Maximise your recoveries - Late Payment of Commercial Debt (Interest) Act 1998

On 1 November 1998 the UK Government introduced The Late Payment of Commercial Debts (Interest) Act 1998 (LPCDI). This allows businesses in the UK to charge interest (and compensation costs) where a customer is late in paying bills.

Although the legislation came into force 17 years ago, many businesses are still unaware of it. The legislation was introduced because late payment of invoices has been a long-standing problem in the UK and many businesses, especially smaller businesses,  experienced cash-flow problems when their customers delayed payment for long periods. A particular complaint was that the slow payers have often been much larger companies, deliberately delaying payment to smaller businesses.

All commercial traders can claim interest from each other. Note that where the parties have a contractual term for interest in their terms of business, the Act will not apply.  The interest on late payment under the Act is bank base rate plus 8%. At present, this is 8.50%.

A claim for compensation can also be obtained from the debtor for collection costs. You are entitled to claim compensation from the debtor for debt recovery costs subject to this scale:

Up to £999.99 – £40.00
£1,000 – £9,999.99 – £70.00
£10,000 or more – £100.00

Many businesses are reluctant to use the LPCDI and demand interest on overdue invoices for fear of upsetting their customers and affecting  future business. But there are a number of ways in which the legislation can be applied, and one or more of these could be appropriate for your business as follows:

• A deterrent

Consider adding wording to all relevant correspondence to warn customers that you may use the Late Payment legislation to collect interest and compensation. You may wish to include this on quotations, invoices and reminder letters.

• A threat

As part of your credit control procedures, you may wish to notify your customers that you will make use of the legislation if you do not receive payment. You could calculate the amount of interest and warn them how much it will cost.

• As part of a claim

If you decide to issue court proceedings, you are unlikely to be concerned about your relationship with the customer and the affect on future business. You should add a claim for the maximum amount of interest and compensation costs, as well as continuing interest. This will give the debtor an incentive to pay sooner rather than later.