The anxiety of spurious late penalty interest demands – the latest try-on from firms that see it as ‘a gold mine’

The anxiety of spurious late penalty interest demands – the latest try-on from firms that see it as ‘a gold mine’

Pic: Inside Small Business

In these straightened times it is prudent for accounts departments to count the pennies so the pounds will look after themselves. For an average SME or even a sole trader a legitimate invoice for late payment interest for a few pounds shouldn’t cause too much of a cash flow problem. However if the invoice for late payment of a few days was from four or five years ago then the amount can run into hundreds of pounds.

Ian Carrotte of ICSM Credit said a member of the credit intelligence group had been sent an invoice from a credit protection company demanding payment of more than £100. The demand was for invoices paid a few days late in 2014 and 2015 and the firm cited The Late Payment of Commercial Debts (Interest) Act 1998, as amended and supplemented by the Late Payment of Commercial Debts Regulations 2002. 

The idea behind the acts was to give smaller firms (of fewer than 50 employees) the right to charge interest on invoices that were paid late. Late being past the 30 days which most companies use for the maximum time it takes to pay an invoice although some accounts departments work on the basis of paying on a statement at the end of the following month which could be up to 60 days. And there lies the problem. The regulations were not introduced to hit firms that pay late by a few days or two or three weeks but large national and multi-national companies who use late payment as free credit. Carillion for instance used to pay some suppliers on 120 days and there are well known supermarkets who have done the same in the past.

“Some collection agencies are going through the ledgers of companies looking for invoices that were paid late,” said Ian Carrotte, “the law allows interest on late payment from up to six years back - but it is not aimed at a firm that paid a few days late. However they calculate the interest and then send a threatening letter to the customer of the supplier demanding the cash. One firm I noticed openly brags that this is a ‘gold mine’, and gleefully see it as a money-making exercise.”

Watson Buckle chartered accountants of Bradford clearly agree with Ian Carrotte. They said: “It would appear that such agencies are effectively approaching liquidators to purchase the rights to pursue claims on behalf of smaller companies in instances where such businesses have failed to formalise their credit terms. Once the rights to pursue such claims have been purchased, agencies are demanding payments under Section 5A of the Late Payment of Commercial Debts (Interest) Act 1998, which are then legally required to be paid by the affected party within 30 days or less.

“Such demands will typically charge a fixed fee on each previously-unpaid invoice – which can easily rack up into tens of thousands of pounds, if not more. In some cases, the collection agency will also threaten to issue a court order in the event of non-payment.”

Almost every legal firm and collection agency has something about the rules on their websites to encourage potential clients to use them to secure interest on past invoices.

Ian Carrotte said these firms see it as a bit of a ruse. “If they send out a hundred of these demands having gone through their client’s books in search of late payments from years ago then no doubt some will pay up out of fear or ignorance.”

He said if the agency took the customer of their client to court over the cash there is no guarantee a judge would rule in their favour. Firstly there is the question of terms and conditions. If there is nothing in the original T&Cs or on the invoice about interest then there’s a problem. And more pertinently if there has been no attempt to chase up or send reminders a judge is likely to think the amount was written off in the past. And there is the spirit of the law said Ian Carrotte which ‘these practices fly in the face of.’

He concluded: “If you get one of these invoices from a collection agency check with us at ICSM Credit as we’ve seen it all before and give members free advice.”

The Late Payment of Commercial Debts (Interest) Act 1998 

The act was only designed to give small and medium-sized businesses (with 50 or fewer employees) the right to charge interest to larger businesses and public sector organisations of any size. The right to charge interest applies to overdue accounts relating to a sale of goods, the hiring of goods or to a supply of services. The court can modify or exclude the provisions if the conduct of the supplier has been such as to make the imposition of interest, in whole or in part, against the interests of justice.

Interest can accrue from the latest of 30 days after the goods are supplied or the service is completed, or 30 days after receipt of invoice (or the customer is told the amount due is payable) and after the agreed date for payment.

The statutory interest rate chargeable, which is simple and not compound, is the Bank of England base rate plus 8%. For debts of less than £1,000 there is compensation amount of £40 and more than £1,000 it rises to £70 and £100 over £10,000.

The Late Payment of Commercial Debts Regulations 2013

The Regulations amend the 1998 Act by imposing limits on payment periods of 30 days when the purchaser of goods/services is a public authority, and 60 calendar days when the purchaser is another business.

About ICSM Credit

ICSM Credit has more than four decades of experience as a credit intelligence group whose members gain inside information about firms in trouble allowing them to avoid bad debts and rogue traders. To join costs less than a tank of fuel - while at the moment there's a special free temporary membership offer during the Covid-19 crisis which gives access to free legal letters. ICSM also has an effective debt collecting service which has a global reach - ask for details from Paul.

For details about ICSM Credit call 0844 854 1850 or visit the website or email Ian at on how to subscribe and to join the UK’s credit intelligence network to avoid bad debts and late payers. Follow ICSM Credit on FaceBook, Twitter and YouTube and Ian Carrotte on LinkedIn.

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