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Late Payment Interest- Advice for Creditors

16 November 2011

Under the Late Payment of Commercial Debts (Interest) Act 1998, all businesses have a statutory right to interest on late payments of debts under business-to-business contracts for the supply of goods or services.

A creditor is entitled to claim interest from the debtor, at 8 per cent above the Bank of England base rate, from the date when the debt becomes due. If no payment due date is specified in the contract, then the default period is 30 days.

Rates for calculating interest are called reference rates and are fixed for six-month periods. The Bank of England base rate on 31 December is used as the reference rate for debts becoming overdue between 1 January and 30 June of the following year. The rate in force on 30 June is used from 1 July to 31 December.

Creditors are  also entitled to charge a one-off sum to compensate for the cost of recovering the debt. This is set at £40 for debts up to £1,000, £70 for debts up to £10,000 and £100 for debts above £10,000.

If the contract contains an express term providing for interest on late payments then the Act will not apply and the creditor can only charge the contractual interest rate, usually 3-4 per cent above a bank’s base rate.

If on the other hand there is no express term in the contract, interest and compensation may be claimed under the Act. It would however be prudent for a creditor to include an express term providing for interest on late payments and also to preserve, by express provision, an alternative right to recover interest under the Act. This is a far more attractive option for the creditor as the statutory rate may be much higher than the contractual rate.

If you need clear and pragmatic legal advice, we’re here to help so please get in touch.

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Chris Wills LLB (Hons)
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