The Late Payment of
Commercial Debts Act

The Late Payment of Commercial Debts (Interest) Act 1998 is the reason a small business can charge a larger customer for paying late. It implies a term into business contracts that a late payment carries interest, and later rules added fixed compensation towards recovery costs. You do not need to have written any of this into your terms.

Who the Act covers

The Act applies to contracts for the supply of goods or services where both the buyer and the supplier are acting in the course of a business. That includes sole traders, partnerships, limited companies and public sector bodies. It does not cover sales to consumers.

When a payment is late

The Act works from the payment date. If you agreed one, a payment made after it is late. GOV.UK says an agreed payment date must usually be within 30 days for public authorities or 60 days for business transactions; a longer period with a business must be fair to both parties.

If you agreed no date, the payment is late 30 days after the customer receives the invoice or you deliver the goods or service, whichever is later. The invoice due date calculator shows the date for any term.

Statutory interest

Once a payment is late, the supplier can claim statutory interest at 8% a year over the Bank of England base rate. The base rate is fixed by a rule in the Late Payment of Commercial Debts (Rate of Interest) (No. 3) Order 2002: it is the rate in force on the 30 June or 31 December immediately before the day interest starts to run. Interest starting between 1 January and 30 June uses the rate on the previous 31 December; interest starting between 1 July and 31 December uses the rate on 30 June. That rate then applies for the life of the debt.

Interest runs daily from the day after the due date until the day of payment. The late payment interest calculator holds the Bank of England's base rate history and picks the right rate for your debt.

Fixed compensation

The supplier can also charge a fixed sum for the cost of recovering each late payment:

• £40 for a debt up to £999.99
• £70 for a debt of £1,000 to £9,999.99
• £100 for a debt of £10,000 or more

It can be charged once for each payment. If recovery costs more, a supplier can claim reasonable costs over and above the fixed sum.

What a contract can change

Businesses can agree their own remedy for late payment in their contract, such as their own interest rate. Where they do, the contract remedy applies instead of statutory interest. A remedy must be substantial: a term that gives the supplier too little can be challenged as not a substantial remedy. And GOV.UK notes that you cannot use a lower interest rate in a contract with a public authority.

Using the Act in practice

Many small businesses never claim under the Act, because they worry about the customer relationship. A middle path works well: say in your terms that you will charge statutory interest and compensation on late payments, then decide case by case. The warning alone often shortens payment times. When you do claim, send a new invoice showing the calculation, as GOV.UK suggests.

Related rules

The Act is about interest between businesses. It sits alongside other late payment measures, such as the duty on large businesses to report their payment practices, and the Small Business Commissioner, who can help small businesses with payment disputes against larger ones. None of them changes how statutory interest is calculated.

A worked example

A £12,000 invoice to a company fell due on 15 August 2025. Interest started on 16 August, so the base rate is the one in force on 30 June 2025: 4.25%. The statutory rate is 12.25% a year, about £4.03 a day, and the fixed compensation is £100 because the debt is over £10,000.

The Act at a glance

How the pieces of the law fit together

The 1998 Act created the right to statutory interest. Later rules changed how it works in practice. The rate is set by the Late Payment of Commercial Debts (Rate of Interest) (No. 3) Order 2002, which fixed it at 8% over the base rate on the relevant reference date. Fixed compensation, the £40, £70 and £100 sums, was added so that suppliers could recover something towards the cost of chasing without proving it. Later changes also brought in the limits on agreed payment periods that GOV.UK describes: usually within 60 days for business transactions and 30 days for public authorities.

You do not need to cite any of this to claim. A new invoice that shows the debt, the dates, the rate and the calculation is enough. But knowing the structure helps if a customer pushes back.

Worked example: two debts, two rates

A joiner has two unpaid invoices from the same company.

The first, £3,000, fell due on 30 June 2025. Interest started on 1 July 2025, so the reference date is 30 June 2025, when the base rate was 4.25%. The statutory rate is 12.25%.

The second, £3,000, fell due on 31 December 2025. Interest started on 1 January 2026, so the reference date is 31 December 2025, when the base rate was 3.75%. The statutory rate is 11.75%.

The two debts carry different rates for their whole lives, even though they are paid on the same day. The late payment interest calculator applies the right rate to each automatically. Both attract £70 compensation, because each is between £1,000 and £9,999.99.

Where to find the due date that starts it all

Everything in the Act runs from one date: the day payment was due. Get that date right and the rest follows. If you agreed terms, it is the last day of those terms; the invoice due date calculator turns any term, from net 7 to 30 days end of month, into a date. If you agreed nothing, it is 30 days after the customer received the invoice or the goods or service, whichever was later, so keep evidence of when your invoice was sent and when the work was delivered. The guide on 30 day payment terms covers the most common case, and the definitions of statutory late payment interest and late payment compensation summarise the two remedies.

What the Act does not do

• It does not make a debt payable sooner. The due date comes from your agreement, or the 30-day default.
• It does not apply to your household customers. Agree terms with them in writing instead.
• It does not override a contract rate, as long as that rate is a substantial remedy.
• It does not collect the money for you. If a customer ignores the interest invoice, the next steps are a letter before action and, if needed, a court claim; see small claims for an unpaid invoice.

Using the Act as a small supplier

The Act is most useful as a quiet signal. A line in your terms saying that late payments from business customers attract statutory interest and compensation tells customers you know your rights. Many small businesses then claim only from customers who pay late repeatedly. The guides on charging interest on late payments and how to chase an unpaid invoice show how to put it into practice, and invoice payment terms covers setting the dates it relies on.

Common questions

Does the Act apply if my customer is a charity? It applies where the charity is acting in the course of a business in buying from you. If you are unsure, the safest course is to agree clear terms, including a late payment clause, in writing.

Can I claim interest on an invoice from several years ago? Claims for debts are subject to time limits for bringing court proceedings, generally six years for a contract debt in England and Wales. Chase promptly rather than relying on that.

Do I charge VAT on statutory interest? Statutory interest and compensation are generally outside the scope of VAT, as they are not payment for a supply.