Late Payment of Commercial Debts: What Interest and Costs You Can Claim

The Late Payment of Commercial Debts (Interest) Act 1998 gives a business the right to charge interest, and a fixed sum towards its recovery costs, when another business pays late. It applies in most business-to-business contracts, but your own payment terms can change the position, and a new Bill is working its way through Parliament.

This guide explains when a payment becomes late, how much you can claim, when your contract overrides the Act, how to make the claim and what the Commercial Payments Bill would change. It is written for business owners in Manchester and across the UK who are owed money.

What Is the Late Payment of Commercial Debts Act?

The Act gives suppliers a statutory right to interest when a business customer, or a public authority, pays late for goods or services. It has two aims: to compensate the supplier for being kept out of its money and to deter late payment. Regulations made in 2002 extended it so that suppliers can also claim a fixed sum for the cost of recovering the debt.

It covers contracts between businesses for the supply of goods and services. It does not cover consumers. If you sell to individuals acting as consumers, different rules apply.

When Does a Payment Become Late?

If your contract sets a payment date, the payment is late once that date passes. The date you agree must usually be within 60 days for business-to-business transactions and within 30 days for public authorities. You can agree a period longer than 60 days between businesses, but it must be fair to both sides.

If you did not agree a date, the Act sets one. Payment is late 30 days after the later of two events: the customer receiving the invoice, or you delivering the goods or providing the service. Interest runs from the day after the payment becomes late.

How Much Statutory Interest Can You Claim?

Statutory interest is 8% a year above a reference rate. The reference rate is the Bank of England base rate in force on 31 December, for interest that starts to run between 1 January and 30 June, or the rate in force on 30 June, for interest that starts between 1 July and 31 December. Because the reference rate is fixed for six months, it can differ from the base rate on the day you send your claim. Check the Bank of England website for the rate that applies to your invoice.

This is simple interest, not compound. To work it out, multiply the unpaid amount by the annual rate, then by the number of days late, and divide by 365.

Here is an example, using a reference rate of 4% for illustration only. An invoice for £5,000 is 40 days late. The statutory rate is 12%, which is £600 a year, or about £1.64 a day. Over 40 days, that is about £65.75 in interest. Add the fixed sum for a debt of that size, £70, and the claim comes to about £135.75 on top of the invoice. Use the total including VAT as your starting amount and show your working to the customer.

Fixed Compensation and Recovery Costs

On top of interest, you can charge a fixed sum for the cost of recovering a late payment. The amount depends on the size of the debt:

• £40 for debts up to £999.99.

• £70 for debts from £1,000 to £9,999.99.

• £100 for debts of £10,000 or more.

You can charge it once for each late payment, so a customer with three overdue invoices can face the fixed sum three times. If your actual recovery costs go beyond the fixed sum, for example because you instructed lawyers or an agency, you can also claim the reasonable extra costs. You must be able to justify them if challenged.

When Does Your Contract Override the Act?

Your contract can displace statutory interest. If it gives a substantial remedy for late payment, the debt does not carry statutory interest unless the parties agree otherwise. A contract term that sets out interest at a lower rate than the statutory rate is not automatically a substantial remedy. Under the Act, a remedy counts as substantial unless it is too small to compensate for late payment or deter it, and it would not be fair or reasonable to let it replace the statutory rate.

Two practical points follow. You cannot claim both contractual and statutory interest on the same debt, so pick one basis and show it in your letter. And if you are drafting terms, a clause that sets a late payment rate and preserves your statutory right as an alternative leaves you the stronger option. Our solicitors can review your terms for this.

What You Cannot Claim

• Interest on consumer debts, because the Act covers business to business and public authority contracts only.

• Interest and compensation on an invoice that was paid late because of a genuine dispute.

• Interest for a period longer than six years from the date payment became late.

How to Claim Late Payment Interest and Compensation

Interest runs automatically, without any notice. Even so, you need to tell the customer in writing that you are claiming it.

• Check the contract and the invoice to confirm the due date and which basis for interest applies.

• Work out the interest and the fixed sum for each late invoice.

• Send a new invoice for the interest and compensation, referring to the original invoice number.

• Add a covering letter or email that sets out the rate, the dates, the days late and the total.

• Keep copies of everything, because the same paperwork supports any later claim.

If the customer still does not pay, a letter before action is the next step. Court claims are handled by appropriately regulated litigation professionals, not by MAR Legal.

The Commercial Payments Bill: What Is Changing?

The Commercial Payments Bill was introduced in the House of Lords on 19 May 2026. It is also described as the Small Business Protections (Late Payments) Bill. It would amend the 1998 Act, and it proposes the following.

• A mandatory right to statutory interest at 8% above the base rate, with any contract term that excludes or lowers it void.

• A maximum payment term of 60 days in contracts within scope, with limited exemptions.

• A ban on retentions in construction contracts, with a penalty for late release.

• A fixed sum for suppliers where a customer raises an invoice dispute late or without enough information.

• More powers for the Small Business Commissioner, including financial penalties for persistent late payers.

The Bill has not become law. It is still going through Parliament, and law firm commentary expects Royal Assent in 2027, with much of the detail to follow in regulations. Until then, the rules above apply, including the ability to displace statutory interest with a substantial contractual remedy. Some guides online describe the new rules as already in force. They are not.

Final Thought

Many businesses never claim the interest and compensation they are entitled to. Know your payment date, check your contract, and work out the figures per invoice. A clear claim often brings payment, and it puts you in a stronger position if the matter goes further.