The Late Payment of Commercial Debts (Interest) Act - Understand Your Right to Claim and Recover Debt

The Late Payment of Commercial Debts (Interest) Act 1998 creates rights for businesses (and organisations in the public sector) to claim interest (this is 8% plus the Bank of England base rate) for late payment of commercial debts and associated recovery costs, when each party is acting in the course of business. 

Where the Act applies, statutory rights apply automatically if no suitable contractual remedy is in place. The Act also allows for contractual terms that do not provide a substantial remedy for late payments to be challenged. The purpose of the Act is to provide security and assurance to businesses, delivering compensation for loss of use of funds owed, and ensuring clear financial consequences for delayed payment. 

To exercise this legal right to claim interest, the claim must be completed/executed correctly. In this guide, we will explain the key principles of the Late Payment of Commercial Debts (Interest) Act, what it means, how it works and how to ensure you follow the correct procedure to manage and secure a claim. 

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Who does the Late Payment of Commercial Debts (Interest) Act 1998 apply to?¶

The Act applies to contracts for the supply of goods or services where the purchaser and the supplier are both acting in the course of business. 

When is payment considered late? ¶

Under the Act, you are eligible to claim interest and late payment compensation if another business is late paying for goods or a service (based on agreed terms or contractual limits). 

If you agree on a payment date, it must usually be within 30 days for public authorities or 60 days for business transactions. It is possible for you to agree to a period longer than 60 days for business transactions - but it must be fair to both businesses. 

If you do not agree a payment date, the law says the payment is late 30 days after either: 

• the customer gets the invoice 
• you deliver the goods or provide the service (if this is later)

What can you recover under the Act?  ¶

Under the Act you are entitled to recover statutory interest, fixed-sum compensation, and reasonable recovery costs. Let's take a look at what this means for you and your business. 

Statutory interest ¶

If payment is not made on time, the Act entitles you to statutory interest. The applicable rate is calculated as the Bank of England base rate plus 8%. This serves two purposes: it provides a financial consequence for delayed payment, and compensates businesses for loss of use of the funds owed. 

Key points about statutory interest:

• Interest starts accruing the day after the payment deadline
• Interest continues to accrue until the debt is fully recovered
• While a warning before applying statutory interest is not necessary, it is considered good practice to notify the debtor

It is important to remember regarding statutory interest, that contractual terms always apply first, providing they offer a substantial remedy for late payment. Your statutory rights apply where the contract is silent, unclear, or offers a weak or unfair remedy. 

Fixed-sum compensation  ¶

For every overdue payment, you are legally entitled to a fixed amount of compensation. This statutory entitlement is automatic and is intended to cover the administrative burden of overdue accounts, such as administration/issuing reminders, updating records, or instructing a lawyer or debt collection agency. The fixed amounts are:

• for a debt less than £1000, the fixed sum compensation is £40
• for a debt of £1000 or more, but less than £10,000, the fixed sum compensation is £70
• for a debt of £10,000 or more, the fix sum compensation is £100

Not all debts are related to invoices. A debt under section 5A(2) of the Late Payment of Commercial Debts Act 1998 is not determined by the invoices themselves, but instead by when sums become payable under the agreed contract terms. Each time part of the price falls due under the contract, another qualifying debt is created, triggering the protections and remedies under the Act, including the fixed sum. This means one invoice may cover several debts, or one debt could cover several invoices. Ultimately this translates into multiple elements of fixed sum compensation becoming payable, if there are multiple debts arising under the contract.

Reasonable recovery costs  ¶

If the fixed compensation amount does not fully cover the cost of recovering the debt, you may also claim reasonable additional recovery costs. These may include debt collection fees, legal support, or other necessary expenses directly related to recovering the debt.  

Together, these remedies ensure that the burden of late payment rests with the debtor—not the business owed money—and reinforce the importance of timely, accountable financial practices. 

It is important to understand that to claim reasonable recovery costs, you will need to provide clear evidence for the expenses you are seeking to claim. Without evidence, your claim can be challenged, reduced, or rejected altogether. 

