Late payments contribute to around 50,000 UK businesses closing annually, as well as inflicting unnecessary stress on owners. In fact, the Federation of Small Businesses (FSB) calculates that over 30 percent of payments are late and the average value of each is over £6,000.
While late payments are inevitable and an ongoing challenge, at Zervant we are constantly working to develop new tools for our customers that reduce the time gap from when you send an invoice to payment. Our software allows you to easily set up automatic reminders in seconds or pick the invoices you want to send reminders for.
We have also included a free late payment calculator in this introductory article that explains the law behind late payments, as well as how to calculate how much interest to charge customers on that missed invoice in 2021.
When does a payment become late?
According to HMRC, exactly when the date an invoice can be considered late depends upon whether you agreed a payment date or not.
If you have agreed payment terms, then it must usually be within 30 days for public authorities or 60 days for business transactions. Longer periods can be agreed upon, but it “must be fair to both businesses.”
If a payment date has not been agreed, the act states that the payment is late 30 days after either:
- the customer gets the invoice (not the pro forma invoice if one has been sent)
- you deliver the goods or provide the service (if this is later)
The accrual of interest can begin:
- 30 days after the goods are supplied or the service is completed
- 30 days after receipt of invoice (or the customer is told the amount due is payable).
- the agreed date for payment
Note: Even though you have a legal right to charge late payment interest, you don’t have to.
Are late charges legal in the UK?
With the UK’s modest sized enterprises currently owed an estimated £26 billion in overdue payments, according to research by payments processing company Bacs, you might begin to wonder if there really is a law regulating the issue.
However, the UK was one of the first countries in the European Union to implement late payment legislation to help promote the culture of prompt payment. Since 1998, there has been a statutory right for small businesses to charge interest for late payment from large firms and the public sector.
In 2002, the law was amended to allow all businesses, including public sector organisations, to claim interest from any other business or organisation, including small businesses.
The Late Payment of Commercial Debts (Interest) Act 1998 (full), which extends to England, Wales, Scotland and Northern Ireland, states that debtors will be forced to pay interest and reimburse the reasonable recovery costs of the creditor if they do not pay for goods and services on time.
Note: Consumers cannot be charged interest on late payments.
The right to claim interest and debt collection recovery applies to overdue accounts relating to the sale of goods, the hiring of goods or to a supply of services.
What are reasonable debt recovery costs?
The law also entitles you to charge a business a fixed sum for the cost of recovering a late commercial payment on top of claiming interest from it, explains HMRC.
They state that you can only charge a business once for each payment and the amount varies depending upon how much they owe:
|Amount of debt||What you can charge|
|Up to £999.99||£40|
|£1,000 to £9,999.99||£70|
|£10,000 or more||£100|
Note: If you’re a supplier, you can also claim for reasonable costs each time you try to recover the debt.
What interest can I charge on late payments?
The interest that you charge is called ‘statutory interest’.
The amount chargeable is 8% of the invoice total, plus the Bank of England’s base rate for business-to-business transactions (more on that below).
Since March 19, 2020, the base rate has been 0.1%, meaning that you can charge 8.1% interest on late payments.
HMRC states that you cannot claim statutory interest if there’s a different rate of interest in a contract or use a lower interest rate if you have a contract with public authorities.
What is the difference between Base Rate and Bank Rate?
There is no difference between Bank Rate and Bank of England base rate, since the latter is just another term used to describe the same thing, along with ‘the interest rate’.
Set by the Bank of England’s Monetary Policy Committee (MPC), the Bank Rate is the single most important interest rate in the UK and is adjusted to meet any target that the Government sets to keep inflation low and stable.
The next adjustment is due on March 18, 2021.
You can check the current and previous Bank of England base rates here.
How to calculate late payment interest
Before you dive into using the free late payment calculator (see below), it might be useful to understand the calculations involved.
For example: If your business is owed £1,000 and the Bank of England base rate is 0.1%:
- the annual statutory interest on this would be £81 (1,000 x 0.081 = £81)
- divide £81 by 365 to get the daily interest: 23p a day (81 / 365 = 0.22)
- after 50 days this would be £11.10 (50 x 0.22 = 11.10)
Should you decide to add interest to the money owed, you can now send a new invoice. And to accompany that new invoice, a strongly worded but considerate invoice email or a letter asking to settle a late payment can go a long way to helping you get paid faster.
Free late payment calculator
As you saw, determining how much statutory interest you can charge your customers when they pay late can be complicated. To make managing late payments as simple as possible with Zervant, you can use this free online calculator to quickly calculate the interest due on your outstanding invoices.
To use the free late payment calculator, enter the invoice value, the date it became overdue and the date payment was received to calculate how much interest you can charge.
Late Payment Interest Calculator
If you are spending your valuable time chasing payments or overdue invoices, then the system you are currently using isn’t working for you. Avoid becoming one of those 50,000 UK businesses heading towards insolvency by signing up to Zervant and getting paid faster with better invoicing software.
When your customers are able to pay invoices by credit or debit card, research says that the payment time can be reduced from 60 days down to 20 days. For information about our software or questions about late payments, please get in touch and we can help!