Most UK business owners have a legal right to charge interest — and a fixed compensation fee — on every invoice a business customer pays late. Very few actually use it. Here's what the Late Payment of Commercial Debts (Interest) Act 1998 gives you, and how to put it into practice without souring the relationship.
What the Act gives you the right to do
The Late Payment of Commercial Debts (Interest) Act 1998, as amended, gives businesses a statutory right to claim interest on a late commercial payment, plus a fixed sum in compensation, without needing anything written into the original contract. It applies automatically to B2B contracts for the supply of goods or services unless the parties have agreed a 'substantial remedy' of their own (see below).
Statutory interest — how it's calculated
The statutory rate is the Bank of England base rate plus 8%. So if the base rate is, say, 4.75%, the statutory interest rate on the overdue amount is 12.75% per year, calculated daily from the date payment became due until the date it's actually paid.
Fixed compensation you can also claim
On top of interest, the Act entitles you to a fixed compensation sum per invoice, based on the size of the debt:
- £40 for debts up to £999.99
- £70 for debts between £1,000 and £9,999.99
- £100 for debts of £10,000 or more
This compensation is payable in addition to interest, and — importantly — is also intended to cover reasonable debt recovery costs, so it can be claimed even if the debt is eventually paid in full without any legal action being taken.
Can a customer contract out of it?
Contract terms can override the statutory rate, but only if they provide a 'substantial remedy' for late payment — in practice, this means the alternative terms have to be broadly as good for the supplier as the statutory scheme. Simply writing '0% interest on late payment' into your terms and conditions is very unlikely to be enforceable if challenged, because it isn't a substantial remedy at all.
How to actually apply it in practice
Most businesses don't charge statutory interest routinely — it can feel confrontational for a first-time late payer you want to keep as a client. In practice, the sensible approach is:
- Send friendly reminders first, without adding interest, for the first minor lapse
- State clearly in your terms and conditions that statutory interest and compensation apply to late payments, so customers aren't surprised
- Add interest and the fixed compensation sum once an invoice is genuinely overdue and reminders haven't worked — this is also standard practice to include in a Letter Before Action
- Use it as leverage in negotiation — a customer facing a growing interest bill has more incentive to settle the principal sooner
Let the numbers do the talking
When we take on a commercial debt recovery case, we calculate and apply statutory interest and compensation as standard — it's often the extra push that gets a stalling client to finally settle, and it costs you nothing to have it correctly calculated and included. Get in touch if you'd like us to review an overdue invoice and work out exactly what you're entitled to claim.
