Changes to Late Payment of Commercial Debts Regulations

Posted on March 18, 2013

Late payment of debt will incur extra penalties, including interest, fixed late payment fees and other ‘reasonable’ costs due to new Regulations coming into force this month.

The Late Payment of Commercial Debts Regulations 2013 will apply to commercial contracts made on or after March 16th 2013 for the supply of goods or services. The Regulations will not apply retrospectively.

Under the current Late Payment of Commercial Debt (Interest) Act 1998 businesses are entitled to charge other business customers interest on overdue accounts and to obtain compensation for late payment. Where the parties have not agreed a payment period for invoices, a 30-day period is permitted for whichever is the later of receipt of the goods or services and/or the invoice for the goods or services. The creditor is then following this period entitled to recover interest. Where the parties have agreed a payment period for invoices, interest is not recoverable until after that agreed period has expired. This could create a situation where debtors agreed long payment terms which would result in creditors not being entitled to recover interest.

The Regulations coming into force on the 16th March 2013, amending the Act. Any commercial contracts for the sale of goods or services will be subject to the certain new provisions on payment.

Where a business purchases goods or services and the contract is silent on the time for payment, the default position is that interest will start to run on outstanding payments from 30 days after the latest of receipt of the supplier’s invoice, receipt of the goods or services or verification/acceptance of the goods/services.

Where there is an agreed payment period for invoices, interest will accrue from the expiry of the agreed period only where it does not exceed certain limits. Businesses are still entitled to agree payment terms of any length, however if the payment term is more than 30 days over the default limit i.e. 60 days, the business will need to establish that the payment period is not 'grossly unfair' to the supplier. Payment terms breaching the limits will result in interest accruing from the 30 day period irrespective of the agreed payment terms.

Commenting on the new regulations, Laura Pracy, Commercial Litigation Solicitor at Pearson Hinchliffe Commercial Law, said: “This is good news for SME’s if used effectively in credit control procedures it will boost cash flow and profitability.”

The Regulations make a number of changes and impose payment periods for commercial contracts for goods and services and interest payments after certain time periods. In essence the Regulations ensure private and public sector businesses pay their debts within a certain time period failing which creditors can now charge all ‘reasonable’ costs incurred in recovering the debt, in addition to interest and fixed late payment charges.

Defaulting purchasers are required to pay interest at a rate of 8% over the statutory rate (currently 0.5%) totalling 8.5%, or a rate which provides a "substantial contractual remedy", and compensation for the cost of recovering the debt.

The new Regulations also provide that in addition to the fixed late payment fee that a creditor may claim as compensation for the cost of recovering the debt, (between £40 - £100 depending on the size of the debt) the creditor can also now claim any other reasonable costs of recovery.

Mrs Pracy added: “Costs of legal action can be off putting for many small firms but this revised legislation will allow creditors to recover their reasonable costs. We would suggest this would include the cost of sending your debtor a solicitors letter before action and other fixed legal costs. I would advise businesses to take a good look at their terms and conditions and if they have any questions not to hesitate in contacting us. They need to look also at their approach to supplier payment terms and perhaps amend internal policies as appropriate.”

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For further help and advice please contact: Laura Pracy using the details provided below.

Please note that the information and opinions contained in this article are not intended to be comprehensive, nor to provide legal advice. No responsibility for its accuracy or correctness is assumed by Pearson Solicitors and Financial Advisers Ltd or any of its members or employees. Professional legal advice should be obtained before taking, or refraining from taking, any action as a result of this article.

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