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What legal options are available to tackle late payment?

  1. Small business late payment fines
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    Lovetts Solicitors

    Lovetts Solicitors UKBF Contributor Full Member

    Posts: 83 Likes: 13
    3 |

    In order to achieve financial success, companies should create a net profit at the end of each financial year. Whilst some larger corporations may be able to ride out a temporary loss, this isn’t always true for smaller businesses who rely on a healthy cashflow to stay afloat.

    Late payment law ensures that companies can take swift action if a debt occurs. If contract terms are not met and payment isn’t received, late payment law enables companies to recoup a potential loss before it causes an irreversible cashflow issue.

    What is late payment law?

    Governed by the Late Payment of Commercial Debts (Interest) Act 1998 and subsequent Regulations companies can claim interest and also receive fixed sum compensation if a payment is not received or if a payment is late. Only applicable to business agreements, the Act discourages tardy payments and provides legal recourse for companies who are owed money.

    If legal action is required, late payment law also seeks to protect small businesses by allowing them to seek the recovery of any reasonable costs.

    When is a payment late?

    Contractual terms

    Taking a proactive approach to late payments is vital for companies. By including express terms in your contract, you can specify when payments should be made and what the penalties are for delayed payments.

    In order to determine when a payment becomes late, it’s necessary to examine the terms of your contract. If your commercial contract specifies a date upon which payment should be made, it will be considered late if it is not received by this time. 

    Whilst parties are free to set their own terms regarding payment, it is important that the payment terms suit your business and that cashflow will not be adversely affected by having lengthy payment terms.

    Statutory interest

    If a commercial contract does not state when payment should be made, the Late Payment of Commercial Debts (Interest) Act 1998 comes into force. Under the law, payment must be made within 30 days of either:

    • The invoice being received
    • The goods or services being received
    • The goods or services being verified or accepted 

    If payment is not made within this timeframe, it is classed as late and the supplier may begin to charge interest on the debt, as well as instigating a debt recovery process.

    What can a supplier claim after a late payment?

    As well as enabling a company to recover the relevant invoice amount, the law provides the opportunity to claim additional recompense: 

    Late payment interest

    Late payment interest is typically claimed at 8% above the Bank of England base rate, but the Court has the discretion to award interest at a rate that it believes is fair. Interest is calculated from the date the invoice becomes due until the date payment is made.

    Late payment compensation

    Generally, the compensation available to a supplier is a relatively small amount. Depending on the value of the contract and payment in question, companies can claim compensation between £40-£100:

    Invoice Amount

    Compensation

    Up to £999.99

    £40 per invoice

    £1,000 - £9,999.99

    £70 per invoice

    Over £10,000.00

    £100 per invoice


    Cost of recovering debts

    Whilst the compensation (cited above) is intended to cover the costs of debt collection, this isn’t always the case in practice. If a contract is signed after March 2013, the Late Payment of Commercial Debts Regulations 2013 are applicable and these allow companies to claim back any additional costs of recovering the debt, providing they are reasonable. 

    When recovering outstanding debts, companies can claim both interest and compensation, in addition to the reasonable cost of recovery, rather than just one form of recompense. 

    Enforcing debts with late payment law

    Although the law protects businesses from the damaging effects of late payments, some companies and organisations have been reluctant to take enforcement action. In some instances, people assume that instigating debt recovery will harm commercial relationships.  As a result, on average only 25% of businesses are utilising the late payment law.

    However, late payment law can be used to recover debts without souring existing business arrangements. Many businesses that utilise the late payment law still maintain good relationships with their customers and continue to trade with them.

    #0
  2. Dan Shaw

    Dan Shaw UKBF Contributor Full Member

    Posts: 36 Likes: 2
    Fantastic artical.. really great advice :)
     
    Posted: Jul 12, 2017 By: Dan Shaw Member since: Jul 8, 2017
    #2
    Lovetts Solicitors likes this.
  3. nicebloke

    nicebloke UKBF Newcomer Free Member

    Posts: 17 Likes: 0
    The biggest problem with this is that larger companies do not produce a PO for the late payment charges so their accounts are unable to process the invoice for it. Inevitably it has to go through court which really isn't worth the hassle unless it 000's.
     
    Posted: Jul 12, 2017 By: nicebloke Member since: Jun 4, 2013
    #3
  4. Lovetts Solicitors

    Lovetts Solicitors UKBF Contributor Full Member

    Posts: 83 Likes: 13
    Our experience is that 86% of Companies will pay at the Letter Before Action stage without the need for further legal action. However, over the past 22 years we have seen many delaying tactics when it comes to payment. A classic is when the Company states their internal accounting procedure prevents them from making payment. For example, they need a PO or " you have missed our payment run therefore, payment can only be made on the next payment which is next month." However, these are just excuses and often when pushed they will find a way to make payment.
     
    Posted: Jul 17, 2017 By: Lovetts Solicitors Member since: Oct 14, 2015
    #4