Credit Control

LATE PAYMENT LEGISLATION

Part I: Introduction to the Act
  History of the Act
  How Will the Legislation Help You Recover Cash?
  What is the Legislation?
  Are You Entitled To Use the Legislation?
  Can You Use An Alternative to the Legislation?
  Can My Purchaser Avoid Paying Interest?
  Can Your Purchaser Offer An Alternative To Interest Under The Act?
  How will the court decide if the purchaser's remedy is substantial?
  How Can Representative Bodies Help?
Part II: Some Frequently Asked Questions
  1. When will your purchaser be "late" in paying?
  2. What if your contracts provide for advance payment?
  3. You have not agreed a credit period but your purchaser usually pays at the end of the month following the invoice date?
  4. How do you actually claim for interest and costs?
  5. Are you obliged to use the Act?
  6. Can you Charge for Interest Retrospectively?
  7. What Interest Rate Can Be Charged?
  8. How do you Inform your Purchaser that you will Use the Legislation?
  9. How Much Compensation Can You Claim?

Part I: Introduction to the Act

History of the Act

The Late Payment of Commercial Debts (Interest) Act 1998 came into force on 1 November 1998 and was introduced to give business a statutory right to interest on late payment. The legislation was designed to reserve the bad practise of deliberate late payment, often ascribed to large companies and organisations using their power over small business although all business will be able to use it with all businesses and the public sector able to claim interest from all businesses and the public sector on debts incurred.

How Will the Legislation Help You Recover Cash?

Basically the legislation provides suppliers with:

• The right to claim interest for late payment
• The right to claim reasonable recovery costs (unless you as the supplier have acted unreasonably) Recoverable Costs
• A right to challenge contractual terms which fail to provide a substantial remedy against late payment.
• A right for "representative bodies" to challenge grossly unfair contractual terms.

Whilst the right to claim is automatic to encourage prompt payment from your purchases, to ensure you benefit from the legislation, you may wish to remind your purchasers of your entitlement to make the claim by adding the following to your terms and conditions:

We hereby notify you of our rights in terms of the Late Payment of Commercial Debts (Interest)Act 1998 as amended to claim interest and compensation for debt recovery costs if we are not paid according to the credit terms agreed between us."

NOTE: to ensure your terms and conditions apply see Battle of the Forms

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What is the Legislation?

The Late Payment of Commercial Debts (Interest) Act 1998 has been amended by European Directive 2000/35/EC. This amended legislation is in force as from 7th August 2002.

Basically the legislation, gives you as supplier, the statutory entitlement to charge interest at 8% over the Bank base lending rate as well as reasonable collection charges from a purchaser who is late in settling accounts. Recoverable Costs

Whilst it is not compulsory for suppliers to use the Act it is hoped the more it is adopted the more likely suppliers will be paid in time - thus reducing "debtor days nationwide".

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Are You Entitled To Use the Legislation?

Unlike the previous legislation which differentiated between different types and sizes of organisation all businesses, notwithstanding their size, including public sector bodies, can use the law. So if you are in business trading with another business or government or local authority you will be able to use the Act and benefit from being able to recover interest as well as reasonable recovery costs.

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Can You Use An Alternative to the Legislation?

There is no reason why you cannot contractually agree the amount of interest you wish to charge your customers in which case the late payment legislation will not apply. Battle of the Forms

So, for example, your terms and conditions may stipulate you are entitled to an agreed defined rate in the event of your account being overdue by 21 days following delivery of goods or performance of services.

Note: (1) If you do make your own provisions for contractual interest then the late payment legislation will not apply.
(2) If you do not make any arrangements for interest then the legislation will apply and you can use it.

The Yuill & Kyle website allows users the option to:

1. Charge no interest;
2. Charge contractual interest or
3. Charge Interest under the legislation.
4. Add collection cost, where appropriate.

These can be found in the "First" and "Second" demand letters in the "Downloads" section First Demand Letters

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Can My Purchaser Avoid Paying Interest?

Basically if your purchaser says the Late Payment legislation does not apply the court will declare this to be void.

If this happens you will still be entitled to take advantage of all the remedies the Act provides. This is because the intention behind the legislation will be avoided if purchasers were to say the late payment of interest legislation did not apply at all, or that some sort of lesser remedy should be substituted. If allowed this would completely circumvent the legislation.

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Can Your Purchaser Offer An Alternative To Interest Under The Act?

It is not unlawful for your purchaser to provide their own remedy if payment is late but if they do it must be "substantial". If a court finds the remedy not to be "substantial" then it will be declared void and the late payment legislation will apply.

The contractual term will be void if it:

• fails to provide a contractual right to interest which is not a substantial remedy for late payment of the debt; or
• varies the right to statutory interest which fails to provide for a substantial remedy for late payment of the debt.

