Late payment is one of the biggest and most avoidable cash flow problems facing UK small businesses. What many owners don’t realise is that the law is already on their side. Under the Late Payment of Commercial Debts (Interest) Act 1998, you have an automatic right to charge interest and claim compensation on overdue business-to-business invoices, even if your contract says nothing about it. This guide explains what the Act covers and how actually to use it.
What the Late Payment of Commercial Debts Act Covers
The Act applies to business-to-business transactions for the supply of goods or services. It gives suppliers the right to charge statutory interest when a business customer pays late, claim a fixed sum toward the cost of recovering the debt, and challenge unfair payment terms buried in a contract. It’s an implied term in every qualifying B2B contract, so it applies automatically, whether or not it’s mentioned in your terms.
The Statutory Interest Rate
Statutory interest is calculated as the Bank of England base rate on the day the debt becomes overdue, plus 8 percentage points. The rate that applies when the debt first becomes overdue is the rate used for the rest of that overdue period, even if the Bank of England base rate changes later. This makes it worth checking the base rate at the point payment was due, not the rate today, when you’re calculating what you’re owed.
Interest accrues from the day after the agreed due date, or, if no date was agreed, from 30 days after the later of the invoice being delivered or the goods or services being supplied.
Fixed Compensation for Late Payment
In addition to interest, you can claim a fixed compensation amount for each overdue invoice without having to prove your actual recovery costs.
| Debt Amount | Fixed Compensation |
|---|---|
| Up to £999.99 | £40 |
| £1,000 to £9,999.99 | £70 |
| £10,000 or more | £100 |
This applies per overdue invoice, not just once per customer, so a client with several unpaid invoices owes compensation on each one individually.
How to Calculate What You’re Owed
Work out the number of days the invoice has been overdue, then apply the statutory interest rate to the outstanding amount for that period, and add the fixed compensation for the invoice value band. For example, on a £1,000 invoice overdue by 50 days at a statutory rate of around 11.75%, the interest works out to roughly £1.61 a day, so about £80.50 for those 50 days, plus £70 fixed compensation, giving a total claim of around £150.50 on top of the original invoice.
Contractual Interest Rates: Can You Be Paid Less?
A contract can set its own interest rate instead of the statutory one, but only if that rate provides a genuine “substantial remedy” for late payment, fair and sufficient to compensate the supplier and deter late payment. Courts have looked closely at this in recent years, and a low contractual rate dressed up as a substitute for statutory interest doesn’t automatically override your rights. If you supply to public sector bodies, payment terms are also capped, generally at 30 days.
Protecting Your Business from Late Payment
- Set clear payment terms on every invoice, including the exact due date
- Follow up promptly once an invoice becomes overdue, rather than waiting weeks
- Keep accurate records of invoice dates, due dates and payment received, which supports both your own cash flow management and any later claim
- Consider requiring deposits or staged payments for larger projects
- Review your working capital position regularly so late payments don’t catch you short
Persistent late payment is ultimately a cash flow issue, and a dedicated business bank account with clear transaction records makes it far easier to track exactly who owes you what, and for how long.
What to Do When an Invoice Is Overdue
- Send a polite reminder as soon as the due date passes
- Follow up with a formal letter before action if the invoice remains unpaid
- Calculate the statutory interest and fixed compensation you’re entitled to and include this in your request for payment
- If the debt remains unpaid, consider the Money Claim Online service or the small claims track for straightforward debts
Good business record keeping throughout this process matters, since you’ll need clear evidence of the original invoice, the agreed terms, and every follow-up if the matter ends up in court.
Frequently Asked Questions
Can I charge interest on a late payment even without a written contract clause?
Yes. The Late Payment of Commercial Debts (Interest) Act 1998 gives you this right automatically for qualifying B2B transactions, regardless of what your contract says.
What is the current statutory late payment interest rate?
The Bank of England base rate plus 8 percentage points, recalculated whenever the base rate changes. Check the current base rate to work out the exact figure for your overdue period.
How much compensation can I claim for a late payment?
£40, £70 or £100 per overdue invoice, depending on the debt amount, claimable on top of statutory interest without needing to prove your actual costs.
Does the Late Payment Act apply to consumers?
No. It applies to business-to-business transactions only, not to consumer debts.
Key Takeaways
- UK businesses have an automatic right to charge interest on overdue B2B invoices
- Statutory interest is the Bank of England base rate plus 8 percentage points
- Fixed compensation of £40 to £100 applies per overdue invoice
- A contractual rate can apply instead, but only if it’s a genuine substantial remedy
- Clear payment terms and prompt follow-up remain the best protection against late payment
About the Author
This guide was prepared by the Business Mine editorial team, who research and write practical UK business, tax and finance guides. This article is provided for general information only and does not constitute legal advice; for a specific dispute, consult a qualified solicitor.
