debt recovery agency, debt collection services, late payment of commercial debts

A closer look at what the late payment of commercial debts act is all about

This law is in place to help suppliers know what their rights are when it comes to late payments and what they can actually end up charging. This helps to keep yourself compliant regarding handling overdue invoices. At the same time, it may also be a good idea to employ the services of a debt recovery agent if you are constantly noticing that a late payment of a commercial debt owed to you is happening. You can learn here to see if you’re ready to work with a dedicated debt collection services team.

Let’s look below to see what this commercial debts act covers, as well as updates to the late payments of commercial debts act in recent years.

Understanding how to know if the Act applies and is enforceable.

One of the key components that needs to exist is a legally binding contract between both businesses. Keep in mind that in the matter of international businesses and international contracts, this Act still can apply if the agreement states that the governing country is either England, Wales or Northern Ireland. Yet if there’s a lot of business and connection occurring within these parts of the United Kingdom, and the contract doesn’t state that fact, the Act could still apply. This helps to protect local U.K. suppliers when working overseas with businesses.

The payment that is owed must only be for goods or services that the supplier provided. Anything related to business debts or shares, or related to land, and a few other situations will not apply to the Act itself. It also has to have the contract state that there is always a consideration for payment (with money) when it comes to getting goods or services from the supplier.

A final note that is important is that both parties that signed the legally binding contract actually need to be fully recognised businesses, and there need to be invoices that are issued between these parties.

Additional items to note with changes that occurred in 2013

The regulations during this period added some additional rules to specifically support smaller suppliers that can suffer from cashflow issues the most. It limited how long B2B invoices could be paid before they were considered overdue. That means even if the invoice doesn’t state a date when the invoice is due anywhere the customer is still required to pay for that invoice within 30 days.

Of course there is flexibility with this addition and both parties are able to agree to extend those payment terms up to 60 days as long as it’s fair for both parties and done in writing which is a critical element.

A final piece to understand for those agreements that were signed post 16th of March in 2013 is that any costs accrued to try to get the debt paid, such as the hiring of a third-party debt recovery agency, can be added to the amount owed by the customer, on top of any other fees or interest accrued.

What does interest calculation look like with the Late Payment of Commercial Debts Act?

If it is deemed that the customer is late on their payments then the amount of interest rate that can be charged is the Bank of England’s base rate plus 8% on top of that. This is of course if there isn’t a specific interest rate written in the contract itself.

For example if you are owed £10,000 pounds and we’re looking at recent highs for the bank rate at around 5% (as of mid-2023) then the amount of interest that can be charged would look something like this:

  • Take the annual interest rate possible to charge, which would be £1,300 (£10,000 x 13% or 0.13 = £1,300)
  • From there, you want to get the daily interest owed, so take the £1,300 and divide it by 365, which gets you £3.56 of interest per day.
  • Then you can see how many days late from the terms the customer is and add interest accordingly. For example, if they were late by 35 days, then it would be 35 x £3.56 or £124.60 of interest owed.

Other fees are allowed to be charged depending on the size of the debt itself. This is in addition to any additional fees or interest charged and fixed amounts. The fixed payments range from £40 all the way up to £100 based on the total amount owed and on what tier it is in.

You have options

Know the rights you have that are designed to protect your businesses. There are avenues for you to take to work on recovering your money from debts or invoices owed and subsequent late fees and interest that can be charged for the inconvenience.