Late Payments Directive

The Late Payments Directive (2011/7/EU on Combating Late Payment in Commercial Transactions) came into effect on Saturday, March 16th 2013, and potentially allows for larger sums to be claimed by contractors and small business who incur costs while chasing debtors for settlement.

In particular, the existing three-tier system of fixed fees chargeable on overdue debts has been retained, with the additional caveat that creditors may now add reasonable costs to the total over and above these fixed sums. That means that, when you are forced to take formal action in order to recover a debt, you can now charge:

  • statutory interest at 8% over the Bank of England base rate, AND
  • a fixed fee of £40 on debts up to £999.99, OR
  • a fixed fee of £70 on debts from £1,000.00 to £9,999.99, OR
  • a fixed fee of £100 on debts of over £10,000.00, AND
  • reasonable additional costs incurred while chasing the debt.

All of this is, of course, in addition to the full original amount owed – and with the inclusion of recovery costs in what can be claimed for, it now means that creditors should not lose out overall when a debtor decides to leave their invoice until it is overdue before making payment.

When can I charge?

The governmental consultation on the Late Payments Directive had originally proposed a 60-day standard payments period on some work, particularly in the public sector; in a joint response by Safe Collections and the PCG, we expressed concern about this. Legislation already allows standard payment terms to be overruled in agreed contractual terms, meaning the existing 30-day standard period can be extended to 60 or 90 days – or any other duration, for that matter – on a case-by-case basis.

With much focus at present on attempts to improve the nation’s cash flow, and to reduce the average time taken for an invoice to be paid, we (and the creditor clients and debtor companies we spoke with) were reluctant to see a standard 60-day period be introduced at a time when many small firms are struggling to get paid on time.

Ultimately the final form of the legislation retains the 30-day standard period for payment on commercial debts, meaning you should expect payment:

  • within 30 days of receipt of your invoice by your client, OR
  • within 30 days of completion of the work (if this is later), OR
  • within the alternative terms agreed by both parties in the relevant contract.

Beyond these deadlines, you are in principle permitted, under law, to add the appropriate fixed fee immediately, and to begin accruing interest on the amount owed; however, as always, it may be wiser in the first instance to offer more flexible payment terms, in order to give your customer a second chance to pay.

Either way, the new legislation appears to extend greater protection to contractors than was previously the case when chasing payments, and it will be interesting to see how long after March 16th it is before the first claims begin to be reported.

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