Late Payments and How to Avoid Them
Small businesses accounted for 99.26% of the UKs business population (1) in 2020, yet their combined turnover was estimated to be just 36.3% against that of large businesses of 47.8%, so what can you do to protect your cash flow against the powerful large corporates?
My new series will look at how you can manage your customer relationships, to reduce the chances that your cash flow will be adversely affected by late payments, and what happens if you encounter any difficulties. My first report however explains the legal framework in England and Wales for claiming interest and compensation if a payment is late.
When is a payment late?
· Your payment is due after your customer receives the invoice OR you deliver the goods or provide the service (if this is later).
· If you work for a Public Authority, the Late Payment of Commercial Debts (Interest) Act 1998 as amended, states that you must be paid within 30 days of the due date.
· If you work for another business, you must be paid within 30 days of the due date unless you agree a later payment date in the contract. This later date should usually be no longer than 60 days from the due date, any longer period must be fair to both parties.
How much can I claim?
There are two amounts for which you may invoice:
Interest of the Bank of England base rate (as at 31 December if the claim is made between 1st January and 30th June, or 30 June if the claim is made between 1st July and 31st December) PLUS 8%,
Compensation of between £40 and £100, depending on the value of the outstanding payment.
How can I calculate this?
The formula is: debt including VAT x total interest rate x number of days late/365.
So, for example, if you are owed £1000 and the payment is 45 days late, as of today’s date (19th May 2021) you could claim:
£1000 x (0.1% PLUS 8%) x 45/365 = £ 9.98 interest PLUS £70.00 compensation.
What is being done to improve the speed of payment?
The Prompt Payment Code operated by the Small Business Commissioner’s Office (part of the Department for Business, Energy and Industrial Strategy) is a voluntary scheme to encourage swifter payments and currently has 3133 signatories. Members must pay 95% of all invoices within 60 days to larger companies and within 30 days to small companies (with less than 50 employees). Signatories also agree to provide clear guidance to suppliers and encourage good practice throughout their supply chain.
The Good Business Pays movement aims to end late and slow payments. Why not join?
Next time I will explore how to set up your customer relationships to encourage prompt payments.