non-departmental public body and local or public authority.

What can you charge?

All businesses and public sector bodies can claim statutory interest on the late payment of business debts as well as the following entitlements:

All reasonable debt recovery costs varying according to the size of the debt.

Simplification of the calculation of statutory interest. A reference rate is 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 plus 8%.

The fixed-reference periods are: Base rate at 31 December will be the reference rate for 1 January to 30 June; base rate at 30 June will be the reference rate for 1 July to 31 December. (For example, for 1 July to 31 December, 2002, the reference rate was 4%, so the interest rate (+ 8%) was 12%.

The Better Payment Practice Group's user's guide explains how the late payment legislation in England and Wales works for contracts made on or after 7 August, 2002. Telephone 0870 150 2500 and quote reference URN 02/883 or click here to download one

How could I use it?

You can set your own credit period when you agree contracts and then include a clause stating your right under the law to claim interest if your big company customer doesn't pay up on time, though you don't have to.

If you don't set a credit period or state your right to interest in the contract you can still invoke the law, but spelling out your rights may help you get paid more promptly. If no credit period is specified in a contract, it will be assumed to be 30 days from delivery or invoice, whichever is the later. The law can be applied whatever the size of debt.

Wording to use on your documentation

We understand and will exercise our statutory right to claim interest and compensation for debt recovery costs under the late payment legislation if we are not paid according to agreed credit terms'

Further action

Ultimately you could pursue your non-payer through the courts (including the Small Claims Courts for amounts up to £5,000) though it's better to chase it up before it gets that far.

The Act also allows you to separate the interest from the principal debt so you can pursue the interest alone even if the big company pays the initial bill. You can also assign the interest to a third party such as a factory.

You may also find the website for the Court Service Money Claim Online useful.

Companies are banned from writing contracts to get around it, but no legislation will stop firms that are determined to pay late from dictating terms to their suppliers. It's a question of changing the culture of late payment, though since the Government announced the legislation would be brought in, surveys among small companies show that the scale of the late payment has reduced - even though most small businesses also say that they are very unlikely to pursue payment from a powerful large customer.

Consequences of legal action

Many experts opposed the law as they were afraid that a large corporation dragged through the courts would simply refuse to deal with the firm again. So deciding whether to use the law or not is a tough question which needs considering in depth.

Naming and shaming

There are plans to 'name and shame' late payers. The Better Payment Practice Group publishes the Federation of Small Business Private Sector Payment Performance League Tables annually, a list of British Plcs ranked according to their payment performance. The idea is that worst offenders will be shamed into paying on time. Performance tables for Government departments are also published annually.

Prompt paying businesses can sign up to the Better Payment Practice Code, to demonstrate their commitment to paying and being paid on time. These businesses are publicly demonstrating a positive attitude to prompt payment and that they will not tolerate being paid late. Signing up is free, and can be done in minutes.

Useful links

Better Payment Practice Group