The issue of late payments has become one of the main problems that not just businesses confront, but even private employees and freelancers too have to face too.
Amongst the numerous negative consequences that you can face due to delays, inconvenience of charging interest for late payments is the most significant one.
By charging a set amount of interest per day the client extends the deadline, you will be compensated in cash for time delays you’ve had to endure from your clients not honouring their commitments.
However, before charging this type of interest, we suggest having a thorough understanding of the topic. That is why we have made it our goal to give you an in-depth overview of all aspects related to late payment interest , so that you can use them to your advantage.
Each business transaction is governed by an established set of guidelines. In order to ensure smooth and unconflicting business transactions, it’s crucial that the payments are completed within the specified timeframe.
The time period is defined as”due date. “due date” of the contract. Once this due date expires, and if your contract allows, you are allowed to charge a late payment fee as well as late payment interest costs.
The charging of interest does not just benefit you by allowing an additional cost of the amount due however, it also makes it easier for clients to pay on time. This is because , if the client refuses to pay the interest due on late payments or fails to make payment after a particular time, there can be serious legal consequences.
In the UK, the implementation of interest on late payments began after the Late Payment of Commercial Debts (Interest) Act 1998. The law also recognized reasonable costs. There will be more about these later .
When can you charge interest on a late payment?
The contract you negotiate with your client will clearly specify the date by which you are free to start charging late payment interest.
The most common duration to receive payments from the public sector is 30 days, whereas for private sector payments , it’s 60 days. This period is subject to change in accordance with specific contracts for various clients.
Before you take steps to charge interest on late payments, it is recommended that it is beneficial to send reminders to the client. This can be done in one of three ways. You might want to start sending a reminder message within two or three days of the due date has been passed.
If the amount is delinquent by more than seven days, it may be an appropriate time to make calls. formal letters or messages may also be sent. If you are still waiting for payment to be received, you may consider charging interest informally.
How much interest on late payments can you charge?
The interest charged on unpaid invoices you charge is contingent on two elements. It could be governed by the law of the country, or the interest rate that you set in your contract.
If there is a predetermined rate of interest that you mentioned in the signed contract, then you’ll be obliged to adhere to that. But, the period of 60 days established by law has to be observed.
In the absence of a specifically mentioned interest rate in an official contract, you will be required to charge the interest rate stipulated by law on late payments.
HMRC controlled interest rates
The HMRC or HM Revenue and Customs is the agency responsible for the tax collection. The HMRC also passes laws setting the interest rates which can be charged for late payments.
The interest rate paid is 8% on top of the base interest rate that is set by the Bank of England. The interest rate charged by the Bank of England has seen many recent reductions. This is due to the general relaxation in rates of interest due to the current COVID-19 pandemic.
The role of late charge assessments
The assessment of the late payment’s interest and other aspects of the late payment is vital. If you’re not aware of the exact amount of payment due or the interest you need to charge the customer, things can become complicated.
To prevent this, it is recommended to do a thorough analysis to fully comprehend the process of making claims of the interest.
The first thing you need to look over the contract you signed together with your client. Through this, you will look at the terms clients and yourself agreed to in relation to late payments as well as the interest on late payments.
You are only able to charge the interest rate as regulated by UK law if your contract does not contain another interest rate that you’ve agreed to.
In addition, this analysis will also be able to identify any time limitations in your contract. This will allow you to plan your strategy for charging interest on the late payment accordingly.
As part of this assessment, you will also crosscheck the other information in the contract to the late payment interest that you have calculated.
What are “reasonable expenses”?
According to UK law the law of England provides three additional damages you may claim depending on the value of the payment due. These include:
PS40 for debts less than PS1,000.
PS70 for debts between PS1,000 and PS10,000
PS100 for the amount of debt of PS10,000 or more.
Sometimes, however the process of chasing late payments can cost a lot of money. If you’re fortunate enough to be in such a situation, you are able to be able to claim the amount as “reasonable costs”.
Therefore, reasonable costs basically assure that you’re not paying any money out of your pocket when trying to collect your missing payments from your client. If you hire the assistance of an company to get these payments are more likely to pay more money on the process and thus are able to claim “reasonable costs”.
In addition, these expenses can be avoided in the event that the interest rate set is that of the contract, and not the one mentioned in UK law.
How long will this process be expected to take?
Making claims to receive late interest payments is a simple procedure.
It doesn’t require you to be doing a lot of running around to fulfill certain specifications or gather numerous documents. Also, you don’t need to finish complicated paperwork. However, it can indeed be time-consuming.
The total time that this process will take is contingent on how long it must acknowledge first and then process the late payment and due interest.
Click here for a late payment interest calculator.
The period of time that UK law provides to the client to use is 30 days in the absence of an agreed due date in the contract. The period begins on the date the client receives the invoice in writing requesting payment. The interest is due from the day right after the date on which the invoice was due.
In the UK public sector, customers are given a time-frame of 30 days for paying the interest on late payment after the claim has been submitted. For private sector customers, this duration can be 60 days.
If the deadlines you set are not observed, you’ll have to wait for an additional deadline that is listed within the Letter Before Action that you issue. This duration of time can differ according to the Letter Before Action you draft. You can wait for up to one week or as long as 60 days.
What happens if a client isn’t able to pay the interest?
There is always the chance of not receiving payment from freelancers on time regardless of numerous prompts and reminders. Some clients might refuse to acknowledge the payment due or the fees and interest that you have charged.
In these situations, the only resort that remains is to go with legal remedies. This could be the most serious decision you can undertake and should be avoided unless absolutely required.
When legal proceedings start and legal proceedings begin, there is a great likelihood that your relationship with the customer will end. Furthermore, there are essential factors to be aware of before making legal actions against clients for pursuing late interest payments.
They include significant legal costs as well as time that must be spent. In this situation the most effective course of option is to conduct an analysis of the costs and benefits.
In an overview
We are aware of how smooth cash flow is contingent on timely business payments. To ensure this smooth flow it is vital that late payments are prevented.
The charge of interest for late payments can help facilitate the flow of cash. The interest is your reward for not paying on time.
To ensure that you have made the right claims for payment or interest on your client it is crucial that you analyze all aspects to it.
This includes how calculation of the interest, the time it takes to settle the claims and what to do should the client not cooperate. Finding out the late payment interest deductible is crucial when considering the interest being charged.