Monday, 10 April 2017 14:17

How to Calculate Late Payment Penalties

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Not being paid on time is one of the biggest worries facing small business owners. Trying to recover outstanding debts can feel like a very lonely process if you are not aware of the help available.

One important thing to remember is this - as a creditor, the law is on your side. Since 1998, UK businesses have been legally entitled to charge interest on overdue payments owed by another company.

The UK was the first country in the EU to pass such a law, and has led the way on promoting fair and equitable payment practices ever since. In 2013, the legislation was strengthened further to allow businesses to charge debtors for costs incurred for debt recovery. In practice, this means that hiring a debt recovery agency is essentially free to the creditor if the debt is recovered along with the additional late payment penalties.

So what are the rules for charging late payment penalties? How do you calculate the interest, and what restrictions are there?

Knowing When to Charge

According to the late payments legislation, a bill is considered overdue the day after the agreed credit period ends, or if no terms are explicitly agreed between the parties, by default 30 days days after the invoice has been issued.

In practice, most businesses come to an agreement between themselves on payment terms, which is acknowledged in the law. Private businesses can agree terms of up to 60 days. If they want to extend this, there has to be express agreement from both sides that they consider this fair and any extended credit must not be “grossly unfair to the creditor”. Although the legislation itself stops short of actually specifying what constitutes grossly unfair.

Calculating Interest

The interest you are allowed to charge on late payments is calculated by statutory interest, which is 8 per cent plus whatever the current Bank of England base rate is for business transactions. So if the current base rate is 0.5 per cent, that means you can charge interest at 8.5 per cent.

Charges Key

That is the annual rate, or the interest you would charge if a customer did not pay for whole year. To work out the actual rate for however long the debt remains unpaid, the best thing to do is to calculate a daily rate. To do this, find 8.5 per cent of the total debt and divide by 365:

Daily Interest = (Total Debt x 0.085)
365

Each day the client does not pay, that daily interest owed is added on.

Claiming Costs

Businesses chasing late payments are legally entitled to claim ‘reasonable costs’ for recovery from the debtor. This includes any fees paid for assistance from debt recovery specialists. In addition, since 2013, companies have also been able to charge a fixed fee for late payment by way of compensation. The rates are as follows:

 Outstanding Amount

Fixed Penalty Fee

 Up to £999.99

 £40

 £1000 to £9999.99

£70

 £10,000 and over

£100

You can get our free late payment calculator app for both iOS and Android phones by visiting our site www.late-payment-calculator.co.uk or by searching for “Safe Collections” on your app store.

How to Claim Penalties

There is no obligation on the part of suppliers to notify customers of their intention to charge interest for late payments, although many choose to refer to their statutory rights in their terms and conditions.

Penalties, including all interest, costs and fixed sums for compensation, are only charged once, i.e. at the point when the debt is settled. In practice, once you receive agreement to pay, or the original debt is paid off, you would need to issue another invoice detailing the additional charges payable. Remember VAT is not applicable on either the interest or fixed cost element of the penalties and must not be charged.

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Image Charges Key by GotCredit is licensed under CC BY 2.0

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