What Is Late Payment Compensation?
Late Payment Compensation

Chasing a late payment costs a business time and money: emails, calls, letters, sometimes an agency. Late payment compensation recognises that cost with a fixed sum the supplier can add to a late business debt, without having to prove what the chasing actually cost. It sits alongside statutory interest as one of the two standard remedies for late payment between businesses.

The fixed sums

GOV.UK notes that these amounts are set by late payment legislation. You can only charge the business once for each payment, however many reminders you send.

Compensation as a share of the debt

• £200 debt, £4020.0%
• £900 debt, £404.4%
• £2,400 debt, £702.9%
• £9,000 debt, £700.8%
• £15,000 debt, £1000.7%

When it applies

Compensation is available in the same cases as statutory interest: a contract for goods or services between businesses, including public sector buyers, where payment is late. It does not apply to consumers. The payment is late the day after the agreed due date or, where none was agreed, 30 days after the customer received the invoice or the goods or service, whichever was later.

Compensation and interest together

Compensation is separate from interest and does not grow over time. Interest accrues daily at 8% over the relevant base rate; compensation is one fixed sum. On small invoices, the compensation is often worth more than the interest. On a £500 invoice paid 30 days late with interest at 11.75%, the interest is about £4.83 and the compensation £40. On large invoices, interest soon overtakes it. The late payment interest calculator shows both for any debt.

Claiming more than the fixed sum

GOV.UK says that if you are a supplier, you can also claim for reasonable costs each time you try to recover the debt. That covers cases where recovery costs genuinely exceed the fixed sum, for example the fees of a debt collection agency. Keep a record of what recovery actually costs if you intend to claim more, and be ready to show it was reasonable.

How to claim it

Put the compensation on the same new invoice as the statutory interest, as a separate line: "Fixed compensation for late payment of invoice INV-0042, Late Payment of Commercial Debts (Interest) Act 1998: £70." Show the original invoice, the amount and the due date, so the customer can see which band applies. If the debt reaches a letter before action or a court claim, include it there as well.

One payment, one compensation

The "once per payment" rule matters for customers with several invoices. Each late invoice is a separate payment, so each can attract its own fixed sum, based on its own amount. Three late invoices of £400, £1,200 and £12,000 could attract £40, £70 and £100 respectively. But one invoice chased ten times still attracts only one sum. If a customer pays several invoices together late, the compensation still follows each invoice.

Should you claim it?

Like statutory interest, compensation is a right, not an obligation. For a small invoice, the fixed £40 is often the most persuasive part of a late payment claim, because it is a round figure the customer can see immediately. Some businesses mention it in their payment terms, so customers know it applies, and then claim it only from those who pay late repeatedly. Others claim it every time, on principle. Whatever you choose, be consistent with each customer, and record what you decided.

Compensation and VAT

Late payment compensation is not payment for a supply of goods or services, so it is generally outside the scope of VAT. Invoice it without VAT, even if you are VAT registered and the original invoice carried VAT. Record it as part of your business income.

A worked example

A graphic designer's £900 invoice to a marketing agency is 45 days late. Interest at 11.75% for 45 days is about £13.04. The designer sends a new invoice: interest £13.04, fixed compensation £40, total £53.04, showing the original invoice number, amount and due date, and the calculation. The agency pays the original invoice and the claim together. Had the invoice been £1,000, the compensation would have been £70 instead.

Why a fixed sum rather than actual costs

Proving what it cost to chase one invoice is awkward: an hour of your time, a few emails, a phone call. A fixed sum avoids the argument. The customer knows in advance what a late payment will cost, the supplier does not need to keep time sheets for chasing, and the amount scales roughly with the size of the debt. For most small invoices, the fixed sum comfortably covers the real cost of a few reminders, which is the point: it removes any financial advantage a customer might gain from paying late.

Compensation when you use a debt collector

If you pass a debt to a collection agency, its fees can be significant, often a percentage of what it recovers. The fixed compensation contributes to that cost, and because suppliers can also claim reasonable recovery costs beyond the fixed sum, a higher agency fee may be recoverable too, provided it is reasonable and you can show it. Discuss with the agency how it will present the claim, so the customer sees the debt, the statutory interest, the compensation and any further costs set out clearly and separately.

Compensation in a court claim

When a debt goes to court, the claim can include the unpaid invoice, statutory interest to date and daily thereafter, and the fixed compensation. Stating each part separately, with the basis for it, makes the claim clear to the court and to the customer. The guide on small claims for an unpaid invoice covers how to set out a claim and the court fees that apply, which are themselves normally recoverable if you win.

Compensation for public sector debts

Public bodies are covered by the late payment rules when they buy goods or services from businesses, and they should usually pay within 30 days. If a public body pays late, statutory interest and compensation are available on the same basis as for a business customer, and with a public authority you cannot agree a lower interest rate in the contract. Many public bodies also publish their own payment performance, and some have formal complaints routes for late payment.

Recording compensation

Record compensation you invoice as income when you receive it, if you use the cash basis, or when you invoice it, if you use accruals. Keep the claim invoice with the original invoice and your chasing record. If the customer never pays the compensation, it is simply a debt that was not recovered; it does not change the original invoice.

Common mistakes

• Charging compensation to a consumer. It applies only between businesses and to public sector buyers.
• Charging it more than once for the same payment.
• Choosing the wrong band. The band depends on the amount of the debt.
• Adding VAT to it.
• Charging it where the contract sets its own late payment remedy that replaces the statutory ones.

Putting compensation in your terms

You do not need to mention compensation for it to apply to a late business payment, but telling customers up front is one of the most effective ways to avoid late payment in the first place. A single line under your payment terms does it: "Late payment by business customers will attract statutory interest and fixed compensation under the Late Payment of Commercial Debts (Interest) Act 1998." Customers who see it are less likely to let your invoice slip to the back of the queue, and if they do, you have already told them what it will cost. The guide on invoice payment terms shows how to set out terms, and the invoice due date calculator fixes the date from which a payment becomes late.

Checking which band applies

The band depends on the amount of the debt. Near a boundary, check carefully: a debt of £999.99 attracts £40, while £1,000 attracts £70. The bands do not change with time or with how late the payment is.

Related terms

Compensation sits alongside statutory interest under the Late Payment of Commercial Debts Act. The guide on charging interest on late payments explains how to claim both, and how to chase an unpaid invoice shows where they fit in the chasing sequence. For HMRC's own charges on late tax, see late payment interest.

In short: for every late business payment, the law gives you a fixed sum towards the cost of chasing it, on top of interest. It is modest, it is certain, and on small invoices it is often the most persuasive part of a late payment claim. Mention it in your terms, claim it consistently, and keep it separate from the original invoice.

People also ask

Is late payment compensation automatic?

Does compensation increase the longer a debt is late?

Can a public body be charged late payment compensation?