Late payers face bill for interest

MORE than 3.7m British businesses will from today be able to claim interest and compensation from customers who have failed to pay their bills on time. The charges are the result of new legislation aimed at overcoming the damaging impact of late payments, which are believed to cause 10,000 businesses to go bust each year.

The Better Payment Practice Group, set up to promote awareness of the new laws, says small businesses are owed £17bn at any one time, £6.8bn of which is paid late.

Small businesses have had the right to claim interest and compensation from other small businesses since November 2000, although few are believed to have taken advantage of it because of uncertainty about which companies can use it and how. But Better Payment spokesman Peter Rowe, whose group has members such as the CBI and the Institute of Directors, believes that with the right being extended to big businesses today, companies will be less concerned about potential damage to client relationships.

'If big businesses start to apply interest on all overdue debts as a matter of course, we could see the move become an accepted standard practice in the UK like it is in some other countries,' Rowe said. 'If that happens we could see everyone taking it up.'

Interest can be charged on overdue debts at the rate of 8% above the Bank of England's official dealing rate. Costs incurred in recovering the money can be compensated at rates ranging from £40 for debts of less than £1,000 up to £100 for debts of more than £10,000.

Michael Frisby, a commercial lawyer with Stevens & Bolton, said the time allowed for payment will be either as stated in a contract or, in the absence of such stipulation, 30 days from the receipt of an invoice. He said the legislation also allowed a claim for late payment to be pursued for up to six years after it was due.

'Commercial considerations may dictate that organisations will wait until their business relationships come to an end, at which point the persistent late payer may face backdated interest claims going back some years.'

Frisby said the new powers could prove popular among liquidators as they attempted to maximise returns to creditors. But he warned the laws would also mean small businesses would have to ensure their payment procedures were effective if they were to avoid incurring the extra costs.

He said it may be possible to alter the terms of the penalties through a contract, although this could be difficult to draft. 'Any variation will have to provide a substantial contractual remedy for the late payment,' he said.

The legislation - the Late Payment of Commercial Debt (Interest) Act - was due to be introduced in November but was brought forward at the direction of the European Commission, which has set today as a deadline for achieving consistent debt repayment penalties across the Continent.