IT Contractor With an Unpaid Invoice? Here's Exactly What to Do (And How IR35 Changes It)

Does IR35 Affect Your Right to Chase an Unpaid Invoice?

This is the first question most contractors ask — and the answer is a firm no, with one important nuance.

IR35 is a tax framework. It determines whether HMRC treats your engagement as employment for Income Tax and National Insurance purposes. It says nothing about whether your client owes you money for work completed.

Where IR35 does matter is in identifying who you actually have a contract with — which defines who you can chase:

• Outside IR35 (limited company): Your contract is between your PSC (Personal Service Company) and either the end client or the agency. That entity is your debtor. This is a straightforward commercial debt.
• Inside IR35 via umbrella company: Your employment contract is with the umbrella. If the umbrella hasn't paid you, this becomes an employment dispute — and umbrella companies are legally required to pay you even if they haven't received funds from the agency. The Employment Rights Act 1996 protects you here.
• Inside IR35 directly engaged (PAYE): You're effectively an employee for tax purposes. Non-payment of wages can be escalated to ACAS or Employment Tribunal — a faster and lower-cost route than civil court for smaller amounts.

Key principle: Identify your contractual counterparty before you act. Chase the wrong entity and you waste time. Chase the right one with the right tool and you get paid.

Step 1: Send a Formal Letter Before Action (LBA)

Before any legal route, you must send a Letter Before Action. This is a legal prerequisite — courts expect it. It also works: around 40% of commercial debts are settled at this stage because the client suddenly realises you're serious.

Your LBA must include:

• The invoice number(s), date(s), and amount(s) outstanding
• The original payment terms and the date payment became overdue
• Statutory interest accrued to date (calculated below)
• Debt recovery compensation you're claiming
• A deadline — 14 days is standard and sufficient
• A clear statement that you will issue court proceedings if unpaid

Send by email and recorded post to the registered business address. Both. Email is easy to dispute receiving; recorded delivery creates a paper trail.

LBA Template (outside IR35 / limited company)

Here's a lean, effective template:

Dear [Name],

I write on behalf of [Your Company Ltd] regarding invoice [number] dated [date] for the sum of £[amount], which remains unpaid as of today's date.

Payment was due on [due date] under the terms of our agreement. This invoice is now [X] days overdue.

Under the Late Payment of Commercial Debts (Interest) Act 1998, we are entitled to charge statutory interest at 8% above the Bank of England base rate (currently [X]%), amounting to £[amount] to date, plus a debt recovery fee of £[40/70/100].

Total now outstanding: £[total].

Please make payment in full within 14 days of this letter. If we do not receive payment by [date], we will commence proceedings in the County Court without further notice, which may result in a County Court Judgment (CCJ) being registered against your company.

Yours sincerely,
[Your name], [Your Company Ltd]

Step 2: Calculate What You're Actually Owed (It's More Than the Invoice)

Most contractors underestimate the total they can legally claim. Under the Late Payment of Commercial Debts (Interest) Act 1998, every B2B invoice becomes a statutory debt the moment it's overdue. You're entitled to:

• The invoice amount — obviously
• Statutory interest: 8% per annum above the Bank of England base rate, calculated daily from the overdue date. As of April 2026 with base rate at 4.5%, that's 12.5% per annum — roughly 0.034% per day.
• Fixed debt recovery compensation:
  • £40 — invoices under £1,000
  • £70 — invoices between £1,000 and £9,999.99
  • £100 — invoices of £10,000 or more
• Reasonable recovery costs if they exceed the fixed compensation (e.g., if you engaged a solicitor)

Example: A £5,000 invoice 60 days overdue. Interest: £5,000 × 12.5% ÷ 365 × 60 = £102.74. Plus the £70 compensation fee. Total claimable: £5,172.74 — before any legal costs.

Step 3: Small Claims Court — Less Scary Than You Think

If your LBA goes ignored, the County Court (Small Claims Track) is your next move. For IT contractors, this is usually the right tool:

• Claims up to £10,000 go through the Small Claims Track in England and Wales
• Filing fee: £35 (claims under £300) up to £455 (claims of £5,000–£10,000) — recoverable from the debtor if you win
• File online at MCOL (Money Claim Online) — gov.uk/make-money-claim
• The defendant has 14 days to respond. If they don't, you can request a default judgment immediately.
• A CCJ on a company's record is taken seriously — it affects their credit rating and is visible to future clients and lenders

The mere act of filing often triggers payment. Defendants know that a CCJ costs them far more in commercial reputation than paying the invoice. Roughly 70% of small claims are settled before the hearing.