Relevant evidence includes: 

• Copies of invoices from your legal team, enforcement agents or debt collection agencies
• Receipts for court fees, tracing services or noticing-serving actions
• Written records of time spent on recovery tasks (when a claim for administrative labour is permitted)
• Logs or screenshots from software tools used to track arrears or automated reminders
• Evidence of unsuccessful recovery attempts that demonstrate necessity and proportionality 

There is an expectation that costs remain reasonable and proportionate to the arrears owed, because excessive fees, unnecessary professional involvement or duplicated administrative work may not be classed as recoverable. As with all claims, maintaining accurate and organised evidence of the process strengthens your legal position throughout the arrears recovery process, so be as organised as possible!

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How to calculate statutory interest¶

Here is a quick overview of how to calculate the amount of statutory interest owed under the terms of the Act. 

Under the Act, the statutory interest rate is the Bank of England base rate + 8%. Once you have checked this, you can use the formula below to calculate your interest amount: 

Statutory Interest = (Amount Owed × Interest Rate × Number of Days Late) ÷ 365 

What can landlords recover under the Late Payment of Commercial Debts Interest) Act 1998? ¶

When dealing with late rent payments in commercial tenancy agreements, it is important to understand the difference between what is written in the tenancy agreement (contractual terms) and what the law automatically provides (statutory rights). The Late Payment of Commercial Debts (Interest) Act 1998 is a statutory framework that can apply to certain commercial lettings and arrears situations, but this means it operates differently from private contractual terms. 

Like in other commercial debt recovery, contract terms apply first, providing they offer a “substantial remedy” for late payment. Statutory rights apply where the contract is silent, unclear, or offers a weak or unfair remedy. 

Understanding the difference ensures landlords: 

• Do not unlawfully enforce unfair terms 
• Apply the correct rate of interest and charges 
• Protect themselves legally if arrears escalate 
• Avoid invalidating legal proceedings due to incorrect charges 

In this instance, tenants benefit from clarity and protection against excessive or punitive charges, while landlords retain the ability to fairly recover arrears. 

Can parties agree to exclude the Act?¶

Yes, parties can agree to exclude the Act, but only within the limits set by the Act itself. 

The Late Payment of Commercial Debts (Interest) Act 1998 does not prevent parties from agreeing their own position on late payment. What it does control is when the statutory regime can be displaced. Sections 8 and 9 of the Act make clear that statutory interest and compensation will not apply if the contract provides a substantial remedy for late payment. 

This means that you and the other party may decide that contractual interest will apply instead of the statutory rules. If your contract expressly states that the agreed interest is intended to be a substantial remedy for the purposes of section 8(2), and that it is the sole remedy for late payment, the courts will usually grant that agreement. Allowing statutory interest or compensation in those circumstances would cut across your agreement. 

However, the ability to exclude the Act is not unlimited. The contractual remedy must be genuine, fair and reasonable. Section 9 explains that a remedy is substantial only if it is sufficient to compensate the supplier for late payment or to deter late payment. If the interest rate is merely nominal, or if the overall remedy is grossly unfair, the statutory regime can still apply despite the wording of the contract. 

Where a valid substantial remedy is in place, the effect is that statutory interest and statutory compensation under the Act are excluded, and the parties are confined to the contractual interest provisions they have agreed. 

Does the Act apply to international contracts?¶

The Act generally applies to most contracts for the supply of goods and services in England and Wales. With regards to international contracts, the Act only applies if there is a significant connection between the contract and England, or if the contract would be governed by English law without the choice-of-law clause. 

Because the Act is designed to protect those commercial suppliers that may be vulnerable and to deter late payments, applying it to all international contracts might discourage parties from choosing English law for international trade purposes, as such Section 12 restricts its reach. 

Here are some factors that may justify applying the Act to an international contract that include a real connection to the UK: 

• The place of performance of contractual obligations is in England;
• One or more of the parties is a UK national;
• The parties conduct relevant parts of their business in England;
• The economic consequences of delayed payment affect the UK, e.g., through related contracts, tax arrangements, or insurance considerations. 

For contracts that relate to supply of services, the focus is on the performance by the supplier in England, rather than on the paying party. 

