Dealing with Late Payment of Commercial Debt

A debt solution may not be suitable in all circumstances. Fees may apply and will affect your credit rating

Article by Laura Walshe of The Business Debt Advisor

Nearly 25% of UK businesses report that late payment of invoices threatens their survival.

Last year, The Federation of Small Businesses (FSB) obtained assurances from the Chancellor of the Exchequer that the Government will take steps to crack down on the late payment of commercial invoices.

This decision follows the much publicised demise of Carillion, which entered liquidation owing £2bn to 30,000 suppliers.

In October 2018, Small Business Minister Kelly Tolhurst announced proposals for dealing with late payments to small businesses by larger organisations.

She commented: “Small businesses are the backbone of our economy, and ensuring we remain one of the best places in Europe to start and grow a small business is a key part of our modern Industrial Strategy.

“Today’s new call for evidence will help us identify the most effective way possible to tackle this issue once and for all and ensure small businesses are on a level playing field with their larger counterparts.”

The Existing Legislation

There is existing legislation for tackling late payments.

The Late Payment of Commercial Debts (Interest) Act 1998 (LPCDA) gives suppliers the right to charge interest on all late payments, and reclaim the administrative costs of chasing payment.

Interest is paid at 8% of the price of the goods or services supplied, and accrue at a daily rate.

The existing legislation also established maximum 30 day payment terms for transactions with public authorities, and 60 day payment terms between businesses, unless they agree longer terms and this agreement is not grossly unfair to the supplier.

The meaning of what is ‘grossly unfair’ will depend on the specific facts of each case, but in general terms the LPCDA sets out that this would be:

  • any gross deviation from good commercial practice, contrary to good faith or fair dealing;
  • the nature of the goods or services in question; and
  • whether the purchaser has any objective reason to deviate from the 60-day payment term.

The Prompt Payment Code

The Prompt Payment Code (the Code) was set up by the Chartered Institute of Credit Management, and supplements legislation to promote a culture of prompt payment.

The code is voluntary, and signatories to it agree to pay 95% of invoices within 60 days and work towards 30 days as normal practice.

You can view the list of signatories at the Prompt Payment Code website.

Relief from VAT on Bad Debt

It is possible to claim relief from VAT if you supply goods or services to a customer, for which you are not paid, subject to certain conditions.

However, you must wait at least six months from the date of supply, or payment date (whichever is the latest).

To claim a refund you should include the amount of the VAT you’re claiming in Box 4 of the relevant VAT return.

So what does the future hold?

The call for evidence sought views on what else can be done to create a responsible payment culture, specifically whether or not new measures are required to ensure that small businesses are better protected.

At the moment the Government is analysing the feedback received and we await the final outcome.

If late payments are affecting your business then you may need to give careful considerations to the options available.

If you would like tailored advice, please fill out our Contact Formand we will be in touch.

Alternatively, call our FREE ADVICE LINE on 0800 781 0990 or chat to us online.

Our team has extensive experience in dealing with businesses across all sectors and can arrange an initial consultation at no cost, usually on the same day.

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