Late Payment of Commercial Debts Interest Act 1998 Guide

Late payment hurts small businesses more than large ones. A big customer can pay 60 or 90 days late and barely notice. A small supplier can miss payroll or rent. The Late Payment of Commercial Debts Interest Act 1998 exists to rebalance that power. It gives a business supplier a legal right to charge interest when another business pays late.

This guide explains that right in plain terms. It covers who the law protects, when a payment counts as late, how statutory interest works, and how a business can claim it in practice. This guide is general information only, not legal or financial advice. Check the official GOV.UK guidance or take professional advice before you act on your own position.

What the law does

Parliament passed the Late Payment of Commercial Debts Interest Act 1998 to tackle a simple problem. Suppliers often felt they could not chase late payers, because they feared losing the customer. The Late Payment of Commercial Debts Interest Act 1998 makes the right to interest automatic. A supplier does not need to threaten, negotiate, or prove bad faith. Once a commercial debt goes past its payment date, the right arises by law.

The Act implies a term into qualifying contracts. In plain terms, the contract behaves as if it always contained a clause: “If you pay late, you owe interest.” A supplier can rely on that term even if the written contract never mentions interest.

Who it protects

The Act protects a supplier who sells goods or services to another business. The buyer can be a limited company, a partnership, a sole trader, or a public authority. Size does not decide the issue. A one-person firm can claim against a large company, and a large company can claim against another large company.

The Late Payment of Commercial Debts Interest Act 1998 does not cover sales to consumers. If you sell directly to members of the public for their personal use, this law gives you no automatic right to charge interest on a late-paying customer. Consumer credit and consumer contract rules govern those sales instead, and they work differently.

Two contract points can change the picture. If your contract already sets a different late-payment rate, you cannot claim statutory interest instead. You also cannot agree a lower rate than the statutory rate with a public authority. Read your contract before you claim.

When a payment counts as late

A payment counts as late once it passes the agreed payment date. Many contracts set that date clearly: for example, 30 days from the invoice date. If you agreed a date, that date governs, within the limits the law sets. Public authorities must usually pay within 30 days. Business-to-business deals usually allow up to 60 days, unless the parties expressly agree otherwise and the term is not grossly unfair.

If you never agreed a payment date, the law supplies a default. GOV.UK guidance says the payment is late 30 days after the later of the relevant trigger events, such as delivery or receipt of the invoice. Check the GOV.UK guidance for the exact triggers, because the start date decides when interest begins.

Interest starts to run on the day after the payment was due. It then builds up daily until the buyer pays in full. A part payment reduces the balance, so later interest runs only on what remains unpaid.

How statutory interest works

Statutory interest under the Late Payment of Commercial Debts Interest Act 1998 is simple interest, not compound interest. Interest does not earn interest of its own. Each day adds the same daily amount on the same outstanding balance, until the balance changes.

The rate is 8% a year plus the Bank of England base rate, for business-to-business transactions. That formula is the stable part. The base rate itself moves over time, so the total rate moves with it. GOV.UK tells readers to check the current Bank of England base rate rather than rely on a figure from an old article. This guide follows that advice and states no single current total rate.

One timing rule trips people up. The base rate you use is not always today’s rate. The rate in force on the preceding 30 June applies to interest starting between 1 July and 31 December, and the rate in force on the preceding 31 December applies to interest starting between 1 January and 30 June. Check which reference date applies before you calculate.

GOV.UK gives a clear worked example. If a business were owed £1,000 and the Bank of England base rate were 0.5%, the annual statutory interest would be £85 (£1,000 × 8.5%). Divide £85 by 365 to get the daily interest: about 23p a day. After 50 days, that comes to about £11.50. Use the same method with your own figures: take the debt, multiply it by the statutory rate as a decimal, divide by 365, and multiply by the days late.

Statutory interest differs from the interest savers earn. Our guide to compound interest explains how savings interest builds on interest over time. Statutory interest on a late commercial debt does not work that way. It stays simple, day by day, on the amount still owed.

The fixed sum for recovery costs

Interest alone rarely covers the full cost of chasing payment. The Late Payment of Commercial Debts Interest Act 1998 therefore lets a supplier claim a fixed sum for debt recovery costs, on top of the interest. You can charge the buyer only once for each late payment.

