Statutory Interest Payable
Statutory Interest applied to each Late Invoice.
Your business has a statutory right to claim interest on commercial late invoice payments which is 8% above the Bank of England Base Rate of Interest. Alternatively you are completely free to increase the statutory 8% rate if you have specified it in your terms and conditions. Invoicey can help you set the rate of Interest within your terms and conditions.
Interest can be charged on every late commercial invoice payment you receive dating back up to 6 years of initial payment. Therefore, if you have invoices which have been paid but were paid late then you can claim statutory interest so long as the invoice was initially dated within the last 6 years - use our free calculator calculate potential interest due on any invoice.
*However if you have agreed a different rate of interest and is stated in a contract then you may have to adhere to those terms unless the agreement is deemed unfair and puts your business at a significant disadvantage. The debtor for instance cannot completely contract out late payment legislation to avoid paying fees on late paid invoices. Therefore any company which has done this could be liable to pay Late fees in full dating back 6 years.
Invoices which are still outstanding and overdue accrue daily interest (see invoice calculator). Rates for calculating interest are called reference rates and are fixed for six-month periods.
Interest should be charged on the outstanding gross amount inclusive of VAT however you should not charge VAT on Interest and Compensation arising from Late fees.
Any partially paid Invoices do still incur daily accruing interest which is calculated using the original Invoice total and not the outstanding balance. For example if your Invoice amount is £5000 and your customer has paid £3000 then Interest is still calculated based on the original £5000 amount and will accrue daily until the remaining £2000 balance has been paid.
Whilst the Small Business Commissioner recommends re-sending invoices which include the late invoice compensation, admin fees and Interest many businesses prefer to receive this as a sperate demand, especially when Invoices need to match a value based on an original quote or PO (Purchase order Number). By adding late fees to an Invoice can cause confusion for larger organisations with a large account department as if the values do not match they will simply reject the invoice causing further delays to your cash flow. It is therefore recommended to send a separate late invoice demand once the original invoice has been paid so accrued interest and admin fees are calculated accurately and there is no reason to delay payment of the original invoice.
Our Invoice Booster can help you create a Late Invoice Demand free of charge via our Invoice Ledger and can be linked to the original Late paid Invoice. The Invoicey dashboard will send an automatic notification via email to inform the customer that late fees have been applied and will automatically generate a Late Invoice Demand when the original Invoice has been settled.
There are two reference dates per year
The first is on 31st December which runs from January 1st until 30th June.
The second is on 30th June and runs from 1st July until 31st December.
For example if an invoice became late between January 1st and 30th June and the Bank of England interest rate was 1% on the 31st December then it would simply be a matter of adding 8% and 1% = 9% during these months.
If however the Bank of England Base rate increased from 1% to 2% on 1st July or anytime during the first half of the year then you simply add 8% and 2% = 10% on any invoices falling due after 1st July and use this until the following 31st December.
If the Bank of England Base Rate of Interest changed again during the second half of the year then this would be altered again on the 31st December and would be used on any invoices falling due from 1st January until the following 30th June.
Despite 8% being the statutory Interest amount there is no set requirement to charge this amount and therefore you can charge more or less than 8% (+ Bank of England Interest) however this must be declared within your payment terms and conditions on your original invoice.
If you do not state this on your original invoice then you cannot retrospectively add a random figure afterwards although you may be to still claim statutory fees even if it was not stated on the original invoice.
We do not recommend charging more than 10% Interest plus Bank of England Interest as charging anything higher could be viewed as unreasonable and unfair towards the business customer and annul any late fees potentially owed if it cannot be justified. It should also be clearly stated on the original invoice and on every reminder so business customer(s) have several clear opportunities to recognise and understand your payment terms.
Do always keep in mind that whilst its your right to charge Late fees and Interest your relationship with your business customer should always come first. Implementing late fees arbitrarily, especially higher than what is statutory could cause harm to potential future business meaning any monies generated from late fees could end up being less than revenue otherwise missed form future repeat business.
Invoicey can assist your business by mediating between your accounts team and business customers by clearly explaining legislation and provide plenty of opportunity and time for businesses to understand their responsibilities as a customer.
