A supplier owed money by another business does not have to accept late payment as a cost of trade. The Late Payment of Commercial Debts (Interest) Act 1998 implies a term into qualifying contracts that late debts carry statutory interest, and a fixed sum is added on top. The Act is UK legislation, so it applies across the UK; this guide explains the rules in general terms, and the court steps in England and Wales are covered in linked guides.
Which contracts are covered
Section 2 says the Act applies to a contract for the supply of goods or services where the purchaser and the supplier are each acting in the course of a business. Consumer credit agreements and contracts intended to operate as a mortgage, pledge, charge or other security are excepted, and a contract of service or apprenticeship is not a contract for the supply of goods or services. "Business" includes a profession and the activities of a government department or local or public authority. A sale to a private consumer is therefore outside the Act, and consumer purchasers have different remedies, described in the guide to the Consumer Rights Act 2015.
When a payment becomes late
GOV.UK explains that if the parties agree a payment date, it must usually be within 30 days for public authorities or 60 days for business transactions. A longer period than 60 days for a business transaction can be agreed, but it must be fair to both businesses. If no payment date is agreed, the payment is late 30 days after the customer gets the invoice or the supplier delivers the goods or provides the service, whichever is later. Section 4 puts the same idea into legal terms: statutory interest starts to run on the day after the "relevant day", and an agreed payment day that falls after the 60-day period is respected only if it is not grossly unfair to the supplier.
Statutory interest
Section 1 implies a term that a qualifying debt carries simple interest. GOV.UK gives the rate for business-to-business transactions as 8% plus the Bank of England base rate, and adds that statutory interest cannot be claimed where a contract sets a different rate of interest. Its worked example uses a £1,000 debt and daily interest, and it advises sending a new invoice if the supplier decides to add interest to the money owed. Because the base rate changes over time, the current figure should be taken from the Bank of England when a claim is calculated. Statutory interest ceases to run when it would cease to run under an express contract term.
The fixed sum for recovery costs
Section 5A entitles the supplier, once statutory interest begins to run, to a fixed sum in addition to the interest. The sum is £40 for a debt of less than £1,000, £70 for a debt of £1,000 or more but less than £10,000, and £100 for a debt of £10,000 or more. If the supplier’s reasonable costs of recovering the debt are not met by the fixed sum, the supplier can also claim the difference. GOV.UK says the fixed sum can be charged only once for each payment.
Contract terms that try to override the Act
Part II of the Act allows contract terms to oust or vary the right to statutory interest, but only in limited circumstances. Under section 9, a remedy for late payment counts as a "substantial remedy" unless it is insufficient to compensate the supplier or to deter late payment and it would not be fair or reasonable to let it displace statutory interest. The court considers all the relevant circumstances when the terms were agreed, including commercial certainty, the parties’ relative bargaining strength, whether one party imposed the term and whether the supplier received an inducement to agree it. A term relating to the fixed sum is also subject to the Unfair Contract Terms Act 1977, even where it is not in the purchaser’s written standard terms.
Practical steps
A supplier should first check that the contract falls within section 2, work out the relevant day under section 4 and record when the invoice was received. The claim can then be set out in a letter or new invoice showing the debt, the interest and the fixed sum. If payment is still not made, the general steps that precede a court claim are covered in the guide to pre-action protocols, a money claim can follow the route in the guide to small claims, and the enforcement options after judgment appear in the guide to enforcing a court judgment. Time limits for the underlying debt are covered in the guide to civil claim time limits.
FAQs
Can a private customer be charged statutory interest?
No. The Act applies where the purchaser and supplier are each acting in the course of a business, so it does not apply to sales to consumers.
Can the interest rate be changed by contract?
GOV.UK says statutory interest cannot be claimed where a contract sets a different rate, but the Act’s substantial remedy test in section 9 limits terms that oust the statutory right, so the wording of the agreement matters.
Is the fixed sum charged per invoice?
GOV.UK says the fixed sum can be charged only once for each payment.
The bottom line
For business-to-business supply contracts, the 1998 Act implies statutory interest on late debts, at 8% plus the Bank of England base rate according to GOV.UK, and adds a fixed sum of £40, £70 or £100 depending on the size of the debt. Agreed payment terms are respected unless grossly unfair, and any term that displaces statutory interest must give a substantial remedy. This is general information, not legal advice.
Sources
- GOV.UK, “Late commercial payments: interest and debt recovery: When a payment becomes late”
- GOV.UK, “Late commercial payments: Interest on late commercial payments”
- GOV.UK, “Late commercial payments: Claim debt recovery costs on late payments”
- legislation.gov.uk, “Late Payment of Commercial Debts (Interest) Act 1998, section 2: Contracts to which Act applies”
- legislation.gov.uk, “Late Payment of Commercial Debts (Interest) Act 1998, section 4: Period for which statutory interest runs”
- legislation.gov.uk, “Late Payment of Commercial Debts (Interest) Act 1998, section 5A: Compensation arising out of late payment”
- legislation.gov.uk, “Late Payment of Commercial Debts (Interest) Act 1998, section 9: Meaning of substantial remedy”