Short answer: the Late Payment of Commercial Debts (Interest) Act 1998 lets a business claim simple interest at 8% above the Bank of England base rate on a late invoice from another business, plus fixed compensation of £40, £70 or £100 per invoice and reasonable recovery costs under section 5A. It applies to most business-to-business supplies of goods and services, unless the contract provides a substantial alternative remedy.
Many businesses do not realise that the law gives them a right to interest when another business pays late, even if their terms say nothing about it. The Late Payment of Commercial Debts (Interest) Act 1998 has been in force for years, but it is still under-used. This guide explains what the Act gives you, how to work out the figures, and how to use it calmly in your credit control.
Debt Collection UK is a trading name of PASECOM GROUP LTD. We introduce unpaid invoices owed by limited companies, LLPs and PLCs to independent partner agencies, who collect. We are not solicitors and we are not authorised by the FCA. This is general information, not legal advice.
What is the Late Payment Act?
The Late Payment of Commercial Debts (Interest) Act 1998 implies a term into qualifying contracts that a debt carries simple interest, called statutory interest, if it is paid late. Later amendments added fixed compensation and a right to reasonable recovery costs. GOV.UK’s guide to late commercial payments summarises the rules.
Does the Act apply to your invoices?
Under section 2, the Act applies to a contract for the supply of goods or services where both the buyer and the supplier are acting in the course of a business. That covers most invoices between companies, and between a sole-trader supplier and a company customer. It also applies to public authorities as buyers.
It does not apply to consumer contracts, and certain contracts are excluded, such as some consumer credit and security arrangements. Section 12 deals with contracts that have an international element; the governing law matters.
When is a payment late under the Act?
If you agreed a payment date, interest runs from the day after it. If you did not agree a date, the debt becomes late 30 days after the later of the customer receiving the invoice and you supplying the goods or services. Agreed terms between businesses are generally limited to 60 days unless a longer period is not grossly unfair to the supplier, and public authorities must usually pay within 30 days. See our guide on when a commercial invoice is legally late.
How do you calculate statutory interest?
The rate is 8% a year above the reference rate. The reference rate is the Bank of England base rate in force on 31 December (for interest arising from January to June) or 30 June (for July to December). It is fixed for that six-month period, even if base rate changes. Always look up the right reference date rather than using a figure from memory.
It is simple interest, not compound. The calculation is:
- Annual rate = 8% + reference rate.
- Annual interest = invoice amount × annual rate.
- Daily interest = annual interest ÷ 365.
- Interest due = daily interest × number of days late.
As a guide to scale: on a £10,000 invoice paid 60 days late, every 1% of annual rate adds about £16.44 of interest (£10,000 × 1% × 60 ÷ 365). Multiply that by the full annual rate for the period. State the daily figure in your letters so the debtor can see how it is built up.
What fixed compensation can you claim?
Under section 5A, once statutory interest starts to run you can also claim a fixed sum for each late invoice:
- £40 where the debt is less than £1,000;
- £70 where it is £1,000 or more but less than £10,000;
- £100 where it is £10,000 or more.
The sum is claimed once per invoice, not once per reminder. See late payment compensation explained.
Can you claim recovery costs under section 5A?
Yes, within limits. Section 5A also allows you to claim reasonable costs of recovering the debt that the fixed sum does not cover. That might include some third-party recovery costs. The test is reasonableness, and you must actually incur the costs. Do not promise a debtor that a specific agency fee will be added, and never invent costs. Our guide on adding collection costs to a commercial invoice goes into this.
Can a contract replace the statutory rights?
A contract can set its own late payment interest instead of statutory interest, but only if it provides a substantial remedy. A clause that sets a token rate, or tries to exclude interest altogether, can be overridden by the Act. Read your own terms and your customer’s terms carefully; the version that governs the contract matters.
How do you use the Act in practice?
- Mention it on your terms and invoices. It is not required, but it sets expectations.
- Calculate accurately. Use the correct reference rate and dates.
- Include it in your letter before action. For a company debtor, follow the Practice Direction – Pre-Action Conduct and Protocols and give 14 days to pay or explain any dispute. Our final demand guide has a template.
- Use discretion. You can waive interest as part of a settlement. That can be a sensible way to get the principal paid quickly.
- Include it in any claim. If you issue a county court claim, add the statutory interest and compensation to the claim.
What records should you keep?
Good records make your Late Payment Act figures hard to challenge. Keep the contract, order or accepted quote showing the agreed payment terms; proof of when the invoice was sent and received; proof of when the goods or services were delivered; and a note of the reference rate you used and where you found it. Keep a simple schedule showing each invoice, its due date, days late, daily interest and the fixed sum claimed. If the matter goes to an agency or a court, that schedule can be used as it stands.
Frequently asked questions
Do I need a late payment clause to claim interest?
No. The Act implies the right into qualifying contracts.
Is statutory interest compound?
No. It is simple interest.
Can a sole trader claim under the Act?
Yes, if both parties are acting in the course of business. Note that we only accept debts where the debtor is a limited company, LLP or PLC.
Does claiming interest guarantee payment?
No. It increases what you can claim. It does not make the debtor pay.
Want a partner agency to pursue the invoice?
If the debtor is a limited company, LLP or PLC and the invoice is undisputed, upload it using the form below. We introduce it to an independent partner agency, which can include your statutory interest and compensation in its demand. The fixed fee is 15% of what is recovered, charged only when you are paid.