In the last few years, late payments have become one of the most pressing problems that not just businesses confront, but even private employees and freelancers too have to confront too.
With the many negative outcomes that you can face due to this delay, the burden of charging interest for late payment is the most important one.
In imposing a fixed amount of interest for each day that the client goes over the due date, you can receive compensation in the form of monetary payments for time delays you’ve had to endure due to your clients not honoring their obligations.
But, prior to charging this interest, we recommend being well-versed in the matter. We have set out to provide you with the complete understanding of all aspects of late payment penalties so that you can implement them to your benefit.
All business transactions follow a certain set of rules. To ensure smooth and non-conflict transactions, it is important that payments are made within the agreed time limit.
The time period is defined in”due date” or “due day” of a contract. The due date will expire and, if the contract allowsit, you’re entitled to charge a late payment fee as well as late payment interest fees.
Charging interest not only benefits you through the payments of interest over the due amount but also encourages clients to pay on time. This is because if a client does not pay the late payment interest or delay payments after a specified time there could be severe legal consequences.
In the UK the UK, the introduction of the interest charged on late payments was introduced following the Late Payment of Commercial Debts (Interest) Act 1998. The law also recognized reasonable costs. It will be clearer about these later on.
What is the best time to charge interest on a late payment?
The contract you enter into with your client will clearly specify the date by which you have the liberty to start charging late interest on payments.
The standard timeframe for receiving public sector payments is 30 days. For private sector payments , it’s 60 days. This duration may be subject to change according to different contracts for different customers.
Before taking steps to charge interest for late payments, it’s recommended that it is best sending reminders your customer. This can be accomplished in three ways. You may want to start with a reminder email at least two days following the due date is passed.
If the delay in payment is by more than seven days, it might be a good moment to call. Letters or messages that are formal can be sent. If you are still waiting for payment to be received, you can start charging interest on a regular basis.
What amount of interest for late payment could you charge?
The interest you charge on unpaid invoices you charge can depend on two factors. It can either be dictated by the law of the country, or the interest rate you specify in your contract.
If there is a set rate of interest that you stipulated in the contract, you will be obliged to adhere to that. However, the term of 60 days that is stipulated by law is to be observed.
In the absence of any specified interest rate in the formal contract, you’ll have to charge the interest rate set by law on late payments.
HMRC regulates interest rates
The HMRC or the HM Revenue and Customs is the agency responsible for the tax collection. They also pass a law setting the interest rates that are charged for late payments.
The interest rate charged is 8% above the base interest rate 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 because of the current COVID-19 pandemic.
Role of late charge assessments
Assessing the late payment interest along with the various other aspects of the late payment is vital. If you don’t know the exact amount due or the interest you have to charge your customer, it could become complicated.
To avoid this, you should do a thorough analysis to understand the procedure of making claims of the interest.
The first thing to examine the contract that you have signed with the client you are dealing with. This will allow you to review the terms the client and you signed that deal with late payments as well as the interest for late payments.
You can only charge the interest rate governed by UK law if the contract does not specify an additional interest rate that you’ve agreed to.
In addition, this analysis will also include recognizing any deadlines which your contract stipulates. This will help you plan your course of action to charge interest on late payment accordingly.
As part of the assessment, you will also crosscheck any other information mentioned in the contract with the late-payment interest you have calculated.
What is “reasonable charges”?
According to UK law the law of England provides three additional compensations you can claim based on the amount of the payment that is overdue. These include:
PS40 for debts that are less than PS1,000.
PS70 for debts between PS1,000 and PS10,000
PS100 for outstanding debts of more than PS10,000.
However, sometimes the process of chasing late payments costs a significant amount of money. If you happen in this circumstance, you’re entitled to claim the amount you’ve spent as “reasonable costs”.
So, reasonable prices basically ensure that you are not paying any money from your pocket as you try to recover your missing payments from the client. The people who employ the assistance of an firm to collect these payments will most likely spend more on the process , which they could be able to claim “reasonable expenses”.
Finally, these costs may be avoided in the event that the interest rate set is that of the contract and not the one specified in UK law.
How long does this process be expected to take?
In claiming Late interest installments is a simple process.
It’s not a matter of getting up and about to meet demands or to gather multiple documents. It is also not necessary to complete difficult paperwork. But, it could take a lot of time.
The total time that this process will take is contingent on the time it must acknowledge first and finally process late payments and the due interest.
The time frame that the UK law gives the client to use is 30-days in absence an agreed due date in the contract. The period begins on the day the client receives an official invoice requesting payment. The interest will be charged on the day after the date of due.
In the UK public sector, customers have 30 days to pay interest on late payment after the claim has been filed. For private sector customers, this duration is 60 days.
If the deadlines aren’t adhered to, you will need to wait until the next time period that is specified in the Letter Before Action that you issue. The length of time you have to wait for can be different dependent on the letter Before Action you draft. It is possible to wait as short as one week or as long as 60 days.
What happens if a customer isn’t able to pay the interest?
There is always the possibility of not receiving payments from freelancers even after several prompts and reminders. Some clients may refuse to acknowledge the due payment or even the interest and fees that you’ve imposed.
In these situations, the only resort which is left is to proceed with legal options. This is perhaps the most serious option you could take, and should be avoided unless absolutely necessary.
If legal proceedings are initiated, there is a high likelihood that your relationship with the client you are dealing with will end. There are also important aspects you must be aware of before engaging in legal proceedings against your clients for the late payment of interest.
These can be substantial legal charges in addition to time that will be absorbed. In this situation the best course for course of action is to conduct a cost-benefit analysis.
In Summary
We recognize that cash flow flows are dependent on prompt business payments. To ensure smooth flow it is vital that late payments are prevented.
Interest that is charged on late payments aids in this cash flow. The interest is your reward for not paying in time.
To make sure that you have made the right claims for payment or interest on your customer it is essential that you evaluate all related factors to it.
This includes how the calculation of the interest, how long it will take to settle the claims and what actions to take if the client is uncooperative. Obtaining information regarding the interest deduction for late payments is crucial when taking into consideration the interest rate charged.
Click here for a late payment interest calculator…
