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?

The Late Payment of Commercial Debts (Interest) Act only applies to debts. Therefore it does not apply to the following:

  • Damages
  • Liquidated damages clauses
  • Insurance indemnity policies

The Act considers the above not to be debts but simply damages awarded by failure to perform under a contract.

Where the right to charge interest is already provided by another act of Parliament such as the Supreme Court Act 1981 and a Court has jurisdiction to award interest under that legislation then the Late Payment of Commercial Debts (Interest) Act will not apply.

Contracts which have no connection to the UK, only in relation to the choice of English law to govern them, will not be subject to the Late Payment of Commercial Debts (Interest) Act.

What happens if a company simply refuses or fails to pay?

Despite the interest payments which can be threatened on a party under the Late Payment of Commercial Debts (Interest) Act increasing the amount of money owed under a commercial contract payment may still never be made.

If an invoice from a company remains unpaid the company has the following options available to them:

  • Act of goodwill
  • Statutory demand for the money
  • Litigation

Act of Goodwill

In certain cases where a company is in financial difficulty owing another company large sums of money and that company forms a large part of the revenue source often there will be seen an act of goodwill in not pressuring that company into paying immediately. In certain cases a longer payment time will be provided in exchange for a guarantee of future orders or business.

This is not always the best option to choose, however, as there are no guarantees that the company will remain in business if they are suffering such bad cash flow problems.

Statutory Demand

The option of issuing a statutory demand for the money is another available in the case of non-payment of commercial debts.

When will this option be available?

The option of a statutory demand will only be available if the amount owed is greater than £750 and where the debts are not in dispute.

How long will the company have to pay the debts?

Following a statutory demand the company will be provided with 21 days in which to pay the commercial debt with the threat of winding up prompting the payment.

What happens if they fail to pay the debt after 21 days?

If the company fails to pay the debt after 21 days a winding up petition is able to be presented to the company with the appointment of a liquidator in place for the liquidation of the company.

Potential problems

There is no guarantee that the debt will be paid in full as the company owed the money will be ranked as an unsecured creditor during the insolvency proceedings. This means that when the company is wound up secured creditors will take priority over the unsecured creditors meaning that there may be no money left.


The Late Payment of Commercial Debts (Interest) Act enables you to apply for legal proceedings with the interest continuing on a daily basis throughout the litigation process.

Litigation has the added advantage over insolvency proceedings as there will no other parties involved in the proceedings meaning that no one else will be able to claim a stake in the money as with insolvency proceedings. However, if the company goes insolvent during the court proceedings the insolvency proceedings will take precedence.