Charging interest on a late invoice

The statutory right, and who it covers

The Act covers commercial debts: a business supplying goods or services to another business, or to a public authority. A limited company, a partnership, a landlord letting property as a business and another sole trader all count. Your neighbour having a bathroom done does not.

You do not have to have mentioned interest anywhere. The right is implied into the contract by statute, so it applies even if your invoice was a plain total on a scrap of paper. That is why it is worth knowing about: it is a right you already have and have probably never used.

The rate, and the date that fixes it

The rate is the Bank of England base rate plus 8 percentage points. The detail that trips people up is which base rate. It is not the rate today, and it does not move when the Bank moves it mid-debt. The Act uses the rate in force on 31 December for debts becoming due in the following January to June, and the rate in force on 30 June for debts becoming due in the following July to December.

So the rate for a given debt is fixed on the day it fell due and stays there, however many times the Monetary Policy Committee meets afterwards. Interest then accrues daily on the outstanding amount until it is paid.

The arithmetic is not hard, but it is fiddly enough to get wrong on a letter you are about to send, which is what our late payment calculator is for. It also produces a line of wording you can paste straight into a reminder.

The fixed compensation almost nobody claims

On top of the interest, each late commercial invoice carries a fixed sum. It is £40 where the debt is under £1,000, £70 where the debt is £1,000 or more but under £10,000, and £100 where the debt is £10,000 or more. It is per invoice, not per customer, so a contractor sitting on six of your invoices owes six of these.

There is a further entitlement that even fewer people use. If your reasonable costs of recovering the debt come to more than the fixed sum, you can claim the difference. Debt recovery agency fees and, in some cases, legal costs can fall under this.

On a small invoice the fixed sum is often larger than the interest. On a £600 invoice a month late, the interest is a couple of pounds and the compensation is £40, which is the part that gets noticed.

When the clock starts

If you agreed a payment period, interest runs from the end of it. If you agreed nothing, the default is 30 days, counted from the later of two dates: the day the customer received the invoice, or the day the goods or services were supplied. That default is the reason to put a term on every invoice, because otherwise the clock is set by whichever of those two events happened last and you may not be able to prove when they got it.

There are limits on how long a payment period can be. Between businesses, more than 60 days is open to challenge unless it is expressly agreed and not grossly unfair to the supplier. For a public authority, 30 days is the maximum and it cannot be extended.

A contract can set its own interest rate instead of the statutory one, but a term that provides no substantial remedy for late payment can be struck out as grossly unfair, and the statutory rate applies in its place. In practice, a supplier's terms that undercut the statutory rate tend not to survive that test.

Charging a private customer

For domestic work there is no statutory interest. If you want to charge it, the right has to come from your own terms, and those terms have to have been given to the customer and accepted before the work started. A line added to the invoice afterwards is not a contract term, it is a wish.

The rate also has to be fair. Consumer contract terms are assessed for fairness under the Consumer Rights Act 2015, and a penal rate on a domestic job is the kind of term that gets held unenforceable. A modest rate stated clearly on the quote is far more likely to stand up than an aggressive one buried in small print.

The practical version for a one-person trade business: put a short payment terms line on your quotes, state the period and state that interest applies after it, and get the quote accepted in writing. That single line does more for your cash flow than any amount of chasing afterwards.

Whether to actually charge it

Most sole traders who are entitled to statutory interest never claim it, and the usual reason given is that it would sour the relationship. That is a real consideration with a customer you want again, and a much weaker one with a customer who has ignored three reminders.

The way to think about it is that the interest is a bargaining chip rather than income. A line in a reminder saying you are entitled to base rate plus 8% and a fixed sum per invoice tells an accounts department that you know what you are owed, and accounts departments pay the suppliers who know. You can then waive it as a gesture when they settle, which costs you the interest and buys back the relationship.

One thing to be clear about if you do collect it: interest received on a business debt is taxable income and goes in your accounts like any other receipt.

Common questions

How much interest can I charge on a late invoice in the UK?

On a business-to-business debt, the Bank of England base rate plus 8 percentage points, using the base rate in force on the preceding 31 December or 30 June rather than today's rate. On top of that you can claim a fixed sum per invoice: £40 under £1,000, £70 from £1,000 to just under £10,000, and £100 at £10,000 or more.

Can I charge a late payment fee to a homeowner?

Only if your terms said so before the work started and the customer accepted them. There is no statutory right to interest on a consumer debt, and a charge added to the invoice after the event is not enforceable. The rate also has to be fair under the Consumer Rights Act 2015.

Do I have to warn the customer before charging interest?

There is no statutory requirement to warn a business customer first, because the entitlement exists whether or not anyone mentioned it. Saying it in a reminder is still worth doing, since the purpose of the interest is usually to get the invoice paid rather than to earn the interest.

My invoice never mentioned interest. Can I still claim it?

From a business customer, yes. The right is implied into the contract by the Late Payment of Commercial Debts (Interest) Act 1998 and does not depend on anything you wrote. From a private customer, no.

Can I claim the fixed compensation on every unpaid invoice?

On every late commercial invoice, yes, and it is per invoice rather than per customer. A contractor holding six of your invoices past their due dates owes the fixed sum six times over, alongside the interest on each.

Is late payment interest taxable?

Yes. Interest and compensation received on a business debt are taxable income and go into your accounts like any other business receipt.

Do the maths

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• How to chase an invoice without losing the customerThe wording and timing that get an overdue invoice paid without damaging a customer relationship, plus what to do when the invoice is stuck inside a company.
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• Should you put an unpaid invoice with a debt collection agency?What debt collection agencies charge, when a third-party letter works better than yours, and when a free letter before action does the same job for nothing.
• Writing off an unpaid invoiceWhether you can claim tax relief on a bad debt depends on which accounting basis you use, and most sole traders are now on the one where there is nothing to claim.

All of it, in the order you need it, on the getting paid hub.

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