Late Payment Legislation

Late and non-payment of commercial invoices is one of the most common reasons for the failure of small and medium enterprises. YouGov research shows that around 85% of UK businesses are affected by customers who pay late or avoid payment, while the amount of business to business late debt has reached a record £39.4 billion.

Late payment of invoices places a strain on cash flow, tying up working capital and restricting business growth. There is also a high risk that late payment will become bad debt and affect profitability. Despite the impact late and non-payment can have on a business, dealing with the situation remains a difficult challenge for most businesses.

The UK was one of the first countries in the EU to recognise that the problems associated with commercial late payment and bad debt were having a negative impact on the whole economy as more and more businesses were forced to close and more people became unemployed. The Government first introduced legislation to help combat the problem in 1998 when The Late Payment of Commercial Debts Act came in to force.

For the first time this legislation allowed businesses a statutory right to charge each other interest on the late payment of commercial debt. The Government and EU have continued in their efforts to promote a culture of prompt payment and have amended the legislation several times since 1998 including a provision that allows businesses to claim fixed amounts of compensation from the debtor. The most significant amendment came in 2013 when a provision was introduced to allow the recovery costs of a third party, such as Advocate to be claimed from the debtor.

The Late Payment of Commercial Debts Act


Late payment legislation applies only to commercial, business to business debt. Both parties should be a business, commercial entity or public sector organisation. Businesses do not have to be limited and include self-employed persons. The legislation does not cover monies owed to a business by consumers.

Defining Late Payment

If you have agreed a credit period with a customer, the payment is late if it is not made by the last day of the agreed credit period.

If you have not agreed a specific credit period, then the legislation sets a 30 day default period. The 30 day default period starts on the day the goods or services are delivered by the supplier.

Interest is accrued from the expiry date of the credit period or 30 day default period.

Calculating Late Payment Interest

Interest rates are referred to as reference rates and are fixed in two standard six month periods, 1st January – 30th June and 1st July – 31st December. The reference rate is the Bank of England interest rate on the first day of the six month period.

The interest rate to be claimed is the reference rate from the six month period that the payment became late plus 8%.

Late payment interest is accrued on a daily basis.

Calculating Late Payment Compensation

Compensation can be charged in addition to interest. The amounts are fixed and apply to each invoice that makes up the unpaid debt:

Unpaid Invoice                                    Compensation

Up to £999.99                                     £40.00

£1,000 to £9,999.99                           £70.00

£10,000 or more                                £100.00

Calculating Late Payment Recovery Costs

Late payment legislation allows creditors to claim the reasonable costs of recovering a debt including the use of a third party. Reasonable costs are easier to quantify with the use of a third party such as Advocate, as the reasonable costs are simply the recovery fee we charge to the debtor.


Read and download the complete Late Payment Regulations:

Late Payment of Commercial Debts Regulations