Every year, UK businesses write off billions of pounds in late and unpaid invoices. What many do not realise is that the law already provides them with a concrete set of tools to tackle overdue payments, tools that most business owners never use. The Late Payment of Commercial Debts Act 1998 gives you the automatic right to charge statutory interest, fixed compensation fees, and reasonable recovery costs the moment a B2B invoice goes unpaid past its due date.
This guide explains exactly what the law says, how to calculate what you are owed, and how to use these rights to put pressure on slow payers without having to resort to lengthy legal battles.
What Is the Late Payment of Commercial Debts Act 1998?
The Late Payment of Commercial Debts Act 1998 (amended in 2002 to include public sector bodies) is a piece of UK legislation specifically designed to address the culture of late payment that damages small and medium-sized businesses. Before the Act, a business owed money had limited options short of issuing court proceedings. The Act changed that by creating a statutory right to charge interest and compensation that exists independently of whatever your contract says.
The key point is that these rights apply automatically. You do not need a specific clause in your contract, and the debtor cannot simply argue that they were unaware of the entitlement. If you supplied goods or services under a B2B contract and the invoice was not paid on time, the Act applies.
When Does a Payment Become Legally Late?
The statutory default payment period under the Act is 30 days for both commercial and public sector contracts. This 30-day clock starts from the later of:
- The date you delivered the goods or performed the services
- The date the debtor received the invoice
If your contract specifies a different payment term (for example, 14 days, 60 days, or 90 days), that contractual term applies instead, provided it is not grossly unfair. Contracts that attempt to extend payment terms beyond 60 days can be challenged as grossly unfair under the Act, particularly where there is an imbalance of bargaining power between a large buyer and a small supplier.
Statutory Interest: What You Can Charge
Once a payment becomes late, statutory interest begins to accrue at 8% above the Bank of England base rate per annum. The interest is calculated daily from the day after payment was due, on the outstanding invoice amount, and continues until the invoice is paid in full.
How to calculate the daily interest
The formula is straightforward:
- Daily rate = (Invoice amount × (8% + base rate)) ÷ 365
- Total interest = Daily rate × number of days overdue
For example, if you are owed £5,000 and the base rate is 4.25%, your statutory interest rate is 12.25% per annum. The daily charge is approximately £1.68. If the invoice is 90 days late, you are entitled to claim approximately £151 in statutory interest on top of the invoice amount.
These are not large amounts in isolation, but when applied consistently across all overdue accounts, they create a genuine financial incentive for debtors to pay on time and signal to slow payers that you take late payment seriously.
Fixed Debt Recovery Compensation
Separate from interest, the Act entitles you to claim a fixed compensation amount for each overdue invoice. The amounts are set by legislation and are applied per invoice, not per debtor:
- £40 — for debts up to £999.99
- £70 — for debts between £1,000 and £9,999.99
- £100 — for debts of £10,000 or more
These amounts are intended to go towards the cost of recovering the debt. If your actual recovery costs exceed these fixed amounts, you can claim the difference as a “reasonable” additional sum, provided you can document those costs. This is where professional debt collection fees, solicitor costs, and court filing fees may all become claimable.
How to Make a Formal Late Payment Claim
Exercising your rights under the Act does not require a solicitor or a formal court process in the first instance. The starting point is a written demand that makes your statutory entitlements clear. Your demand letter should:
- Reference the invoice number, amount, and original due date
- State that the invoice is overdue and calculate the interest accrued to date
- Specify the fixed compensation amount you are entitled to claim
- Cite the Late Payment of Commercial Debts (Interest) Act 1998 explicitly
- Set a firm deadline for payment (typically 7 to 14 days) with a clear statement of next steps
Sending this kind of letter does several things. It demonstrates that you know your legal rights, it creates a documented paper trail, and it puts the debtor on notice that further delay will result in an increasing financial liability for them.
Why Most Businesses Do Not Use These Rights
The reality is that most UK businesses never claim statutory interest or compensation, even when they are clearly entitled to it. The reasons are predictable:
- Fear of damaging the commercial relationship
- Lack of awareness that the right even exists
- Uncertainty about how to calculate and claim the amounts correctly
- Assumption that the amounts are too small to be worth the administrative effort
All of these concerns are understandable, but they contribute to a culture where late payment is effectively consequence-free. A debtor who knows you will not enforce your statutory rights has no financial incentive to prioritise your invoice over others.
The most effective approach is to apply these rights consistently from the outset, not selectively on only the most extreme cases. When late payers know that your business always charges interest and compensation, they adjust their payment behaviour accordingly.
Contractually Opting Out: When Is It Allowed?
Some large buyers attempt to include contractual clauses that exclude or modify statutory interest rights. The Act permits this only where the contractual remedy is “substantial” and the overall contract is not grossly unfair. In practice, this is a high threshold that courts apply strictly in favour of the creditor.
