Late payment: your rights as a business

Claim statutory interest and debt recovery costs when business customers pay invoices late. Covers the Late Payment of Commercial Debts Act, the substantial remedy test for contract terms, Prompt Payment Code, public sector payment requirements, and how to enforce your rights.

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Guide summary

If a business customer pays your invoice late, you can charge them interest and a fixed fee. This is your legal right. You do not need to have this written in your contract. The law is there to help you get paid on time.

  • Charge interest at 8% plus Bank of England base rate
  • Claim a fixed fee of £40, £70 or £100 per late invoice
  • Interest starts the day after the payment was due
  • If no date agreed, payment is late after 30 days
  • Public sector must pay you within 30 days
  • You can claim back your reasonable debt recovery costs
  • Customer cannot avoid paying if their contract is unfair
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When another business pays you late, you have statutory rights to claim interest on the overdue amount plus fixed compensation for debt recovery costs. These rights apply automatically to commercial contracts for goods and services - you do not need to have included them in your contract terms.

The Late Payment of Commercial Debts (Interest) Act 1998 gives you these rights to encourage prompt payment and compensate you for the cost of chasing unpaid invoices. These protections cannot be waived entirely by contract.

Your statutory rights to interest

You can charge interest on late payments at the statutory rate. This applies to all business-to-business (B2B) transactions and contracts with public authorities. Consumer transactions are not covered by this Act.

How to calculate what you are owed

Work out the daily interest rate, then multiply by the number of days the payment is overdue. The formula is straightforward:

  1. Annual interest: Debt amount multiplied by (8% + current base rate)
  2. Daily interest: Annual interest divided by 365
  3. Total interest: Daily interest multiplied by number of days overdue

For example, if you are owed £5,000 and the base rate is 4.75%:

  • Annual interest = £5,000 x 12.75% = £637.50
  • Daily interest = £637.50 / 365 = £1.75
  • After 30 days late = £1.75 x 30 = £52.50

Remember to use the Bank of England base rate that applied on the reference date (30 June for debts becoming late in the first half of the year, 31 December for debts becoming late in the second half).

Fixed debt recovery costs

In addition to interest, you can claim a fixed sum to compensate for the cost of recovering the debt. This is a one-off amount per invoice, not per day of lateness.

When payment becomes late

A payment is late if it has not been made by the agreed payment date. If no date was agreed in the contract, statutory default periods apply:

Public sector customers
30 days from invoice or delivery (whichever is later)
Business customers (goods)
30 days from delivery or invoice (whichever is later)
Business customers (services)
30 days from completion or invoice (whichever is later)
Maximum contractual period (private sector)
60 days (unless not grossly unfair to exceed)

You can agree different payment terms in your contract, but they must be fair to both parties. Terms longer than 60 days for business customers may be challenged if they cannot be objectively justified.

Contract terms and the substantial remedy test

Your customer cannot simply contract out of your late payment rights. If a contract tries to exclude or limit statutory interest, that term is only enforceable if it provides a substantial contractual remedy for late payment.

Public sector payment requirements

If you supply goods or services to public authorities (central government, local authorities, NHS trusts), special rules protect you. The public sector has stricter payment obligations than private businesses.

The Prompt Payment Code

The Prompt Payment Code is a voluntary code of practice administered by the Small Business Commissioner. Signatories commit to paying suppliers within agreed terms and following good payment practices.

Code administrator
Small Business Commissioner
Nature
Voluntary code, but public commitment
Maximum payment terms for signatories
Aim for 30 days, maximum 60 days
Reporting requirement
Signatories must report payment performance
Public register
Yes - signatories listed on GOV.UK
Removal from code
Possible if performance is poor

Why the Code matters to you:

  • If your customer is a Code signatory, you have evidence of their payment commitments
  • You can check if a potential customer is a signatory before extending credit
  • Persistent late payers can be removed from the Code, which is reputationally damaging
  • Large companies bidding for government contracts over £5 million must demonstrate good payment practices

The Code does not create legal rights, but it does create public accountability. A customer who signs the Code and then pays you late may face consequences from the Small Business Commissioner.