GOV.UK sets out the bands as follows. For a debt up to £999.99, the fixed sum is £40. Debts from £1,000 to £9,999.99 carry a £70 sum. For a debt of £10,000 or more, it is £100. These amounts come from late payment legislation, so check the official GOV.UK guidance before you rely on them for a current claim.

How to claim in practice

Claiming statutory interest starts with good records, not with a legal letter. Keep the contract or quote, the invoice, proof of delivery, and every reminder you sent. Note the agreed payment date and the date the buyer actually paid, or the date payment remains outstanding.

Next, send a new invoice that adds the interest and the fixed sum to the money owed. GOV.UK recommends this step. Show your working on the invoice: the original debt, the statutory rate you used, the number of days late, and the fixed sum. Clear working prevents arguments and helps a court or adviser check your figures fast.

If the buyer disputes the debt itself — for example, faulty goods or incomplete work — deal with that dispute first. Statutory interest does not settle whether the debt is valid. It only adds interest once a valid debt goes unpaid past its date.

If polite chasing fails, consider a formal letter before action, mediation, the Small Business Commissioner, or a court claim. Weigh the amount at stake against the cost, and take advice before you start court action.

Limits and common mistakes

Four mistakes weaken otherwise valid claims. First, suppliers forget to check their contract for an existing late-payment rate. If the contract already sets a substantial remedy, statutory interest under the Late Payment of Commercial Debts Interest Act 1998 may not apply. Second, suppliers use the wrong base rate date and overstate the interest. That error damages credibility, even if the claim is otherwise sound.

Third, suppliers claim the fixed sum more than once for the same late payment. The law allows one fixed sum per late payment, not one per reminder. Fourth, suppliers wait too long. Interest keeps running, but old claims get harder to prove as records fade and staff move on. Act promptly, and keep records from day one.

This law also differs from tax interest. If HMRC charges interest on late tax, different rules, rates, and dates apply. Our guide to HMRC late payment interest explains that separate system. Do not mix the two: commercial-debt interest runs between businesses, while tax interest runs between a taxpayer and HMRC.

A final word

The Late Payment of Commercial Debts Interest Act 1998 gives small suppliers a practical tool, not a magic fix. It will not force a reluctant buyer to pay overnight. It does change the conversation. A buyer who knows interest runs daily, plus a fixed sum, has a clear financial reason to pay on time.

Use the tool calmly and accurately. Check your contract, work out the correct reference date, and show your working. If the amount is large or the buyer disputes the debt, take professional advice early.

General-education note: This article is general information only. It is not legal or financial advice. Rates, bands, and rules can change, and your contract and circumstances affect your position. Check the official GOV.UK guidance and consider professional advice before you claim.

FAQs

What is the Late Payment of Commercial Debts Interest Act 1998?

It is UK legislation that gives a business supplier an automatic right to charge interest, plus a fixed sum for recovery costs, when another business pays a commercial debt late. The right arises by law, even if the contract never mentions interest.

Who can claim under the Act?

A business that supplies goods or services to another business or a public authority can claim. The law does not cover sales to consumers for personal use, and a contract that already sets a different late-payment rate can displace the statutory right.

How much interest can I charge?

Statutory interest runs at 8% a year plus the Bank of England base rate, calculated as simple interest on the outstanding debt, divided by 365 for a daily figure. Because the base rate moves, check the current rate and the correct reference date (30 June or 31 December) before you calculate.

What fixed sum can I claim for recovery costs?

GOV.UK sets the fixed sums by debt size: £40 for debts up to £999.99, £70 for debts from £1,000 to £9,999.99, and £100 for debts of £10,000 or more. You can claim the fixed sum once per late payment, on top of the interest.

How do I add interest to an invoice?

Send a new invoice that shows the original debt, the statutory rate used, the days late, the daily interest, and the fixed sum. Clear working helps the buyer check your figures and helps an adviser or court assess the claim if the buyer disputes it.

Does the Act apply to late tax payments?

No. Late tax payments fall under HMRC’s separate interest rules, with different rates and dates. This Act covers commercial debts between businesses, not debts owed to HMRC.