For claims above £10,000 (a common scenario for senior IT contractors on day rates), you move to the Fast Track or Multi-Track — at that point, getting a solicitor involved pays for itself.

The IR35 Complication: When Your Agency Is the Problem

Many IT contractors work through a chain: end client → agency → umbrella → contractor. This creates a specific failure mode where the agency doesn't pay the umbrella, so the umbrella doesn't pay you.

Here's the legal position:

• The umbrella company is your employer — they must pay you regardless of whether the agency has paid them. This is settled law. The agency's failure to pay the umbrella does not extinguish your right to wages.
• If the umbrella refuses to pay you citing non-payment from the agency, this is a breach of your employment contract and potentially an unlawful deduction from wages under the Employment Rights Act 1996.
• You can raise this with ACAS or take it to Employment Tribunal — there's no filing fee for wages claims under £25,000.
• If the agency is the counterparty and isn't paying the umbrella, the umbrella can pursue the agency through civil courts — but that's the umbrella's problem to solve, not yours.

Outside IR35 contractors have a cleaner chain: your PSC invoiced the agency or client directly. If they don't pay, it's a standard commercial debt. Apply all of the above steps from your limited company.

What If the Client Disputes the Invoice Because of IR35?

A growing tactic: end clients refuse to pay, claiming the IR35 determination changed mid-contract and the invoice is therefore disputed. This is legally very weak, but it does happen.

Your position:

• IR35 status does not retroactively invalidate a commercial contract. If you completed the work under an agreed contract, the fee is owed. Period.
• Under the off-payroll working rules (Chapter 10, ITEPA 2003), the tax liability sits with the fee-payer — the agency or end client — not with you. Their tax exposure cannot be offset against your invoice.
• If they're trying to claw back an IR35 liability by not paying your invoice, document everything in writing and proceed with LBA and court as above. Courts have little sympathy for clients using tax arguments to avoid legitimate commercial payments.

Your Escalation Ladder: Summary

Use this sequence. Don't skip steps — courts want to see you tried to resolve it first.

1. Days 1–3 overdue: Friendly payment reminder (email)
2. Day 7: Formal overdue notice referencing Late Payment Act, add interest calculation
3. Day 14: Letter Before Action — 14-day deadline, full amount including interest and compensation
4. Day 28: File at MCOL (gov.uk/make-money-claim) — claim the full amount including statutory additions
5. Day 42: If no response, apply for Default Judgment
6. Post-judgment: Enforce via warrant of control (bailiffs), attachment of earnings, or charging order

For umbrella contractors alleging unlawful wage deduction: raise with umbrella formally (step 1), then ACAS Early Conciliation (step 2), then Employment Tribunal claim (step 3).

Frequently Asked Questions

Can I charge interest on an overdue contractor invoice even if my contract doesn't mention it?

Yes. The Late Payment of Commercial Debts (Interest) Act 1998 implies a right to statutory interest into every B2B contract by law, regardless of whether your contract mentions it. You don't need a contractual clause — the right exists automatically. You can also include the fixed debt recovery compensation on top.

My client says they'll dispute the invoice because they think I was inside IR35. Can they do that?

No — not validly. IR35 status affects tax treatment, not your entitlement to your agreed fee. An IR35 determination (even a correct one) does not retroactively change the commercial terms of your contract. The fee is owed. Any additional tax liability from an IR35 determination is the fee-payer's problem under the off-payroll rules, not something they can recover from your invoice.

What's the fastest way to get paid when an agency isn't paying?

Send an LBA by email and recorded post on day 14 of overdue — don't wait. For sums up to £10,000, file at MCOL immediately after the LBA deadline passes. Agencies respond to court claims because a CCJ affects their ability to operate as a recruitment business. If you're via umbrella, simultaneously notify the umbrella in writing that you are holding them liable for unlawful wage deduction — this motivates them to pursue the agency aggressively.