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A Guide to Late Payment Regulations

By: Kevin Watson MSc - Updated: 18 Mar 2011 | comments*Discuss
Late Payment Commercial Debts Interest

Late payment for goods and services can destroy businesses. Lack of money disrupts cash flow. Entrepreneurs have to turn to banks for help to pay their debts. But the banks may not be willing to offer credit.

This means that some entrepreneurs go bankrupt. Those who survive lose confidence in the integrity of their customers. They cannot plan ahead.

Late payment is clearly a serious issue. It damages an economy. And the UK is particularly prone to the problem. According to BACS, the direct debit and credit organisation, small and medium-sized businesses in the UK have to wait, on average, 41 days longer than their agreed payment terms before customers pay invoices.

Benefits of Prompt Payment

The negative effects of late payments are clear. But what are the benefits of prompt payment?

Prompt payments mean that entrepreneurs can:

  • Rely less on banks and credit facilities
  • Plan their businesses with greater confidence knowing that money will flow regularly
  • Pay their own debts promptly
  • Be more competitive by reducing their prices because they don’t have to pay bank fees for credit
  • Establish a more trusting and relaxed relationship with customers

Furthermore, prompt payment of debts encourages investment. An economy can then grow more successfully.


The UK Government has recognised these benefits. In 1998, it introduced the Late Payment of Commercial Debts (Interest) Act. It then supplemented and amended the Act four years later with the Late Payment of Commercial Debts Regulations. The Government refers to the Act and the Regulations together as the UK’s late payment legislation.

From 7 August 2002, all businesses of any size, and all public sector organisations, can use the legislation. An entrepreneur can claim statutory interest and compensation for the late payment of a commercial debt.

Period of Payment

A customer usually has 30 days to pay an invoice. The period begins from the later of:
  • The day on which the customer receives the invoice
  • The day on which the customer receives an entrepreneur’s goods or services

The Interest Rate

Once 30 days is up, the interest rate for late payments is 8% above the Bank of England base rate. This is ‘simple’ interest and not ‘compound’.

To calculate the interest, an entrepreneur should establish the base rate, the number of days the debt is overdue, and the amount of the debt.

For example:

  • The interest rate is 8% plus a Bank of England base rate of 0.5% = 8.5%
  • The number of days the debt is overdue is 40
  • The amount of the debt is £2,000
  • Annual interest is £2,000 x 8.5% = £170.
  • Daily interest is £170 divided by 365 = 47 pence.
  • Total interest is 47 pence x 40 days = £18.80.


An entrepreneur can charge interest on the gross debt. This may include VAT. An entrepreneur does not, however, pay VAT on the interest.


In addition to interest, an entrepreneur can charge compensation for a late payment.

The rates are as follows:

  • £40 for debts up to £999.99
  • £70 for debts of £1,000 - £9,999.99
  • £100 for debts of £10,000 or over

Contractual Interest

An entrepreneur and a customer can make alternative arrangements about interest for late payments. The law refers to such interest as contractual.

If contractual interest applies, an entrepreneur cannot use the late payment legislation.

Custom and Practice

The late payment legislation does not have to affect current custom and practice. An entrepreneur may, for example, have an arrangement with a customer to receive payment at the end of the month that follows the date on an invoice. Such a payment may be in excess of 30 days.

If the payment is still late, the legislation applies. In these circumstances, an entrepreneur calculates interest from the final day of the month that follows the month in which the customer received the invoice.


Late payment legislation applies in one form or another to all countries of the European Union. The details of the legislation described here are specific to England, Northern Ireland, Scotland and Wales.

Prompt Payment Code

The Confederation of British Industry (CBI), the British Chambers of Commerce (BCC), the Federation of Small Businesses (FSB), the Forum of Private Business (FPB) and the Institute of Directors (IoD) support the prompt payment of commercial debts. To assist businesses, they have drawn up the Prompt Payment Code (PPC).

The purpose of the PPC is to provide clear advice about the payment process and to encourage best practice. In effect, best practice means paying invoices on time. Entrepreneurs can sign up to the PPC to show their willingness to abide by its principles.

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