Interest on late payments

With more and more businesses feeling the pinch in the current financial climate, it is taking longer to obtain payment of invoices. John Abbott explores the possibility of claiming interest on invoices that are not paid on their due date.

An entitlement to claim interest can come from any of three possible sources:

1. Your terms and conditions. Well-prepared terms and conditions should make provision for an entitlement to interest if an invoice is not paid on its due date. The terms and conditions should set out the rate of interest to be claimed. Providing the terms and conditions have been properly incorporated into the contract then you would be entitled to claim interest as a contractual right at the rate provided for in the terms and conditions.

2. The Late Payment of Commercial Debts (Interest) Act 1998. Even if your terms and conditions do not enable your case, you may nevertheless be entitled to claim interest on unpaid invoices. The rate currently applicable under this legislation is 8 percent above base rate. This is a statutory right to claim interest on invoices that are not paid by their due date.

3. Court Interest.  Interest can be charged on the issue of proceedings in the High Court or the County Court to recover a debt. The present court rate is 8 percent and interest will run from the date that the debt was due until judgment or the debt is paid.

Under the first two above, you do not have to wait until proceedings are issued to claim interest, you can simply issue a demand or an invoice, or series of demands or invoices, for the interest.

You will be able to sue not only on the principal debt, but also on the interest claimed. In theory, if the principal debt has been paid late, you can still pursue the interest on it separately.

Interest under the final source can only be claimed once proceedings have been issued for the principal debt.

Claiming interest under terms and conditions or under The Late Payment of Commercial Debts (Interest) Act 1998 has the advantage of putting an interest claim before a late payer without the need to issue proceedings, and if the late payer can see that interest is running, may be persuaded to pay debts promptly.

Of course, in reality, the bargaining power of a large and valuable customer may mitigate against pursuing a claim for interest against it.