egos^®  - Late Payment of Commercial Debts (Interest) Act 1998

Interest and fixed sum ‘compensation’ on unpaid debts - a legal FAQ

This article applies to debts between businesses – and not to debts where one party or both are consumers.

Where statutory interest becomes due on a contract made after 7^th August 2002, an additional fixed sum becomes payable - ₤40 where the debt is under ₤1,000;  ₤70, where the debt is between ₤1,000 and under ₤10,000;  and ₤100 in all other cases. 

Under the imaginatively entitled 'Late Payment of Commercial Debts (Interest) Act 1998', a term relating to interest is implied into certain contracts. The conditions you have to satisfy are:

• That the debt was incurred in the course of a contract where both parties are acting in the course of their respective businesses
• That payment is overdue - if there is a contractual date for payment, the debt will be overdue if that date has passed; if there is not, then it will be overdue it the debt remains unpaid 30 days after invoice
• That there is no express contractual provision for interest (or, if there is, that the contractual provision is 'not a substantial remedy' for late payment).

Satisfy these conditions, and you're entitled to interest at 8% over the 'official dealing rate' (see below), according to the date on which the statutory interest started to run. 

So, if you’re entitled to interest, invoice for it (don't forget interest is zero-rated - so don't add VAT).

You do not need to make it a contract term that the provisions of the act will apply - they will apply in any event unless there is some other reasonable provision governing late payment.  In my view it's generally preferable to omit reference to interest completely from the contract.

When it comes down to it though, unless you are a bank, interest is a poor compensation for not having the money you've earned and doubtless need for your own purposes. Before you enter a contract, satisfy yourself as best you can that the other party has a good reputation for paying on time - you doubtless intend to honour the terms of the contract yourself, and are entitled to expect the other party to do likewise.

Rates

On 7^th August 2002 the rules for calculation changed:

If the date on which the statutory interest started to run was 1^st July to 31^st December, then the ‘official dealing rate’ for these purposes is the rate that applied on the preceding 30^th June.

If the date on which the statutory interest started to run was 1^st January to 30^th June, then the ‘official dealing rate’ for these purposes is the rate that applied on the preceding 31^st December.

The ‘official dealing rate’ is also called the ‘MPC rate’ and can be found on http://www.bankofengland.co.uk (the last time I checked it was at the end of this file)

Past rates:

Date	MPC rate change
5th April 2001	Reduce to 5.50%
10th May 2001	Reduce to 5.25%
2nd August 2001	Reduce to 5.00%
18th September 2001	Reduce to 4.75%
4th October 2001	Reduce to 4.50%
8th November 2001	Reduce to 4.00%
6th February 2003	Reduce to 3.75%
10th July 2003	Reduce to 3.50%
6th November 2003	Increase to 3.75%
5th February 2004	Increase to 4.00%
6th May 2004	Increase to 4.25%
10th June 2004	Increase to 4.50%
5th August 2004	Increase to 4.75%
4th August 2005	Decrease to 4.5%
3rd August 2006	Increase to 4.75%
9th November 2006	Increase to 5.00%
11th January 2007	Increase to 5.25%
10th May 2007	Increase to 5.50%
5th July 2007	Increase to 5.75%
6th Dec 2007	Decrease to 5.50%
7th Feb 2008	decrease to 5.25%
10th April 2008	decrease to 5.00%
8th October 2008	decrease to 4.5%
6th November 2008	decrease to 3%
4th December 2008	Decrease to 2%

 

Thus statutory interest:

Debt due date on or after between	And no later than	Statutory rate
1st January 2001	30th June 2001	13.75%
1st July 2001	31st December 2001	13.25%
1st January 2002	30th June 2002	12.00%
1st July 2002	30th June 2003	12.00%
1st January 2003	30th June 2003	12.00%
1st July 2003	31st December 2003	11.75%
1st January 2004	30th June 2004	11.75%
1st July 2004	31st December 2004	12.50%
1st January 2005	30th June 2005	12.75%
1st July 2005	31st December 2005	12.75%
1st January 2006	30th June 2006	12.50%
1st July 2006	31st December 2006	12.50%
1st January 2007	30th June 2007	13.00%
1st July 2007	31st December 2007	13.50%
1st January 2008	30th June 2008	13.50%
1st July 2008	31st December 2008	13.00%

 

I'd really appreciate your feedback on this FAQ - so mail me and tell me what you think of it, if it's been useful to you, or let me know of any specific problem you have where I may be able to help.

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