The Final Stage of the Late Payment of Commercial Debts (Interest) Act 1999
Effective Date: 7 August 2002
Last Updated: 1st July 2005
Current Figures/Calculation
|
For the period July 1st to December 31st 2005, the late payment interest rate will be: |
|
|
Statutory Rate |
8% + |
|
Bank of England Base Rate* |
4.75% |
| Late Payment Interest Rate | 12.75% |
* The late payment interest rate is calculated using the Bank of England base rate as at July 1st 2005 and will be fixed until December 31st 2005 regardless of any changes in the base rate during this period.
Next Late Payment Interest Review:
January 1st 2005
1.Introduction
The late, and non, payment of commercial invoices is the single most destructive chain event for many SME’s. The answer to such a problem was not to litigate to deter, but to prevent the delay in payment from gathering pace from, say, from 45 days overdue to 120 days: thus becoming a ‘bad debt’ scenario rather than being ‘just overdue’. There also needed to be a way to focus the debtor, and to some extent the creditor, on the increasing cost of delaying payment to both them and the creditor.
With this in mind, the government brought in the Late Payment of Commercial Debts (Interest) Act 1998 to deal with commercial payment default: taken as a right within the UK business community. As with many government initiatives, getting the message out is arguably the easy part: getting those intended to benefit from the legislation to use it is, by far in this case, near impossible (think, stakeholder pension).
The whole issue of charging your customers over and above the invoice amount is akin to poking them in the eye every time they order something. But this is exactly what the government wants you to do. The introduction of late payment interest is not meant to act as a deterrent alone, but as a justifiable way to maintain profitability when your cash flow is not earning bank interest or, more likely, reducing the overdraft facility. Also, to help foster a culture of prompt payment within the business community. The current status quo for paying invoices is about 45-days from invoice date: this means that for this initiative to have the desired impact, suppliers should insist that all debtors meet the generous 30-day period that they have built into their budget and cash flow.
2. The Legislation
The time frame for introduction was:
1 November 1998 – Small businesses (less than 50 employees) can claim interest from large companies and most public services.
1 November 2000 – Small businesses can claim from each other in addition to the above.
Since 7 August 2002 – the following apply:
a) All commercial traders can claim interest from each other. The 7 August 2002 legislation is not retrospective, but small businesses with invoices dated between 1 November 1998 and 6 August 2002 can claim for late payment interest (but not compensation for debt collection administration as in the 7 August 2002 legislation). The period for making a claim for late payment interest is six-years from the invoice date (five-years in Scotland) but not to include any period before 1 November 1998. In reality this will not become an issue until 2004 (2003 in Scotland).
b) Where two parties agree on a rate of late payment interest – contractual interest – the Act will not apply. However, if default arises and the rate/period agreed is not considered to be a ’substantial remedy’, the courts will act in favour of the aggrieved party who has a right to either: a better remedy or the basic remedy offered within the Act. The concern of the government was that large companies will extract unfair credit periods or interest rates from the smaller and more conciliatory supplier when sourcing business.
c) Further, a claim for ‘reasonable’ compensation can be sought from the debtor for collection costs (this is in addition to court fees if the creditor sues and wins). However, if you have your own late interest payment conditions in your terms of sale you cannot claim for ‘reasonable costs’ or statutory interest (see 3)t page).
Reasonable Recovery Costs
| Invoice Amount | Costs Claim |
| up to £999.99 | £40.00 |
| £1000.00 to £9999.99 | £70.00 |
| over £10,000 | £100.00 |
d) Further, a ‘representative body’ – I expect in the mould of the Federation of Small Business and Chamber of Commerce – acting on behalf of SME’s (under 500 employees) can argue for a litigant, or group of litigants, if the terms and conditions of sale of a large corporate is considered to be grossly unfair contractual terms. I am not fully appreciative of this move as I thought we already had a sufficient group of professionals for arguing over unfair contractual, or otherwise, terms. 3. Written, Verbal or No Terms?
