Interest on Late Payment and the Law
Statutory interest can be claimed under the Late Payment of Commercial Debts (Interest) Act 1998. The rate of interest is calculated as the Bank of England base rate plus 8% per annum.
Late payment is defined as either being beyond an agreed period from the date of supply or in the absence of that, from the end of the month following that in which the goods or services were supplied. This latter definition is referred to as the default period.
Alternative Rates of Interest
Statutory interest is chargeable from the day after agreed payment terms have been exceeded or if payment terms are absent from the date of written notification that statutory interest is to be claimed.
It is possible to include interest charges for late payment in terms and conditions which do not match the statutory rate of interest or the default payment term. An interest rate that can be viewed by a court as being “excessive” however will not be enforceable. If a lower rate than the statutory rate forms part of commercial terms and conditions, the statutory rate cannot subsequently be applied.
Notifying Interest Charges for Late Payment
As statutory interest for late payment of commercial debts is an unconditional right, prior notification between two trading parties is not required for it to take effect.
Making it clear that statutory interest will be claimed in the event of late payment may well be a good idea to focus the minds of customers on paying your bills on time however. The following wording is therefore recommended to appear on commercial documents such as order forms, delivery notes, invoices and statements of account.
We reserve the right to apply statutory interest charges for late payment.
You may then choose to overlook interest liability for an initial late payment as a goodwill concession if you wish but then insist on it for subsequent breaches. The fact should never be overlooked however that notwithstanding statutory interest, continuing to deal on a credit basis with consistently late payers could eventually represent a threat to your business.