What happens if a debtor refuses to pay interest?¶

If a debtor refuses to pay interest on a late invoice, there are several steps you can take. First, ensure your payment terms are clear and communicated upfront. As soon as a payment is overdue, issue reminders that explicitly reference the contractual or statutory late payment interest. If the debtor continues to resist, escalate the matter with a formal letter (ideally with professional legal support) detailing the interest now due under either the contract or the Late Payment of Commercial Debts (Interest) Act 1998. If the debtor continues to refuse, you are legally entitled to include the interest in a claim through the courts or a debt collection process.

It is important to note that debt recovery can become complex, especially if the debtor disputes the claim or lacks the funds to pay. A solicitor experienced in debt recovery can help from drafting a legally compliant letter at the start of the process, through to representing you in court, and advising on the most effective enforcement strategy.

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How do I claim interest under the Act?¶

If you are owed monies for goods supplied and payment is late, you have a statutory right under the Act to claim interest and relevant compensation. To exercise your right to interest, you must claim this properly. 

1. Start with a friendly reminder  ¶

Before taking formal action, try to resolve the issue amicably. Contact the debtor by phone or email to remind them of the outstanding payment. If they cannot pay the full amount immediately, consider offering a reasonable repayment plan. 

2. Formal notification (seek professional support) ¶

If informal reminders don’t work, speak to a legal professional like those in our commercial debt recovery team to issue a formal Letter Before Action (LBA). This is a legal requirement before initiating court proceedings. The letter should detail the debt, including the original amount and due date, demand payment within a set period (usually 14 days), and explain the consequences of non-payment. Sending it by recorded delivery ensures you have proof it was received. This is an important step and it is advisable to do so with professional support to ensure it is accurate, clear and rightly exercises your rights under the Act.

3. Explore mediation ¶

Mediation is a cost-effective way to resolve disputes without going to court. Services such as the Civil Mediation Council can help creditors and debtors reach an agreement. Mediation is typically quicker and less expensive than court proceedings. 

4. Issue a claim in Court  ¶

If the debt remains unpaid, you can pursue legal action through the Court. If the debtor disputes the claim, a judge will review the evidence and make a decision.  In this instance your best route to payment and recovery of associated costs is through the support of a specialised debt recovery solicitor. Seeking professional support maximises your chances of recovering your debts.

5. Enforce the court order  ¶

Winning a court judgment does not guarantee repayment. You may need to enforce the order and there are various options/ways to do this, but once again a specialist debt recovery solicitor like those at Harwood & Co are best placed to support you in successful recovery of debts. 

Claiming interest under the Act as part of court proceedings¶

If court proceedings are issued, statutory interest has to be claimed using the claim form or particulars of claim. It is common, and sensible, to claim statutory interest in addition to, or as an alternative to, other forms of interest (for example contractual interest or interest under the Court’s general discretion). This is to provide greater protection to you as a supplier in case the defendant decides to dispute whether the Act applies to the contract or debt.  Your legal professional (debt recovery solicitor) will be able to help handle this process.

Although Courts can award statutory interest even if it is not pleaded, best practice is always to plead it expressly from the outset. 

Interest after judgment (post-judgment)  ¶

Once judgment is entered for a sum of money, interest will generally run on the judgment debt until such time as the payment for the debt  is made. This is separate from statutory late payment interest and is instead governed by judgment interest rules. 

Interaction with contractual interest  ¶

If the contract contains an interest clause, that clause may displace statutory interest under the Act if it amounts to a substantial remedy for late payment. Where there is any doubt, it is usual to plead: 

• contractual interest, and
• statutory interest under the Act, in the alternative

When enforcing late payment rights, businesses often encounter avoidable problems. Being aware of these issues can help ensure recovery is smooth, compliant, and enforceable. 

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Common late payment and debt recovery issues and how to avoid them¶

If you're fortunate enough to have limited experience in late payments and charging interest, there are some common pitfalls. Here are things that could impact your ability to chase and recover late payments and interest, and importantly, how to avoid them: 

Applying the wrong interest rate  ¶

Some creditors incorrectly calculate statutory interest or apply it from the wrong start date. This can result in disputes or reduced recoverability. 

You can avoid this by ensuring the contract specifies a valid interest rate. If not, apply the statutory rate under the Act  from the day after payment became due. 

Charging both statutory and contractual remedies  ¶

Businesses sometimes try to claim statutory interest and fixed compensation even where the contract already provides an enforceable interest clause. This may be classed as unlawful or be challenged. 

