The Late Payment of Commercial Debts Act Explained: Your Rights, Rates, and How to Enforce Them

What Does the Late Payment of Commercial Debts Act Actually Cover?

The Act covers commercial contracts for the supply of goods or services where both parties are acting in the course of business. That means:

• Business-to-business (B2B) transactions — any supplier invoicing another company
• Business-to-government transactions — supplying public sector bodies, NHS trusts, councils, and government agencies

It does not apply to consumer transactions (i.e., selling to individuals who are not acting in the course of a business). For that, different consumer protection rules apply.

The Act was significantly strengthened by the Late Payment of Commercial Debts Regulations 2013 (Statutory Instrument 2013 No. 395), which implemented the EU Late Payment Directive (recast) into UK law. Post-Brexit, this domestic legislation remains fully in force.

When Does a Payment Become "Late"?

This is where many businesses lose money — they don't know the clock has started.

A payment is legally late if it has not been received by the agreed payment date. If no date was agreed in the contract:

• Default: 30 days after the invoice date, or 30 days after delivery of the goods or services — whichever is later
• For public authorities: always 30 days, regardless of what the contract says
• For B2B contracts: agreed terms can extend to a maximum of 60 days, but only if both parties explicitly agree in writing and the extended term is not "grossly unfair" to the creditor

Example: You deliver a website project on 1 March and send the invoice the same day. No payment terms were agreed in writing. If the client hasn't paid by 31 March, interest begins accruing automatically from 1 April — whether or not you've chased them.

The "grossly unfair" provision matters. Courts have struck down 90-day and 120-day payment terms imposed by larger businesses on smaller suppliers precisely because they were deemed grossly unfair under the Act.

What Can You Claim? Interest, Compensation, and Recovery Costs

The Act gives you three separate entitlements the moment a payment becomes late:

1. Statutory Interest

Interest accrues at 8% per annum above the Bank of England base rate, calculated daily on the outstanding debt from the date it became overdue.

The Bank of England base rate as of April 2026 is approximately 4.75%, making the total statutory interest rate around 12.75% per annum.

How to calculate it:

• Take the debt amount
• Multiply by the statutory rate (e.g., 0.1275)
• Divide by 365
• Multiply by the number of days overdue

For example: a £5,000 invoice that is 90 days overdue at 12.75% = £157.19 in statutory interest.

2. Fixed Compensation Fee

This is automatic and requires no calculation — it is owed from the first day the invoice is late:

• £40 — for debts up to £999.99
• £70 — for debts between £1,000 and £9,999.99
• £100 — for debts of £10,000 or more

You are entitled to this compensation per invoice, not per debtor. If a client has five overdue invoices each worth £2,000, you can claim £70 × 5 = £350 in fixed compensation, in addition to interest on each debt.

3. Reasonable Debt Recovery Costs

If your actual costs of recovering the debt (letters, calls, legal fees, debt collection agency fees) exceed the fixed compensation fee, you can claim the reasonable additional costs under Section 5A of the Act. This is especially relevant for high-value debts where you've engaged solicitors or a collection agency.

Can You Contract Out of the Act?

Largely, no — and this is important if you're being presented with supplier agreements by larger clients trying to restrict your rights.

You can agree a different contractual rate of interest, but only if it constitutes a "substantial contractual remedy" for late payment. A token 0.5% interest rate buried in T&Cs would not qualify — courts have held that such clauses do not displace the statutory entitlement.

Any clause that purports to remove or reduce your rights under the Act without providing a genuine substantial remedy in its place is void and unenforceable.

Practical takeaway: If a client's contract says "interest on late payment shall be 2%", you can challenge that clause as not providing a substantial remedy — and fall back on the Act's full 8% + base rate entitlement instead.

