Late Payment Interest and Compensation: A Simple Guide for Businesses
As a business owner, getting paid on time is essential to maintain a healthy cashflow. Unfortunately, late payments can cause a financial strain on your business. This is where late payment interest and compensation come into play. In this article, we’ll demystify late payment regulations and explain how you can calculate late payment interest and compensation effectively.
Demystifying Late Payment Interest and Compensation
Before we dive into the details, it’s essential to understand the basics of late payment interest and compensation. Late payment interest is the interest charged on an outstanding invoice, and compensation is the additional sum you can charge for the inconvenience caused by late payment.
As a business owner, dealing with late payments can be frustrating and time-consuming. Late payments can cause cashflow problems and affect your ability to pay your own bills on time. That’s why it’s important to understand how to calculate late payment interest and compensation.
A Step-by-Step Guide to Calculating Late Payment Interest
Calculating late payment interest can seem complicated, but it’s relatively simple if you know the formula. The current late payment interest rate is 8% plus the Bank of England base rate. The Bank of England base rate is currently 0.1%, bringing the total interest rate to 8.1%. To calculate the interest owed, take the amount owed and multiply it by the interest rate. For example, if you have an invoice of £1,000 that is 30 days overdue, the interest owed would be £8.20.
It’s important to note that you can only charge interest after the payment becomes overdue, and it’s your responsibility to inform the debtor of the interest rate you intend to charge. You can include the interest rate in your payment terms or send a separate notice.
It’s worth noting that charging interest on late payments can also act as a deterrent for future late payments. If your clients know that they will be charged interest on late payments, they may be more likely to pay on time in the future.
Understanding the Legal Framework for Late Payment Compensation
The Late Payment of Commercial Debts (Interest) Act 1998 governs late payment compensation. The act states that you can charge a fixed sum of £40 to £100 per invoice, depending on the value of the invoice. Additionally, you can charge reasonable debt recovery costs if the debtor fails to pay within the agreed period.
It’s important to remember that compensation is not the same as interest. Compensation is an additional sum that you can charge to cover the administrative costs of chasing late payments. This can include the cost of sending reminder letters or making phone calls to follow up on late payments.
To charge compensation, you must include it in your payment terms or give notice in writing. The notice must state the amount of compensation you intend to charge and when you will charge it.
It’s worth noting that charging compensation on late payments can also act as a deterrent for future late payments. If your clients know that they will be charged compensation on late payments, they may be more likely to pay on time in the future.
Late Payment Interest and Compensation FAQs
Can I charge interest and compensation on all invoices?
You can charge interest and compensation on commercial debts owed by another business or public authority. You can’t charge interest or compensation on consumer invoices.
How long does the debtor have to pay before I can charge interest?
The debtor has 30 days to pay from the invoice date or the date of receipt of goods or services, whichever is later. After 30 days, you can charge interest and compensation.
What if the debtor disputes the invoice?
If the debtor disputes the invoice in good faith, you can’t charge interest or compensation until the dispute is resolved.
Do I have to charge interest and compensation?
No, it’s up to you to decide whether to charge interest and compensation. However, charging them could act as a deterrent to late payment and cover the costs of debt recovery.
Navigating Late Payment Regulations with Ease
Now that you understand the basics of late payment interest and compensation, navigating the regulations can be even more accessible with these quick links to the relevant legislation.
However, it’s important to note that late payments can have a significant impact on small businesses. According to a study by the Federation of Small Businesses, late payments cause 50,000 small businesses to close every year, and the total owed to small businesses in late payments is estimated to be around £26 billion.
Quick Links to Late Payment Legislation
- Late Payment of Commercial Debts (Interest) Act 1998
- Late Payment of Commercial Debts Regulations 2013
How do I find the correct base rate to use?
The correct interest rate to be used can be found by viewing this reference rate table.
| Period | Reference Rate | Interest Rate (Reference rate plus 8%) |
| 1st January – 30th June 2023 | 3.50% | 11.50% |
| 1st July – 31st December 2022 | 1.25% | 9.25% |
| 1st January – 30th June 2022 | 0.25% | 8.25% |
| 1st July – 31st December 2021 | 0.10% | 8.10% |
| 1st January – 30th June 2021 | 0.10% | 8.10% |
| 1st July – 31st December 2020 | 0.10% | 8.10% |
| 1st January – 30th June 2020 | 0.75% | 8.75% |
| 1st July – 31st December 2019 | 0.75% | 8.75% |
| 1st January – 30th June 2019 | 0.75% | 8.75% |
| 1st July – 31st December 2018 | 0.50% | 8.50% |
| 1st January – 30th June 2018 | 0.50% | 8.50% |
| 1st July – 31st December 2017 | 0.25% | 8.25% |
| 1st January – 30th June 2017 | 0.25% | 8.25% |
| 1st July – 31st December 2016 | 0.50% | 8.50% |
| 1st January – 30th June 2016 | 0.50% | 8.50% |
| 1st July – 31st December 2015 | 0.50% | 8.50% |
| 1st January – 30th June 2015 | 0.50% | 8.50% |
| 1st July – 31st December 2014 | 0.50% | 8.50% |
| 1st January – 30th June 2014 | 0.50% | 8.50% |
| 1st July – 31st December 2013 | 0.50% | 8.50% |
| 1st January – 30th June 2013 | 0.50% | 8.50% |
| 1st July – 31st December 2012 | 0.50% | 8.50% |
| 1st January – 30th June 2012 | 0.50% | 8.50% |
| 1st July – 31st December 2011 | 0.50% | 8.50% |
| 1st January – 30th June 2011 | 0.50% | 8.50% |
| 1st July – 31st December 2010 | 0.50% | 8.50% |
| 1st January – 30th June 2010 | 0.50% | 8.50% |
| 1st July – 31st December 2009 | 0.50% | 8.50% |
| 1st January – 30th June 2009 | 2.00% | 10.00% |
| 1st July – 31st December 2008 | 5.00% | 13.00% |
| 1st January – 30th June 2008 | 5.50% | 13.50% |
| 1st July – 31st December 2007 | 5.50% | 13.50% |
| 1st January – 30th June 2007 | 5.00% | 13.00% |
| 1st July – 31st December 2006 | 4.50% | 12.50% |
| 1st January – 30th June 2006 | 4.50% | 12.50% |
| 1st July – 31st December 2005 | 4.75% | 12.75% |
| 1st January – 30th June 2005 | 4.75% | 12.75% |
| 1st July – 31st December 2004 | 4.50% | 12.50% |
| 1st January – 30th June 2004 | 3.75% | 11.75% |
| 1st July – 31st December 2003 | 3.75% | 11.75% |
| 1st January – 30th June 2003 | 4.00% | 12.00% |
| 7th August – 31st December 2002 | 4.00% | 12.00% |
Conclusion
Late payment interest and compensation can seem daunting, but they are essential tools to mitigate the financial losses that late payments can cause. By following the legal framework for charging interest and compensation and keeping track of your unpaid invoices, you can ensure timely payment and healthy cashflow for your business.
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