Late Payments of Commercial Debts Regulations 2013
Debtors Guide Q & A Where the Act is to be enforced
Why the ACT?
The legislation fulfils the UK’s obligations under the European Directive on combating late payment of commercial transactions. The UK was one of the first countries in the EU to implement late payment legislation and maintains this legislation after Brexit.
The aim of the Act is to promote a culture of prompt payment within the UK. Most businesses will identify with and recognise the problems associated with late payment that has plagued legitimate business for many decades. The issue of note is that until recent times, the problem has been getting steadily worse. This legislation ensures that companies with available funds cannot continue to sit on the same to their own benefit with the penalties for late payment usually being more costly than for example their own overdraft rate.
What Does the Act Provide for?
All companies have an automatic legal right to both late payment interest and also a fixed ‘compensation’ fee from late paying business customers. The legislation was further amended in April 2013 to allow the right to claim additional costs incurred in collecting overdue payments if the fixed fee compensation does not cover all costs. .
Can we dispute the interest and/or the compensation charge?
No. If you are late in paying this account then you have no legal right of appeal against these fees. This is legislation that is enforceable through the UK courts.
What if we didn’t agree to late payment charges?
The Late Payment of Commercial Debts Legislation is statute. Therefore, you do not have to expressly agree to these terms for them to be enforceable.
What happens if we just pay the principal sum?
The Act provides that any part payments received from a purchaser, following formal notification from a supplier that they intend to claim the interest and/or compensation costs, be allocated first and foremost against the due costs.
Accordingly paying the principal sum only will essentially leave you with a balance on the account which you have already acknowledged as being due and payable by very definition of the fact that you have paid the account.
A new daily interest rate may even then apply to the balance and further compensation costs could also be added once again if you do not pay. This is achievable because the outstanding sum is not costs but simply the balance of the account.
Proceedings may then be issued against you immediately, without further reference, as you have failed to discharge the letter of demand in full.
Realistically if court proceedings are issued against you in these circumstances then this would be a legal case that you will not be able to win. You and/or your legal advisors will be challenging UK Government directives, not just contractual terms between your company and your supplier. It seems likely that a Judge would view such actions very dimly. You will also become liable for court fees in addition to the interest/compensation costs penalty in the event that proceedings are issued against you.
What if we dispute the principal sum in its entirety?
If your dispute is valid then of course you will not be liable for any late interest or compensation penalties. Please bear in mind however, that if our client does not accept your dispute, and a court
subsequently awards a judgment order against you, then the penalties noted on the letter of demand will become immediately due in full. In these circumstances there will also be additional interest charges calculated up until the date that the debt is finally settled, and you may also find that there are further court fees and solicitors costs to pay.
If you feel you have a merited dispute of this nature, we recommend that you contact us without delay.
The debt is part disputed. Are all interest fees payable?
No. You may be entitled to a recalculation of interest penalties on a pro-rata basis. If you are a debtor with this dilemma then it is recommended that you contact us to discuss the position. Again, however any recalculation will be subject to the costs being reapplied in the event that the debt is ultimately upheld as legitimate. It is unlikely that the compensation costs figure noted on the letter of demand will be varied.
How is the interest calculated?
The legislation provides that the Bank of England Reference Rate is used to determine the late payment interest rate, which is fixed for a six-month period. The late payment interest rate that applies in the UK is the Bank of England reference rate + eight per cent. The annual rate therefore at the date of preparation of this document 2/01/24 is 13.25% per annum. The easiest means of explanation is to provide an example calculation:
Debt Value – £3,500.00
Days Overdue – 72
Prevailing Interest Rate – 13.25% (reference rate 5.25% plus 8.00%)
£3,500.00 x 11.25% = £463.75
Divide by 365 days= Daily interest rate of £1.27
72 days overdue multiplied by £1.27 = £91.48 = Total Interest Due on the day of calculating and increasing at a rate of £1.27 per day until payment or sooner Judgment.
All parties who wish to verify the interest calculation received by them should apply the calculation to the above formula using the information provided on the letter of demand. Late payment interest is calculated up to and including the expiry date of the letter of demand. Please note is may be necessary for you to apply a calculation on each and every invoice owing to our client by your company dependent on the reference rate when each invoice became due for payment.
How is the Compensation Charge Calculated?
There is an automatic fixed fee per debt (invoice) dependent upon each invoice value.
| Value of unpaid invoice | Sum to be paid to the creditor |
| Up to £999.99 | £40.00 |
| £1,000.00 to £9,999.99 | £70.00 |
| £10,000.00 or more | £100.00 |
How is the additional costs of recovery calculated?
The legislation confirms that compensation is due on each qualifying ‘debt’, therefore invoice.
If the fixed fee compensation is not enough to cover the costs incurred to date of the recovery of the outstanding debts, the Regulations allow for additional costs to be claimed against the debtor.
What should we do now?
Put quite simply the choice is pay your indebtedness now or incur increased charges for non-payment.