Large company payment reporting

Large companies and LLPs must publish reports on their payment practices and performance twice a year. This gives you information about potential customers before you extend credit.

Reporting threshold (companies)
2 of: £36m+ turnover, £18m+ balance sheet, 250+ employees
Reporting frequency
Every 6 months within 30 days of reporting period end
Where published
GOV.UK payment practices reporting service
Information disclosed
Average payment time, percentage paid late, payment terms offered

Before taking on a large customer, check their payment practices report. If they routinely pay invoices late or impose long payment terms, factor this into your credit decisions.

Claiming interest and costs

You can claim statutory interest and debt recovery costs whether or not they are mentioned in your contract. Follow a structured approach:

  1. 1

    Confirm the payment due date

    Establish when payment was due - either the date in your contract, or the statutory default period. Your invoice should clearly state payment terms. If terms were not agreed, the statutory period applies.

  2. 2

    Send a payment reminder

    Contact your customer to request payment. Note the date - interest runs from the day after payment was due, not from when you asked. A phone call followed by an email creates a paper trail.

  3. 3

    Calculate the total amount owed

    Add up: the original invoice amount + statutory interest (calculated to date) + fixed compensation (£40, £70, or £100 depending on debt size). Use the Bank of England base rate from the relevant reference date.

  4. 4

    Send a formal claim letter

    Write to your customer stating the original amount, the interest accrued, the fixed compensation, and the total now due. Cite the Late Payment of Commercial Debts (Interest) Act 1998. Give a reasonable deadline (7-14 days) to pay.

  5. 5

    Consider alternative dispute resolution

    If they dispute the debt or refuse to pay, mediation can be faster and cheaper than court. The Small Business Commissioner can also help resolve payment disputes with larger businesses.

  6. 6

    Take legal action if necessary

    For debts under £10,000, use the Money Claim Online service. For larger amounts, consider instructing a solicitor. The court can award you the interest and costs you claimed.

The Small Business Commissioner

The Small Business Commissioner helps small businesses resolve payment disputes with larger businesses. This is a free service.

You can make a complaint to the Commissioner if:

  • Your business has fewer than 50 employees
  • You are owed money by a larger business
  • You have already tried to resolve the dispute directly

The Commissioner cannot force payment, but their involvement often prompts resolution. They can also name businesses that fail to engage with the complaints process.

Practical considerations

Before claiming interest, consider your business relationship and the circumstances:

  • First-time lateness: A phone call or gentle reminder may preserve the relationship while still prompting payment. You can always claim interest later if they do not pay.
  • Repeat late payers: You are within your rights to claim interest - doing so may encourage better payment behaviour. Consistent late payment suggests a deliberate strategy.
  • Disputed invoices: If the customer disputes the amount or quality, resolve that first. Interest only applies to undisputed amounts that are genuinely due.
  • Cash flow problems: If your customer is struggling financially, claiming interest may push them into insolvency. Consider whether a payment plan is more likely to recover the debt.
  • Large customers: Some businesses fear losing contracts by enforcing payment terms. The law is on your side, but weigh the commercial impact. Consider whether you want to continue supplying customers who pay late.

Preventing late payment

While you have strong rights when payments are late, prevention is better than cure:

  • Clear terms: State payment terms prominently on quotes, order confirmations, and invoices
  • Credit checks: Check new customers before extending credit - use Companies House payment reports and credit reference agencies
  • Invoice promptly: Send invoices immediately on delivery or completion. Delays in invoicing lead to delays in payment.
  • Chase early: Follow up within days of the due date, not weeks. Squeaky wheel gets the grease.
  • Retain title: For goods, include a retention of title clause so you can recover goods if not paid
  • Deposits: For new customers or large orders, request payment in advance or staged payments

Record keeping

Keep clear records to support any claim for late payment interest:

  • Original contract or order confirmation showing agreed terms
  • Delivery note or proof of service completion
  • Invoice with clear payment terms and due date
  • Record of when payment was received
  • Copies of all correspondence chasing payment
  • Bank of England base rate at the relevant reference date

If you go to court, you will need to prove when the debt became due and how you calculated the interest claimed.