How to Actually Claim — Step by Step

Knowing your rights is one thing. Getting the money is another. Here's the process:

1. Send a Late Payment Notice. Email the debtor stating the invoice number, original due date, days overdue, interest accrued to date, and the fixed compensation fee. Reference the Late Payment of Commercial Debts (Interest) Act 1998 explicitly. This often prompts immediate payment.
2. Issue a revised invoice or statement. Include the original debt, statutory interest calculated to the date of the notice, and the fixed compensation. Keep updating the interest figure if they still don't pay.
3. Issue a formal Letter Before Action (LBA). State that if payment is not received within 7–14 days, you will commence proceedings without further notice. Courts look favourably on claimants who followed pre-action protocols.
4. Use the County Court (for debts up to £100,000). File a claim online via Money Claim Online (MCOL) at gov.uk. For debts under £10,000, the Small Claims Track applies — costs are capped and you don't need a solicitor.
5. Enforce the judgment. Once you have a County Court Judgment (CCJ), you can enforce via warrant of execution, attachment of earnings, or third-party debt order.

Late Payment Act for Freelancers and Small Businesses: Common Scenarios

Scenario 1: A client ignores your 30-day invoice

You're a freelance developer. Invoice for £3,500, sent 1 January, 30-day terms, unpaid by 31 January. By the time you chase on day 45:

• Fixed compensation: £70 (owed from day 31)
• Statutory interest (15 days at ~12.75%): £18.36
• Total additional claim: £88.36

Small amounts — but stating them clearly in your chaser email signals you know your rights and are prepared to enforce them. That alone changes how quickly clients respond.

Scenario 2: A large company imposes 90-day payment terms

You're a small agency. A corporate client insists on 90-day terms in their standard supplier agreement. Under the 2013 Regulations, you can challenge this as grossly unfair. Raise it before signing, or — if already signed — document that you objected and that the term was non-negotiable. Courts have set aside such clauses where there is a significant power imbalance.

Scenario 3: Disputed invoice

If the client raises a genuine dispute about the quality or delivery of the goods/services, interest only accrues from when the dispute is resolved, not from the original due date. However, raising a spurious dispute to delay payment does not stop the clock — courts look at whether the dispute was raised in good faith and in a timely manner.

What the Act Doesn't Do — Honest Limitations

The Act is a powerful tool, but it has real-world limits worth understanding:

• It doesn't guarantee payment. If a debtor is insolvent, the Act won't help — you'd need to file as a creditor in insolvency proceedings.
• It can damage relationships. Invoking statutory interest with a long-standing client requires judgement. Many businesses use it as leverage rather than pursuing every penny.
• Small Claims Court has a cap. For disputes involving legal complexity beyond a straightforward debt, you may need to use higher tracks where costs are recoverable but not guaranteed.
• You still need to chase. The interest accrues automatically, but you have to claim it. It won't appear in court proceedings unless you include it.

How AI Is Changing Late Payment Management

For most small businesses, the reason statutory rights go unclaimed isn't ignorance — it's capacity. Manually tracking 40 invoices, calculating daily interest, drafting chasers, and knowing when to escalate is time-consuming work that doesn't generate new revenue.

AI-powered accounts receivable tools now handle all of this automatically: sending tiered reminders at the right intervals, calculating statutory interest dynamically, and flagging invoices that are approaching the point where formal action becomes viable. The businesses using these tools are recovering more debt, faster, with less friction.

Quick Reference: Late Payment Act at a Glance

Frequently Asked Questions

What is the Late Payment of Commercial Debts Act?

The Late Payment of Commercial Debts (Interest) Act 1998 is a UK law that gives businesses a statutory right to charge interest (at 8% above Bank of England base rate), fixed compensation (£40–£100 per invoice), and debt recovery costs when a commercial invoice is paid late. It applies automatically to B2B and business-to-government contracts — you don't need a specific clause in your contract to use it.

How much interest can I charge under the Late Payment Act?

Statutory interest is set at 8% above the Bank of England base rate. With the base rate at approximately 4.75% in April 2026, this means interest accrues at around 12.75% per annum on the overdue amount. On top of interest, you can claim a fixed compensation fee (£40, £70, or £100 depending on the debt size) automatically from the first day of late payment.

Does the Late Payment Act apply to freelancers and sole traders?

Yes — as long as you are supplying goods or services to another business (not a consumer), the Act applies regardless of your business structure. Sole traders, freelancers, LLPs, and limited companies all have the same rights under the Act. The key requirement is that both you and your client are acting in the course of a business.