The Late Payments Directive, known more technically as Directive 2011/7/EU or the Late Payment of Commercial Debts Regulations 2013, came into force on March 16th and should mean better protection for businesses of all sizes - from freelancers to big brands, and including the public sector - when chasing late payments.
Generally speaking, the Directive puts 30-day payment terms on contracts where a longer deadline is not mutually agreed, and allows you to charge fixed fees, statutory interest, and reasonable recovery costs on any action you take after that deadline has passed.
But just how much does that mean you can charge? Here's our breakdown of the amounts you can add in fixed fees and recovery costs, based on the original amount owed by your client.
A Brief History
Briefly, late payments legislation has been in force in the UK since 1998, when it was introduced for larger firms, and for small businesses since 2002.
The new legislation has been designed to provide some consistency when compared with the pre-existing laws, but the inclusion of 'reasonable costs' is new.
The statutory interest rate you are allowed to charge on your overdue invoices is often described as being 8% above the Bank of England base rate - and this is true as a rule of thumb.
However, it is worth noting that the 'reference rate' does not change in real time when a Bank of England Monetary Policy Committee decision is announced - instead, it is set twice a year, in January and July.
The rate set on January 1st is based on the Bank of England base rate for the preceding day, December 31st, and remains in place until June 30th of the same year; the July 1st rate is based on the June 30th base rate, and remains until December 31st of that year.
At present, the base rate has been at 0.5% for several years, and it seems likely that 8.5% will remain the statutory interest rate chargeable for some time to come.
Fixed Fees and Recovery Costs
The table below shows the breakdown of fixed fees chargeable on different sums of money owed.
The recovery costs you can claim are theoretically equivalent to your cost of chasing the debt, minus the fixed fee - so while you should not be out of pocket for chasing the payment, you won't profit either, aside from the statutory interest.
|Amount Owed||Fixed Fee||Recovery Costs|
|£0.01 - £999.99||£40.00||£110|
|£1,000.00 - £9,999.99||£70.00||£80 - £1,429.99|
|£10,000 and above||£100.00||£1,400.00 and above|
The 'Recovery Costs' column is not enshrined in the legislation, but is based on our approximate charges for chasing a debt of that size.
We charge a fixed fee of £150.00 for claims for amounts of less than £1,000 - which is why the claimable recovery costs are a single stated amount for smaller amounts.
Above the £1,000 threshold, the costs will be a percentage of the total amount owed - and on large amounts that are significantly overdue, the combination of this percentage and the statutory interest charged can lead to extremely substantial amounts recovered under the new legislation.
Sid Home our MD had this to say on the recast legislation:
Companies who rely on late payments to suppliers as a cheap injection of capital may soon find that the costs outweigh the gains. Whilst legitimate businesses who are the victims of deliberate late payment will now be able to take recovery action without fear that they will bare the costs."
The Bottom Line
If your company raises an invoice after the 16th of March 2013 and your client does not pay on time and in full you can now take debt recovery action, safe in the knowledge that the law states it is the debtors responsibility to pay for it.
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