The Late Payment of Commercial Debts (No.2) Regulations (Amended Regulations) came into force on 14 May this year making further changes to the Late Payment of Commercial Debts (Interest) Act 1998 (Act) as previously amended by the Late Payment of Commercial Debts Regulations 2013 (2013 Regulations). We will sum up the recent changes made to the Act and how they affect businesses.
The aim of the Act is to encourage prompt payment of invoices, in particular to support small suppliers from suffering cash flow problems due to late payment of their invoices. However, it was noticed that a mistake had been made in the drafting of the 2013 Regulations, creating a position where in some cases, statutory interest would not start to run until up to 120 days after performance of the contract. The Amended Regulations were introduced to rectify this error.
The Act (as amended) sets out default payment requirements in relation to business to business and business to public authority contracts for the supply of goods and/or services.
The default payment date is within 30 calendar days after the latest of:
- the customer receiving the supplier’s invoice
- receiving the goods or services, or
- verifying or accepting the goods or services
The parties can agree to extend this payment date to a maximum of 60 days in relation to business to business contracts, but there is no exemption for business to authority contracts.
If a buyer requires time to verify the goods then this is limited to a 30 day period, or it can be longer if agreed with the supplier. After the verification period is complete, the 60 day period will start to run.
The maximum number of days for payment in any event is 90 days (or 120 days for contracts made between 16 March and 14 May 2013) after the date of performance of the agreement by the supplier.
Where payment is late, the Act provides for interest to be payable. Where no alternative rate is specified, interest will accrue from the payment date at a rate of 8% above the Bank of England’s base rate.
As well as interest on late payment, a supplier can also claim a fixed charge for recovering the debt known as ‘compensation’, which is calculated as follows:
- £40 for a debt of less than £1,000
- £70 for a debt of £1,000 or more, but less than £10,000
- £100 for a debt of £10,000 or more
If a supplier’s reasonable costs in recovering the debt are not met by the fixed sum, they are now (in addition to the compensation) entitled to a sum equivalent to the difference between the fixed sum and those costs.
It is important that both suppliers and buyers are aware of these Regulations.