The Late Payment of Commercial Debts (Interest) Act 1998 is one of the most useful statutes in UK business law, and one of the least used. It was written to make late payment between businesses expensive for the debtor. Knowing how it works turns an unpaid invoice from a problem you absorb into a problem the debtor pays to solve.

What the Act does, in one sentence

It gives a creditor whose commercial invoice is paid late a statutory entitlement to three things on top of the principal: a fixed compensation payment, interest accruing daily at a high prescribed rate, and the reasonable costs of recovering the debt. All three are recoverable from the debtor, not from the creditor.

Who it applies to

The Act applies to commercial contracts for the supply of goods or services where both parties are acting in the course of a business. A business, for this purpose, includes a company, an LLP, a partnership, a charity, and even a government department. It does not apply to consumer contracts, nor to contracts where one party is a private individual acting outside a trade.

In practice this means the Act covers the vast majority of business‑to‑business invoices in the UK. If your customer is a limited company and they are late paying for something you sold them, the Act is almost certainly engaged.

When the clock starts

The Act implies a term into every qualifying contract that any sum due is to be paid by the end of the "relevant day", which in most cases is the payment date specified in the contract, or thirty days from the date of the invoice or the delivery of the goods or services, whichever is later. The longest payment period a contract may impose on a debtor is sixty days, unless the parties have expressly agreed otherwise and that agreement is not grossly unfair to the creditor.

The moment the relevant day passes without payment, the debt is in default. From that moment, statutory compensation attaches and statutory interest begins to accrue daily.

Statutory compensation

Statutory compensation is a flat, fixed sum that becomes payable the instant the debt goes into default. There are three brackets:

  • £40 for debts up to £999.99
  • £70 for debts between £1,000 and £9,999.99
  • £100 for debts of £10,000 and above

Compensation is per invoice, not per creditor. Ten late invoices from the same debtor produce ten compensation payments, not one. On a portfolio of late invoices, the compensation alone can be material.

Source: Late Payment of Commercial Debts Regulations 2002, Regulation 5.

Statutory interest

The prescribed rate of statutory interest is eight per cent above the Bank of England base rate, fixed for six‑month reference periods. The rate that applies to a debt is the rate in force on 31 December or 30 June immediately before the debt goes into default. If the base rate is 4.75%, the statutory rate is 12.75% per annum.

Interest runs from the date of default and continues to accrue, daily, until the debt is paid in full. On a £5,000 invoice that is sixty days overdue, at a 12.75% statutory rate, interest works out to roughly £105. On £50,000, the same sixty days produces £1,048.

Interest is simple, not compound. The Act does not require quarterly rest periods or monthly capitalisation, and the better view is that interest runs cleanly at the stated annual rate pro‑rata for the period of default.

Source: Late Payment of Commercial Debts (Interest) Act 1998, Section 4; Late Payment of Commercial Debts Regulations 2002.

Reasonable costs of recovery

The most commercially useful provision in the Act sits in Regulation 5A of the 2002 Regulations. Where a qualifying debt is paid late, the creditor is entitled to recover not only the fixed compensation but reasonable costs of recovering the debt, to the extent those costs exceed the compensation.

This is the provision that lets a creditor instruct a commercial recovery firm on the debtor's account. The firm's fee, if reasonable, is recoverable from the debtor under Regulation 5A. The creditor is not out of pocket for the cost of recovery; the debtor pays for creating the problem.

What counts as "reasonable" is ultimately a question for the court, but there is now a substantial body of recovery practice charging fees of between ten and twenty percent of the principal, plus VAT, on commercial matters. Rafferty & Maze's standard is fifteen percent, assessed per case. A court invited to opine on a percentage at that level in a defended small‑claims matter is extremely unlikely to take issue with it.

Source: Late Payment of Commercial Debts Regulations 2002, Regulation 5A.

What "undisputed" means, and why it matters

The Act applies to debts that are due. A debt is not due if it is genuinely disputed on the merits. In practice, this means the distinction between undisputed and disputed debts is the single most important gate in any recovery matter.

An undisputed debt is one where the debtor has not, on any substantive basis, contested the invoice before or at the due date. Late replies and attempts to manufacture a dispute after demand generally do not render the debt disputed in the legal sense, although they can slow the recovery process. A debtor who, under pressure, says the goods were never delivered or the work was not completed, without documentary support for that position, is unlikely to defeat a recovery. A debtor who had been raising specific complaints in writing for months before the invoice fell due is on a different footing.

How to invoke the Act

The Act operates automatically on any qualifying debt. A creditor does not have to "opt in" or issue any particular notice to become entitled to compensation, interest, or recovery costs. But invocation matters: a debtor who has been told, formally and in writing, that these sums are being demanded is far more likely to pay than one who has not.

Our demand sequence invokes the Act expressly on Letter I, restates it with accrued interest on Letter II, and presents it with a seven‑day ultimatum on Letter III. Most debtors settle between Letters I and II. The mechanics of the Act, properly deployed, do most of the work.

Common objections by debtors, and what to do about them

"Your terms don't mention the Late Payment Act"

They don't need to. The Act implies the relevant terms into the contract automatically. A creditor's silence on the Act does not remove its protection.

"We always pay net sixty"

If the contract's payment term is silent, the implied term is thirty days. A unilateral "we pay net sixty" policy is not a contract term; it is an expression of intention that does not bind the creditor.

"This is excessive"

Whether the sum demanded under the Act is excessive is ultimately a matter for the court. The statutory compensation and the prescribed rate of interest are fixed by statute and cannot be characterised as excessive. The recovery costs component is the part that can be argued, but the range that is commonly accepted in practice is well within the ten to twenty percent window.

"We'll have to take legal advice"

They should. Legal advice is likely to confirm that the sums demanded are payable and that continued non‑payment will produce a county court judgment. This concentrates the mind.

When the Act does not help

The Act does not help against a debtor who simply has no money. It does not help where the debt is genuinely disputed on the merits. It does not help where the debtor has become insolvent, in which case the creditor is a creditor in a winding‑up process and the Act's mechanisms are subordinated to insolvency law. It does not help where the debt is outside the six‑year limitation period for simple contract debts under the Limitation Act 1980.

For everything else, it does help. Quite a lot, in fact.

Try the numbers on your own invoice

If you have a specific invoice in mind and want to see what the Act demands on that particular debt, run the figures in our interest calculator. It will show statutory compensation, statutory interest at current rates, and representative recovery costs, itemised line by line.

Or, if you have already spent enough time on this matter and would like us to take it over: submit a case. We will confirm within twenty‑four hours whether we can act and, if so, issue Letter I the same day.