If a customer’s standard terms purport to waive your late payment rights entirely, those clauses are almost certainly unenforceable. A debt recovery specialist or solicitor can advise on specific contract language.
Using a Debt Collection Agency to Enforce Your Rights
For many businesses, the most practical way to enforce late payment rights is to instruct a professional debt collection agency. A reputable agency will include statutory interest and compensation in their initial demand letters, increasing the total amount the debtor must pay to clear the account and creating additional pressure for prompt settlement.
Under a no win no fee arrangement, the agency’s fee is recovered from the collected amount, which means the statutory interest and compensation you claim can partially offset the cost of recovery. In some cases, particularly for larger invoices, the interest and compensation alone cover a significant portion of the collection fee.
When to Escalate to Court Action
If the debtor ignores demand letters, you have several escalation options:
- County Court claim: For debts up to £100,000, a County Court Judgment (CCJ) can be obtained through the online Money Claim Online (MCOL) service. Filing fees range from £35 to £455 depending on the claim amount.
- Statutory demand: For business debts over £750, a statutory demand can be served. If the debtor fails to pay or dispute the demand within 21 days, you can petition for winding up (for a company) or bankruptcy (for an individual).
- High Court Enforcement: CCJs over £600 can be transferred to the High Court for enforcement by High Court Enforcement Officers, who have significantly more power than County Court bailiffs.
At each of these stages, the statutory interest under the Late Payment Act continues to accrue, increasing the total debt and reinforcing the financial case for the debtor to settle quickly.
Protecting Your Business Going Forward
Alongside enforcing your existing rights, the most effective long-term protection against late payment is prevention:
- State your payment terms clearly on every invoice and in every contract
- Reference the Late Payment of Commercial Debts Act in your terms and conditions
- Run credit checks on new customers before extending credit
- Issue invoices promptly and follow up on day one of any overdue account
- Consider requiring deposits or stage payments for larger projects
Businesses that treat credit management as a core discipline rather than an afterthought consistently achieve faster payment and lower bad debt write-offs.
Get Expert Help With Late Payment Recovery
If you have invoices that are past due and you want to enforce your statutory rights professionally and effectively, Jack Russell Debt Collection specialises in B2B debt recovery across the UK. We apply the Late Payment Act on your behalf, draft legally compliant demand letters, and escalate cases through the full enforcement process where necessary, on a no win no fee basis for qualifying debts.
Contact Jack Russell today for a free, no-obligation assessment of your outstanding debts and find out exactly what you are owed under the Late Payment Act.
Disclaimer: This article is for general information purposes only and does not constitute legal or financial advice. For advice specific to your situation, consult a qualified debt recovery specialist or solicitor.
Frequently Asked Questions
What is the Late Payment of Commercial Debts Act 1998?
The Late Payment of Commercial Debts Act 1998 is a UK law that gives businesses the statutory right to charge interest and fixed compensation fees when another business pays an invoice late. It applies automatically to B2B contracts and cannot be contracted out of unless the alternative contractual remedy is substantial.
What interest rate can I charge on a late payment?
Under the Act, statutory interest is charged at 8% above the Bank of England base rate per annum. The base rate changes periodically, so the effective rate varies. Interest accrues daily from the day after the payment was due and continues until the invoice is paid in full.
What compensation can I claim for a late payment?
In addition to statutory interest, you are entitled to claim fixed debt recovery compensation per invoice: £40 for debts under £1,000, £70 for debts between £1,000 and £9,999.99, and £100 for debts of £10,000 or more. You can also claim reasonable debt recovery costs above these amounts if they exceed the fixed fee.
Does the Late Payment Act apply to all businesses?
The Act applies to commercial contracts between businesses where goods or services are supplied under a contract. It does not automatically apply to contracts with consumers (B2C). It covers sole traders, partnerships, limited companies, and public sector bodies.
When does a payment become legally late under the Act?
If your contract specifies a payment term, the debt becomes late the day after that deadline. If no payment term is agreed, the statutory default is 30 days for business contracts and 30 days for public sector contracts. You should always state clear payment terms in your invoices and contracts to avoid ambiguity.
Can I use the Late Payment Act even if my contract does not mention it?
Yes. The statutory right to charge interest and compensation under the Act applies automatically to qualifying B2B contracts, regardless of whether the contract mentions it. You do not need to include a specific clause. However, including payment terms and referencing the Act in your invoices reinforces your position.
Do I need a solicitor to claim late payment interest and compensation?
No. You can claim statutory interest and compensation yourself by sending a written demand that references the Late Payment of Commercial Debts Act 1998. However, if the debtor disputes the claim or refuses to pay, instructing a debt collection agency or solicitor significantly increases the chance of recovery, particularly if court action becomes necessary.
