The Late Payment of Commercial Debts Act Explained: Your Right to Charge Interest

Are you treating your B2B clients like they are customers, or are you accidentally acting as their free, unauthorised bank? When a commercial client ignores your payment terms and holds onto your money, they are effectively using your business to prop up their own cash flow.

Many UK small and medium-sized enterprises (SMEs) absorb this financial abuse because they believe they have no other choice. They fear that adding late fees will "ruin the relationship." But the reality is, a client who routinely abuses your payment terms is already damaging your business.

Fortunately, UK law is entirely on your side. The Late Payment of Commercial Debts (Interest) Act 1998 (and its subsequent amendments) is arguably the most powerful, yet under-utilised, weapon in a creditor's arsenal. In this comprehensive guide, I will break down exactly how this legislation works, how to calculate your statutory interest, and how you can legally force your debtor to pay your debt collection agency fees.

What is the Late Payment Act?

Introduced to protect SMEs from the aggressive cash-retention tactics of larger corporations, the Act creates a statutory framework that automatically penalises late paying businesses. It ensures that if a commercial invoice is not paid on time, the creditor is legally entitled to financial compensation for the delay.

Crucially, you do not need to have a late payment clause written into your contract to use this Act. The rights provided by the legislation are automatically implied into every B2B contract governed by UK law, unless you have explicitly agreed to a different, substantial remedy for late payment.

Does the Act Apply to My Invoices?

To invoke the Act, your situation must meet three simple criteria:

1. It must be a B2B transaction: The debt must be between two businesses (Limited Companies, PLCs, LLPs, or sole traders acting in a business capacity). It does not apply to consumer debts.
2. It must be for goods or services: The Act covers commercial supply. It does not cover consumer credit agreements, mortgages, or standard loans.
3. The payment must be legally late: If you agreed on a payment date in your contract, the payment is late the day after that date. If you did not agree on a specific date, the law imposes a default strict 30-day payment term from the date the debtor received the invoice or the goods/services (whichever is later).

1. How to Charge Statutory Interest (The 8% Rule)

Once an invoice is officially late, the Act allows you to begin charging "Statutory Interest." This is not a trivial amount. The rate is set at 8% plus the Bank of England (BoE) base rate.

The BoE base rate you use is fixed for six-month periods to make calculations easier. If your invoice becomes late between January 1st and June 30th, you use the BoE base rate from December 31st of the previous year. If it becomes late between July 1st and December 31st, you use the rate from June 30th.

2. Claiming Fixed Late Payment Compensation

Interest accrues daily, but the Act also allows you to hit the debtor with an immediate, one-off penalty the very second the invoice becomes late. This is designed to compensate you for the administrative headache of having to chase the debt.

The amount you can charge is a fixed sum, tiered based on the size of the individual invoice (not the total ledger):

Size of the Unpaid Invoice	Statutory Compensation Amount
Up to £999.99	£40.00 per invoice
£1,000 to £9,999.99	£70.00 per invoice
£10,000 or more	£100.00 per invoice

Note: If a client owes you five separate invoices of £500 each, and all five are late, you can charge £40 compensation five times (£200 total), plus the daily interest.

3. Section 5A: Passing on the Debt Collection Fees

This is the most crucial, yet overlooked, amendment to the Act. In 2013, the UK Government recognised that the fixed compensation (£40-£100) rarely covered the actual cost of hiring a professional to recover the debt.

They introduced Section 5A. This section states that if the fixed compensation does not cover your reasonable costs of recovering the debt, you are legally entitled to claim the shortfall directly from the debtor.

What does this mean for you?
It means that if you instruct a commercial debt collection agency, you can legally add the agency's commission or legal fees to the debtor's total outstanding balance. In many successful recovery scenarios, the debtor ends up paying the agency fees, ensuring you receive 100% of your original invoice value back into your bank account.

How to Enforce Your Rights Under the Act

You do not need to wait for a court to grant you these fees. You can—and should—apply them immediately during your pre-legal credit control process.

1. Issue a Revised Statement: Send the debtor an updated statement of account showing the original principal debt, the fixed compensation applied, and the daily interest accruing.
2. Send a Letter Before Action (LBA): Clearly state that you are enforcing your rights under the 1998 Act. We highly recommend using our Free Final Demand Letter Template, which incorporates the necessary legal wording.
3. Instruct an Agency: If the revised statement and LBA are ignored, do not waste further time. The longer you wait, the lower the probability of recovery.