You can avoid this by deciding which regime applies: Decide which regime applies: statutory or contractual. You cannot mix both unless the contract clearly allows additional recovery costs under statute. 

No evidence of recovery costs  ¶

It is important that you do not try to claim “reasonable recovery costs” without invoices, statements, or time records, leading to objections or rejection. 

You can avoid this by ensuring you keep detailed records of time spent, third-party fees, and administrative steps relating to debt collection. 

Not issuing clear payment demands  ¶

Without a clear written demand showing the amount owed, interest applied, and basis for the claim, your negotiations are likely to  stall and legal escalation may weaken. 

You can avoid this by ensuring you send a clear and dated written notice outlining the overdue amount, interest calculation, fixed compensation, and planned next steps. 

Waiting too long to escalate  ¶

Delaying proceedings can make debt harder to recover and may damage  your negotiating leverage. The best way for you to avoid this is to utilise reasonable reminders and if no response is received at that stage, you can escalate in line with internal policy or legal requirements. 

Can statutory interest be reduced or denied? ¶

While rare, there are “special circumstances” in which it is deemed unjust to award statutory interest in full, or at all. These are usually classed as are exceptional situations, or "special circumstances" relating to the conduct of the supplier (you, the person/business claiming interest). 

Examples of potential special circumstances include situations where the business claiming interest has: 

• Caused, or significantly contributed to the late payment  (for example, by issuing invoices late or with errors) 
• Failed to provide information necessary for payment processing 
• Deliberately delayed resolving a dispute in bad faith 
• Acted in a misleading, obstructive, or unreasonable manner 

When special circumstances are agreed, the court can, at its discretion:  

• Reduce the rate of interest 
• Shorten the period for which interest is payable 
• Disallow statutory interest entirely (this is rare) 

It is important to note that these are exceptional circumstances relating to the party claiming interest, which make it unjust to award the requested statutory interest. In these cases the 'special circumstances' must relate to the supplier's conduct (not the debtors), they must be out of the ordinary (i.e normal commercial disputes do not apply), and the burden of proof is on the debtor. 

Other helpful things to know regarding the Act¶

Here are some useful terms and process requirements you may need to be familiar with when the Act applies to debts owed for you or your business. 

Grossly Unfair Term  ¶

A grossly unfair term under the Act refers to a contractual term that significantly deviates from good commercial practice, or is unjustifiable for extending the requested payment date. Such terms can include provisions that deny suppliers the right to reasonable compensation for debt recovery costs, or remove or minimise rights to statutory interest for late payment. The Act aims to protect suppliers from such terms.

Acceptance Date  ¶

The Acceptance Date under the Act is the date from which interest on overdue debts begins to accrue. This date is crucial as it determines when the creditor can claim interest on the debt. If the contract does not specify an agreed payment date, interest generally accrues from the latest either the delivery, invoice, or acceptance of the goods or services. If you have not received payment by the end of the period for which you are entitled to claim interest, you can start charging interest from the date you expect the payment to be received.

Issuing an Invoice  ¶

Issuing an invoice correctly is key, because it starts the clock for statutory interest on late payments. An invoice should clearly state the amount owed, the goods or services provided, and the payment due date. Clear, dated invoices not only establish the debt and its due date, but they assist significantly in the event that  legal action becomes necessary. Even if a contract doesn’t mention late payment interest, the Act implies the right to charge it, making proper invoicing essential for protecting your business. 

Statutory Limitations  ¶

Most debts in the UK become unenforceable six years after the last payment or acknowledgment under the Limitation Act 1980. Some exceptions apply, such as mortgage-related debts. If you are worried about limitations impacting your outstanding monies owed, you should consult with a professional debt recovery solicitor for advice. 

Need professional debt recovery support?¶

Even after a judgement you may still need help enforcing the collection of debt and professional assistance is the safest and most efficient way to do this. Debt recovery specialists like ours at Harwood & Co are there to guide you through the process, supporting you with insight, information and access to options, maximising your recovered costs. 

If you're seeking support with unpaid debt, unsure of how to proceed and keen to recover your funds professionally and effectively, we can help. Get in touch with our debt recovery team today for more information. 

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