It’s a fact of life that businesses are getting worse at paying their bills on time. You’re fed up with the effect on cash flow and want to start charging interest. What’s involved and how do you calculate what’s due?
Can we charge it?
Provided your customer’s not a consumer i.e. they’re in business, and as long as there’s no argument over the bill, then under the Late Payment of Commercial Debts (Interest) Act 1998 (“the Act”) you’re automatically entitled to charge interest on overdue debts. There’s no need to even refer to the Act in your terms and conditions, it’s automatically implied.
What’s the rate?
The Act provides that you’re entitled to charge interest at the rate of 8% above the Bank of England’s base rate (currently 4.75%). This figure applies no matter how much is owed. To save you having to do a series of calculations each time the rate changes, you only need to know the rate on either June 30 or December 31. This is because the Act says that if the debt arose between July 1 and December 31, the base rate applicable is the one on the preceding June 30. Likewise, if the debt arose between January 1 and June 30, you apply the base rate that prevailed on December 31.
To check what the rate was on the relevant day, visithttp://www.bankofengland.co.uk.
There’s nothing to stop you setting your own rate of interest. However, be aware that the Act doesn’t then apply. Also don’t go overboard – it’s always open to the customer to go to court to challenge your interest figure and you may end up having it reduced to the rate under the Act. Nonetheless, there’s no reason why you shouldn’t charge more than the statutory rate. Something like 12% plus base should be OK.
When is the debt overdue?
The Act says you can start to charge interest on the amount owed (including VAT), 30 days after either the date you supplied your goods/services, or the date the customer’s given your invoice, whichever is later.
To start the clock ticking as quickly as possible, don’t delay in sending out your invoices. Remember, if your normal procedure is to do the job or provide the goods before sending out your bill, you can’t start to charge interest unless and until you invoice your customer. Better still, override the 30-day period altogether by adding a clause to your contract saying when interest becomes due i.e. on receipt of the invoice.