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Practitioners and their clients can both benefit from late payment legislation, as Robin Jarvis explains.

Government research shows that late or unpaid commercial bills cause 10,000 business failures each year. Evidence also points to the fact that some larger companies exploit their weight in the supply chain to impose unfair payment conditions on smaller suppliers.

Bad payment practices can have a multitude of effects: if suppliers are forced out of business the late paying company can harm both its reputation and its relationships with other suppliers. There is therefore a real onus on companies to adopt fair payment and sound credit management practices.

Legislation Introduced
In 1998 the Late Payment of Commercial Debts (Interest) Act 1998 was introduced. It was later amended in 2002 to cover companies of all sizes and to meet the requirements of EU legislation. The Better Payment Practice Group was set up as a public-private partnership to educate businesses about both the legislation and the benefits of good credit management. The law now states that, for contracts dated on or after 7 August 2002, any UK business has the statutory right to charge late payment interest and debt recovery costs to business customers that have exceeded their agreed payment terms.

Calculating Late Payment
Twice a year, the Bank of England base rate is used to determine a reference rate, which lasts for the following six months. The late payment interest rate is then calculated by adding 8% to this reference rate, which is applicable for the same six-month period. Table 1 below illustrates this.

£100 is the maximum that can be claimed for each overdue order, which is important because businesses often issue several invoices in respect of one customer order. A company does not need to supply proof of debt recovery expenditure with its claim, although the more information a debtor is given the less excuse they have not to pay.

Contracts dated before 7 August 2002 are subject to slightly different rules that depend on the size of the businesses involved on either side. Lastly, if companies have their own system for calculating late payment interest, and if they include this in their standard contracts, they forfeit their rights under the legislation.

Credit Management Tool
The late payment legislation was introduced as a credit management tool. It is intended to sit within a company’s cash collection strategy, alongside other tactics such as credit vetting, invoicing and the use of third parties, like debt collectors. A further way a company can signal it is a fair payer that expects to be paid fairly is by signing the Better Payment Practice Code. This enables businesses to display the Better Payment Practice Group’s logo on literature and materials. Signing up is straightforward and requires businesses to:

• agree payment terms at the outset of a deal and stick to them
• explain their payment procedures to suppliers
• pay bills in accordance with any contract agreed with the supplier or as required by law and tell suppliers without delay when an invoice is contested
• settle disputes quickly.

The Better Payment Practice Group’s website - www.payontime.co.uk - includes a facility to sign up to the Code online and provides credit management advice, a free guide to the legislation and a late payment interest calculator.

Robin Jarvis - Head of Small Business, ACCA (ACCA is a member of the Better Payment Practice Group)

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