Levying Charges for Late Payments

Under what circumstances can I charge for the late payment of commercial debts?

In the UK many business fail due to late or unpaid commercial debts.

It is often the case in business in the UK that larger companies may try and exploit this to the detriment of the smaller companies. For example if a large business delays making payment to a smaller supplier who needs the money faster in order to meet their expenditure – that smaller business can be put at a huge disadvantage.

Debt recovery for these smaller companies is therefore of huge significance.


In order to try and rectify this problem ensuring that companies adopt fairer payment and credit check practices the UK government has enacted specific legislation to deal with this problem.

The Late Payment of Commercial Debts (Interest) Act 1998

The Late Payment of Commercial Debts (Interest) Act came into force in 1998 and was provided with a further amendment in 2002.

Purpose of the Act

The purpose of the Act is to allow UK business to charge interest on late payments and debt recovery costs for clients and customers that have exceeded the payment terms agreed by the parties.

Does the Act apply to all commercial contracts?

The Act applies to all commercial contracts that have been created on or after 7 August 2002.

How much interest can companies charge?

The Act enables businesses to charge 8% above the Bank of England base rate set on a twice-yearly basis and also debt recovery compensation of up to £100 on each overdue order.


The fact that companies can charge this amount in excess of the standard rate means that the charges that can be levied against a company and much more likely to exceed the benefit which a company may see in withholding payment. This means that the Act provides business with a huge incentive to operate within the original agreed contract and to pay up within the original contractually agreed payment schedule.

Can the parties agree to not be bound by the rules under the Act?

Both parties to a commercial contract can agree not to use the provisions contained within the Late Payment of Commercial Debts (Interest) Act. However, this is only under the circumstances that the contract agreed on provides a substantial remedy for late payment.

What is meant by a substantial remedy?

Section 9 of the Late Payment of Commercial Debts (Interest) Act defines a substantial remedy as the following:

  • If either the remedy is apt both to deter late payment and to compensate the creditor
  • Even if it is not apt it is fair and reasonable to allow reliance on it taking account of the needs of commercial certainty and the relative bargaining position of each of the parties

Unfair Contract Terms Act 1997

All terms which will be inserted into a contract to try and get around the Late Payment of Commercial Debts (Interest) Act will be subject to the test of reasonableness established by the Unfair Contract Terms Act.

The reasonableness test often makes it difficult to change the interest charged under the Late Payment of Commercial Debts (Interest) Act to a lump sum for failure to pay under a contract which many business try to impose.

Are there any commercial contracts that the Act does not apply to?

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For more information on:

  • What happens if a company simply refuses or fails to pay?
  • Act of Goodwill
  • Statutory Demand
  • When will this option be available?
  • How long will the company have to pay the debts?
  • What happens if they fail to pay the debt after 21 days?
  • Potential problems
  • Litigation