"Tis the Season" ... To owe Money!

Christmas may well be the season of good cheer, but along with the festivity comes the seasonal slowdown and businesses find themselves hard-pressed on cashflow.

Although introduced in stages since 1998, many businesses may not be aware that the final stage of the Late Payment of Commercial Debts (Interest) Act 1998 came into operation on 7th August 1998, giving creditors the right to charge customers late payment costs and interest on overdue debts. The purpose of the legislation is to encourage a culture of prompt payment.  

Key Features:

• Now applies to all businesses irrespective of size
• Clarification of the calculation of late payment interest and costs
• The right to charge debtors reasonable late payment recovery costs
• Representative bodies may challenge grossly unfair commercial contract terms

Contractual interest/costs

If the terms of the contract are already agreed and provide for an agreed late payment interest rate or compensation then that rate will apply instead of the legislation. This would arise where there is a written contract or where the goods or service are supplied under standard terms and conditions.

Rate of Interest

The current rate is 8% above Bank of England Base Rate (currently 4.5%), and thus the late payment rate is 12% . The rates will vary. The calculation is achieved by applying the 12% divided by 365 to establish the daily rate. That is then multiplied by the number of days overdue from the due date for payment. The interest then accrues at a daily rate until paid.

30 Days due date

In the absence of written terms to the contrary, the legislation provides for a 30 day credit period before the debt becomes due for payment after which interest will become payable.

Reasonable compensation/recovery costs

The legislation provides for the right to claim reasonable recovery costs depending on the size of the debt:

Debt Costs

Up to £999.00 £40.00

Up to £9999.00 £70.00

Over £9999.00 £100.00

Making demands for payment

It is suggested that standard chase letters are revised appropriately to incorporate the notification to customers of the intention to claim interest and compensation under the late payment legislation.

Application of the legislation

If after demand customers do not pay late payment interest or compensation then there is no obligation to impose the legislation on customers. However as in contract claims there is a 6-year limitation period from date of invoice after which time you will not be able to take legal action to enforce payment.

Challenging grossly unfair contract terms

The legislation also enables a "representative body," defined as a group or organisation representing particular SME’s in a sector or geographical (eg Chamber’s of Commerce) to challenge grossly unfair contract terms or conditions of a company.

Useful Information

Take a look at :

www.payontime.co.uk which is the Better Payment Practice Group’s website where you can download a User’s Guide to Late Payment Legislation. The site also has a late payment interest calculator.

Should you wish to discuss the information contained in this article further, or have questions relating to this area of law, please contact Tony Sutton 0208 296 6703 or tony.sutton@ctts.co.uk