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How will the court decide if the purchaser's remedy is substantial?

Basically the court will want to ensure the seller has, in all the circumstances, a substantial remedy in the event of a purchaser failing to settle their account timeously. The following are non-exhaustive examples which will be deemed unfair. In these examples the late payment legislation will apply:

• Credit periods which avoid the possibility of late payment.
• Credit periods which greatly differ from established practice in a particular industry.
• Variations in credit periods offered to other suppliers by the same purchaser.
• Interest rates lower than the statutory rate the effect of which means the supplier does not receive from the purchaser interest for a sufficient amount to over the theoretical cost of borrowing the cash.

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How Can Representative Bodies Help?

If you are a small to medium enterprise a representative body can question whether a purchaser's terms give the effect of undermining the purposes of the late payment legislation.

What they can do is take the issue before the court on your behalf. Indeed in certain circumstances they can do this on your behalf without your even having to make the request. For this to happen the representative body will have to demonstrate a relevant link with you such as acting for similar organisations such as yours; for a particular industry sector or geographical area.

(A small to medium sized enterprise is defined as having fewer than 250 employees; and either has a turnover of less than ERU40 milllion or an annual balance sheet total not exceeding EUR27 million; and is independent)

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Part II: Some Frequently Asked Questions

1. When will your purchaser be "late" in paying?

You will be able to recover your interest and recovery costs once payment is late Demand Letters

Payment will be late in the following circumstances:

• If you have agreed a credit period with the purchaser, their payment will be late if made after that agreed date. The agreement can be made orally or in writing.
• If no credit period has been agreed interest will commence 30 days after the later of the following:-
  • You have delivered the goods or performed the service; or
  • The day on which your purchaser has received notice of what is owed to you.

This 30 day period is known as "the 30 day default period". The moral is to both invoice accurately and as soon as possible. If you do not invoice at all or your invoice is inaccurate the default period will not start and you will lose some interest.

[Note: If your own terms and conditions apply you cannot claim interest under the Act although you will be able to claim your own interest and reasonable recovery costs if your terms are binding. Demand Letters

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2. What if your contracts provide for advance payment?

• If your contract provides the whole price has to be paid before the goods are delivered or service performed and payment is not made then interest will commence as soon as you have performed your part of the bargain.
• If you have an instalment contract then interest will commence on the day after the instalment is due.

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3. You have not agreed a credit period but your purchaser usually pays at the end of the month following the invoice date?

• In this situation interest will run the day following when you would expect to be paid according to this custom.

Remember: - If there is no agreed credit period the 30 day default period will apply.

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4. How do you actually claim for interest and costs?

Basically all you need to do is to ask your customer for it.

You can do this by using the demand letters First Demand Letter and Second Demand Letter. Each type of letter contains:

• Principal due
• Total interest due
• Daily accrual of interest
• Recoverable costs
• Multiple invoicing facility
• Downloadable on your own letterhead
• Automatic reminder facility
• Option to send by hard copy, email or both.

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5. Are you obliged to use the Act?

The answer is "no" although it is hoped the more often the Act is used the greater businesses will be aware they will have to pay their bills on time leading to a new culture of payment being required within credit periods.

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6. Can you Charge for Interest Retrospectively?

The answer is "Yes" although you will have to watch limitation periods being 6 years in England and 5 years in Scotland.

Also because the previous legislation was phased over a four year period commencing in November 1998 you may not have a valid claim against all types of business from that date. It will all depend upon their type and size. If you require further information on this please contact us. scowan@yuill-kyle.co.uk

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7. What Interest Rate Can Be Charged?

The rate of interest you are able to charge is 8% above the Bank of England base lending rate.

For the purposes of the legislation at the start of a six month period the Bank of England's rate will be made a fixed "reference rate" for the subsequent six months. This is the rate of interest you will be able to claim.

The reference rate will be added into the website program by Yuill & Kyle.

All you will have to do is add the amount of the invoice and the date the interest is due from. The program will automatically work out the interest, freeing you of having to make the calculation.

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8. How do you Inform your Purchaser that you will Use the Legislation?

The legislation is intended as a deterrent, to ensure your accounts are paid on time. That being the case you should remind your customers of your intention to use the legislation to recover interest and collection costs if your account is not settled within the agreed specified time limit.

Whilst this is not a legal requirement it will be good business practice to clearly state on all written communications, credit application forms, order confirmation invoices and contracts the following:

"We reserve our statutory right to claim interest and compensation for debt recovery costs under the Late Payment Legislation if we are not paid according to the agreed credit terms"

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9. How Much Compensation Can You Claim?

The amount of compensation depends upon the amount you are due:

These amounts will be added to the demand letters, depending, of course, on the amount due to you. Demand Letters

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