Where there are no written ‘terms of credit sale’ between supplier and purchaser, the Act provides for a mandatory 30 day credit period and late payment interest payable from the due date as if there were written terms. Again, where there were no written terms, and the payment was to be sent to you on, say, delivery, a 30-day period will commence and you can claim interest after this period: however, in legal terms, there was no credit period in this transaction. This means that you cannot decide to take a 30-day credit period from anyone you choose as the creditor can take legal action against the debtor from the first day the invoice was overdue. You can charge interest for this void period within your own contract terms.There is no need for the terms in the Act to be added to your terms and conditions of credit sale, or in anyway indicated on your purchase order or invoice, for the Act to cover your trade dealings. But not to include a specific payment penalty clause is just one step behind not having a written terms and conditions of credit sale contract. The Better Payment Practice Group suggests the following words to inform, and warn, your customers that you want paid as agreed:
Where payment is due at the end of the month following the month the invoice was raised, the first day of the month following this period will count as the first day (meaning that the legislation will still allow for agreed credit periods in excess of 30-days without a special clause in your terms, but you should state your terms in all circumstances). 4. Late Payment Calculation Consumer Debt Help IndexFrom 1st July 2005 to 31st December 2005, the rate of late interest payment will be as follows:
The current rate of late payment interest is 12.75%, being: Bank of England base rate of 4.75%, and 8% statutory rate in accordance with the Late Payment Act 1998 (both rates being changeable). Example Scenario: Debt (£500) multiply by Interest Rate (12.75%) divide by 365 days = 0.17p Next, multiply this by the number of days late (let’s say 30 days) = £5.14 due now – and will increase by 0.17p per day until paid. Ok, the interest seems small but for debts that are high in amount, the interest will soon give the debtor incentive to pay you back ASAP. The original invoice VAT is included in the calculation; however, no VAT is chargeable/payable on the interest amount. Part payment of a debt will be first set-off against the interest due, and then the principal sum. 5. EC ImplicationsThe 7 August 2002 legislation also brings the UK into line with the EC Directive on late payment. The European Central (EC) nations are taking up late payment legislation from the 7 August 2002, using the EC base rate (3.25%) and, probably, 7% statutory interest: a total of 10.25%. For those exporting from the UK, this will not only mean that they can apply interest penalties as set down by the EC, but also that EC traders will be in a position to apply their own penalties: whether in the terms and conditions of sale, or not, so beware! 6. EnforcementYou do not have to enforce the Act on your debtors. If you do enforce the Act you have six years from the invoice date to do so. The minimum requirement for taking legal action, in terms of physical evidence, is an overdue invoice. However, such a limited attempt at debt recovery will not be in your best interest when you meet the district judge! To start your claim for interest, and the amount unpaid on your invoice, you should first write to your debtor stating the invoice date, number, service/product and amount overdue. You should then add in another paragraph the amount of interest due to date, and at what rate the interest will rise on a daily basis. Finally, you should set a time limit by when you want paid (3, 7, 10, 14 days) or for the debtor to raise any issues relevant to non-payment. Bear in mind, the longer you give to pay, the less you are likely to get paid. Such a letter is considered as a ‘formal demand’ for payment and is considered as good business practice. If the demands in your letter are not met, you can then sue through your local court. You can use a third party (debt agency, solicitor) to do this for you. Some businesses sell their debt portfolio to specialist debt traders: as long as the original creditor informs the debtor of the assignment to the new ‘owners’, all is in order. Suppliers can act as agents for factored invoices, as can debt recovery agents calculate and claim interest on their client’s debt portfolio. Any disagreement as to interest periods and rates can still make their way to the county courts as with any other commercial dispute. 7. A Fairer WayI think that it would be fair to say that to-date the take up of late payment interest charging (introduced on 1 November 1998 that allowed small business owners to charge large companies and the public sector services) has been poor. However, are we about to see the late payment legislation used to it’s full by the larger companies? If we are to witness such a system, where does that ‘chain event’ end up? Back to the small business again, I fear. Should the government re-think the benefit to small business in particular, or should they amend the legislation to read that ‘all debtors must calculate and add the interest due at the time of sending payment to the payment amount?’ Or, my choice, keep the legislation that is now in place – which favours small business – and let big business, and public services come to that, look after themselves. Anyone who has worked in credit management, and dealt with either, will have strong views on the bureaucratic payment practice of these two! 8. Referencewww.payontime.co.uk The Better Payment Practice Group: a public private partnership that promotes good credit management practice. www.courtservice.gov.uk/mcol/ The new online claims (summons) service for undefended debts. www.icm.org.uk The Institute of Credit Management: the UK’s official professional institute for those who work in credit management. Late Payment Calculator and Letter : www.bizhelp24.com/ctocp/ctoc/index.html Hard Copies of the Act Guidance on how to use the Act is set out in “The Late Payment of Commercial Debts (Interest) Act 1998: A User’s Guide “. To obtain a copy telephone 0870 150 2500 and quote reference URN 00/1308. |
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