Late Payment Legislation

All the owners of any kind of business in the UK are allowed to charge interest for late payment. The Late Payment of Commercial Debts (Interest) Act 1998 came into force on the first of November 1998. It has been amended since then to become equal with a European directive (2000/35/EC).

Late Payment of Commercial Debts (Interest) Act 1998

Customers paying late have been a big problem in the UK. Many businesses have experienced delayed payment from their debtors which resulted in serious cash flow problems or the company going into administration.

The Late Payment of Commercial Debts (Interest Act) 1998 came into force to in order to induce payments on time and to discipline bad payers. This legislation only refers to commercial debts. It cannot be applied when one of the parties does not act as a business. Both parties need to be commercial entities or public sector organisations.

Once the legislation was introduced it was decided it would be brought in stages. This means that different rules apply depending on the date the contract was agreed.

Phase 1- 1st November 1998 to 31st October 2000
Interest on Late Payment may be claimed at 8% over the base rate; only small businesses can use the legislation to claim against large businesses.

Phase 2 - 1st November 2000 to 6th August 2002
Small businesses may now claim against other small businesses; large businesses still not able to use the legislation.

Phase 3 - After 7th August 2002
Revised to bring into line with the EU directive; interest rates fixed for six months at a time rather than changing every time base rates change; companies may demand compensation for the costs of collecting late payments up to a fixed amount; the legislation can be applied by both small and large businesses.

For contracts formed on or after 7th August 2002 an additional interest can be charge: late payment compensation. It is calculated in the following way (depending on the amount of outstanding invoices);