Recently in the news it has been reported how the United Kingdom’s supermarkets have been squeezing their suppliers by paying them later than their contractual payment period. Yet in reality there is already a remedy in place as a result of the Late Payment of Commercial Debts (Interest) Act 1998, Late Payment of Commercial Debts Regulations 2002 (LPCDR).
The Late Payment of Commercial Debts (Interest) Act 1998 and LPCDR 2002 (revised in 2013) give businesses the statutory right to claim interest on late payments from other businesses. This includes sole traders (Acting as a business), partnerships, Limited Liability Companies, Limited Companies and Public Limited Companies and public sector organisations, such as the National Health Service.
Of course the reality is that often it is not “good business sense” to claim this entitlement, but it is a remedy that is available to companies, as late payment can cause serious cash flow issues, particularly for smaller concerns and in some instances could lead to an insolvency event, although this would be an extreme case and would require some aligning of events that usually wouldn’t happen.
The Original Act was implemented in 3 stages, these being:
1. The Act came into effect on 1st November 1998 and allowed small businesses, (50 employees or less) the right to claim interest for late payment from large businesses, (over 50 employees) and public sector organisations.
2. From the 1st November 2000 small businesses have also been able to claim statutory interest from other small businesses.
3. With effect from 1st November 2002, all businesses, including public sector organisations have been entitled to claim interest from any other business or organisation, (including small businesses).
How would we define a late payment to align with both the Act and the Regulations:
A late payment is where the agreed credit period given by the supplier to the purchaser has expired. If no credit period has been specified, the Act specifies a default period of 30 days after which the penalty fee and interest will accrue.
How the 30 day period is calculated will depend on the circumstances, as this Act has to align the whole economy to a set time period and following are a few examples of how the timing is calculated.
The 30 day period runs from either the delivery of the goods or the performance of the service, or the day the purchaser receives notice of the debt.
However, if a contract between the parties specifies that there is no credit period the main debt will be due as soon as the goods are delivered or the service has been performed.
If payment is made in advance of goods being delivered or the service being provided, effectively a deposit or retainer, then the Act states that the right to claim interest only begins from when part of the goods are delivered or part of the service is performed.
However, if the contract between the parties states that the whole sum is paid in advance; the statutory interest period runs from the day after the goods are delivered or the service performed. Although in practical terms this would be difficult to calculate as effectively the monies have changed hands before the service commences.
Where payment is to be made by instalments, the statutory interest runs from the day after an instalment is due.
If there is no specified credit period, but previous practice has been that payment is made 30 days after the end of the month that the invoice is received; then interest will begin to accrue on the day after the 30 days has elapsed. If there is no specified credit period or previous practice, the default credit period is 30 days.
As can be seen by these examples, there are a number of different timings to take into account, but it is best practice to:
• Agree the credit terms in advance in writing and where possible have them included into the contract between the parties
• Have details of the Due Date for Payment on any invoice.
It is also good practice if a business intends to use the Act to enforce payment to the agreed terms that they state this on all invoices and letters seeking payment, such as in the example below:
“[Company Name / Trading Name] reserve the right to claim statutory interest at 8% above the Bank of England base rate in force on the date the debt becomes overdue and at any subsequent rate where the base rate changes and the debt remains unpaid in accordance with the Late Payment of Commercial Debts (Interest) Act 1998 as amended and supplemented by the Late Payment of Commercial Debts Regulations 2002.”
2013 Amendments to the Regulations
As is normal good practice legislation is reviewed and updated from time to time to allow it to be up to date with current norms. In 2013 the LPCDR were amended and the following provisions were included in the amended Regulations:
1. Where a debt is owed the creditor can force the debtor to pay interest plus the reasonable costs incurred by the creditor in recovering the money owed if the debtor fails to pay for goods and/or services on time.
2. Businesses have 60 days to pay, though the parties can agree a longer period to pay, as long as it is not grossly unfair to the creditor.
3. Public authorities or bodies have 30 days to pay, (unlike business-to-business transactions there is no option to negotiate a longer period).
4. Creditors are entitled to a Fixed Penalty Charge from the debtor, which has three tiers. Additional reasonable costs incurred, (this may include legal advice and action) can also be claimed. The three tiers are as follows:
• Debt owed up to £999.99 – £40 charge
• Debt owed £1000 – £9,999 – £70 charge
• Debt owed £10,000 or more – £100 charge
5. The new Regulations only apply to contracts concluded after 16th March 2013.
A further reason for the 2013 revisions to the Regulations was for these regulations to apply across Europe. It was also recognised that public bodies and authorities can be amongst the worst for late payment and their overall payment period is limited to 30 days as a consequence.
Some companies have also taken advantage of the revisions in trying to enforce 90 days as standard payment terms.
The rate of Interest
The interest rate under the Act is the Bank of England base rate of lending that applies during the period in which the debt falls due PLUS 8%.
For the purposes of calculating interest owed the base rate is fixed every 6 months. This is known as the “Reference Rate.” Therefore it is possible that the Reference Rate could change dependent on when a debt became due and the interest owed will need to be apportioned where the Reference Rate changes before the debt is paid in full.
Claiming Interest on overdue payments
The supplier can notify the purchaser orally that interest will be claimed although it is best practice to have the right to interest under LPCDR to be included in any contract or advised in writing. Where in writing this should include the following general points in relation to interest:
• The original invoice details
• The amount owed, including the total interest accrued at date of the letter.
• The continuing daily interest rate.
• Full name and address to whom payment should be made, if different to who was originally owed the monies
• Accepted method of payment.
Interest is calculated on a simple interest basis and the following formula can be used to calculate the sum due:
=(Total Amount Due x BaseRate + Penalty Interst rate) / No of Days in a Year)) x No of Days Late
If we assume a debt of £1,000 has been due for 30 days at the time of writing the demand, the sum due would be the following formula:
=(1000 x 8.5%)/365.25) x 30
This would mean the interest due was £6.98 and this would increase by 23 pence per day, every day the debt remains unpaid. Of course the Penalty Charge needs to be added to the sum due, which in this instance would be £70.
Contractual Interest or Compensation
It is possible to exclude the Act and LPCDR from applying where parties to a contract may agree a specific interest rate or compensation for late payment.
However, to avoid larger companies from abusing the position that their bargaining power brings any agreed interest rate or compensation for late payment must be “substantial.” If it is not based on the following two tests, the Act will apply instead.
Substantial means that:
• It will cover the supplier for losses incurred due to late payment or act as a deterrent.
• It is reasonable to let the contractual compensation replace the provisions of the Act.
Timing of Payments
Sole Traders and businesses in England & Wales, (or their receivers or liquidators) have 6 years from the time the debt became due to make a claim for interest. However If the purchaser disputes the original invoice or the interest charged the matter can like other disputes end up in the County Court. It is also possible for a supplier to transfer the debt to a third party although the supplier should inform the purchaser in writing that the debt has been transferred.
If, while the supplier is waiting for payment the base rate (Reference Rate) changes the amount of interest needs to be apportioned to take account of the change in the base rate. Further, if the purchaser pays only part of the debt owed; the part-payment will first go to reduce the amount of interest owed and then the principle sum that is owed.
In reality a business or commercial enterprise does not have to exercise the right to claim interest and many are concerned that this will risk their existing relationship. However, if you state at the time the contract is made that you will exercise your right to interest if payment is late, this may act as a deterrent of sorts. But then if paid late consistently, you must exercise the right
The question is often asked, “Is it right to claim interest and compensation for late payment?”
To which the simple answer is “is it right to fail to make payment in accordance with the terms and conditions that you have agreed?”