Late Payment of Commercial Debts (Interest) Act 1998 – what is it and when can it be applied?

In the current economic climate, the volume of invoices being paid late or, in some cases, not at all, is rising. Figures show that around two-thirds of all UK business has had to write off bad debt which has a clear knock-on effect on those businesses cash flow and profitability. Whilst not an all-encompassing solution to these issues, the Late Payment of Commercial Debts (Interest Act) 1998 (the Act) can help mitigate the impact of the late payment of invoices and assist in the prevention of future late payment by allowing businesses, in certain circumstances, to charge extra compensatory and interest amounts from the date the invoice becomes overdue.

When can LPCD(I)A 1998 be used?

As the name suggests, the Late Payment of Commercial Debts (Interest) Act 1998 applies to debts which have been incurred in the course of business. It is therefore applicable to invoices due by a company, sole trader or partnership to another company, sole trader or partnership where goods have been supplied or services rendered. Where an invoice remains unpaid outside of the agreed contractual terms, the Act can be invoked immediately rather than having to wait for Court proceedings to be commenced meaning that the amount due from the debtor increases as soon as the invoice becomes overdue.

What can be claimed under the Act?

The Act provides that interest can be charged by the claimant at the rate of 8% above the Bank of England Base Rate. This is of course higher than the statutory interest which can be claimed under Section 69 of the County Courts Act 1984, which allows for a flat rate of 8% to be charged on debts owed. It should also be noted that the Act allows interest to be claimed from the date the invoice became due and that this interest accrues daily until the outstanding sum has been paid in full.

In addition, the Act provides for a sum of Late Payment Compensation to be added to the debt depending upon the level of the outstanding balance due. For debts of between £0.01 and £999.99, a compensation sum of £40.00 can be applied to the balance; for debts of between £1,000.00 and £9,999.99, a sum of £70.00 may be applied and for debt of £10,000.00 and above, a sum of £100.00 may be applied in compensation.

An interesting point of note is that the Act provides that interest and compensation can be applied to each invoice which falls due and not just to the full overall balance. As such, if you have multiple invoices due from the same debtor, multiple sums of compensation and interest may be applied.

How can this help?

The obvious way in which the Act can assist businesses is by increasing the amount which can be claimed by them from their debtors, albeit only slightly. The amounts provided for by the Act can also however act as a deterrent to your customers letting your invoices lapse as they will likely wish to avoid further charges being applied.

A point to note

Whilst the Act does provide for additional sums which can be utilised by businesses to assist in their debt recovery, it also states that where reasonable provision has been made by the creditor to compensate them for the late payment of their invoices, the Act cannot be applied. One example of this would be the application of contractual interest to an outstanding balance – if this is done then the Act would not be applicable as this would likely be deemed adequate compensation for the late payment. It is therefore imperative that, before applying the sums provided for by the Act, a claimant seeks the appropriate advice to ensure this is applicable to their case.

Should you require any further information regarding debt recovery, please do not hesitate to contact us and we will be happy to assist.