Could you claim thousands in late payment compensation?

A small business owner has paved the way for entrepreneurs to claim thousands in interest and penalties for late payment.

Late payment remains one of the most important problems facing the UK’s SMEs. Ageing invoices can place dramatic strains on firms’ ability to meet their own financial obligations and, in a growing number of the worst cases, can put them out of business altogether.

But a new case, in which an entrepreneur has made use of a little-known part of the law on debt, could signal a sea chance in the way late payment is treated.

James Morley, the founder of Northern Ireland firm Blue Autumn, has won more than £40,000 as a result of cases brought against late payers under the Late Payment of Commercial Debts (Interest) Act 1998. The series of legal victories that constitute this sum have set a precedent under which small firms across the country may also be able to secure thousands. So could you follow Morley’s lead and make a claim?

What does the Act say?

The Late Payment of Commercial Debts (Interest) Act was introduced in 1998 with the explicit intention of providing recourse for small firms that are owed money by larger companies. It provides creditors with the statutory right to charge interest on overdue payments.

The Act applies to debts incurred as a result of business to business contracts, in cases where the contract is not a consumer credit agreement, and in which separate provision for interest has not been made.

The Act gives you the right to claim interest at a rate of 8 per cent over the Bank of England base rate, in addition to compensation for the cost of recovering the debt. You can make claims for late payment even if the payment has now been made, and you can claim for instances up to six years ago.

It is important to understand that there have been recent changes to the Act, as a result of an EU Directive. These changes, which came into force in March 2013, are relatively minor, but should still be considered. They stipulate that when a date for the payment of a debt has been agreed, for the purposes of the Act it cannot exceed 30 days in the case of public sector debtors. In the case of private sector buyers it cannot exceed 60 days unless otherwise agreed, and provided that this is not “grossly unfair” to the supplier. Additionally, the changes increase the amount suppliers can claim for debt recovery. While there had previously been a fixed fee of either £40 or £100, suppliers can now claim any amount provided that it reflects the reasonable costs of recovering the debt.

Should I make a claim?

If you have been the victim of late payment, and if the circumstances fit the criteria set out above, you could be able to make a claim. You do not need to separately invoice your debtors for the interest owed. Instead, you simply write to them setting out how much is due, why, and how it should be paid. In the event that the client still does not make payment, you may have to begin court proceedings.

It is important to remember, though, that in most cases this will represent a full stop to your relationship with that client. It is unlikely that you will secure further business from them after taking this action, and it is therefore important that you factor in the potential for lost revenue when deciding whether or not to pursue compensation.

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