Late Payment Law & Debt Recovery for UK Businesses

Late payment is one of the most persistent threats to UK small business cash flow — the Federation of Small Businesses estimates that late and non-payment costs the UK economy £2.5 billion per year. This guide explains your legal rights, the interest and compensation you can claim, and the debt recovery options available when customers don't pay.

1. Late Payment of Commercial Debts Act 1998

The Late Payment of Commercial Debts (Interest) Act 1998 (as amended by the Late Payment of Commercial Debts Regulations 2002 implementing EU Directive 2011/7/EU) gives businesses a statutory right to charge interest on overdue commercial debts. The Act applies to contracts for the supply of goods and services where both parties are acting in the course of a business — it covers B2B (business-to-business) and B2G (business-to-government) transactions.

The Act does not apply to consumer debts (B2C transactions), employment contracts, or debts already bearing interest under another statutory regime. It applies across England, Wales, Scotland, and Northern Ireland.

Key rights under the Act:

• A statutory right to interest on late payments (see Section 2)
• A statutory right to fixed compensation per invoice (see Section 3)
• A right to recover reasonable debt recovery costs exceeding the fixed sum
• Protection against grossly unfair contractual terms that seek to deprive the creditor of these rights — such terms can be voided by a court

The Act's protections cannot be excluded by agreement — any contractual term purporting to disapply the statutory interest and compensation rights is of no effect unless it provides a "substantial contractual remedy" in their place (e.g., a contractually agreed interest rate that is genuinely more favourable).

2. Statutory Interest Rate

The statutory interest rate under the Act is 8% per annum above the Bank of England base rate(the "reference rate" in force on 31 December or 30 June immediately before the debt fell due). This rate applies regardless of any lower rate in the debtor's payment terms.

Interest accrues daily from the day after the payment was due. If no payment date was agreed, the Act provides a default:

• The debt falls due 30 days after the later of: (a) the date of delivery of goods or performance of services, or (b) the date of receipt of the invoice
• For public authorities (government bodies, NHS trusts, local councils), the maximum payment term is 30 days
• For agriculture, the Food and Agriculture Produce (Contracts) Code provides a maximum payment term of 30 days for fresh food and 60 days for other agricultural products

Contracting parties can agree a payment term of up to 60 daysfor B2B transactions without any need to justify the term. Payment terms longer than 60 days can only be agreed if they are not "grossly unfair" to the creditor — a test applied by courts considering industry norms, the nature of the goods, and the relative bargaining power of the parties.

Practical tip: always include a late payment interest clause in your terms of business at a rate at least equal to the statutory rate — this prevents ambiguity and supports a later claim. Include a provision that interest accrues automatically without the need for a formal demand.

3. Fixed Compensation

In addition to interest, the Act provides an automatic right to fixed compensation for each late-paid invoice:

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

The compensation is per invoice, not per debtor — a single customer with 10 unpaid invoices of £500 each would generate £400 in fixed compensation (10 × £40) in addition to interest on each invoice. The compensation is intended to cover internal recovery costs (staff time, administration) and is payable automatically when the debt becomes late — no formal demand is required.

Where the creditor's actual recovery costs exceed the fixed amount — for example, where a solicitor's letter before action was necessary — the creditor can also claim reasonable debt recovery costs under section 5A of the Act. This might include the cost of a letter before action from a solicitor, administration charges, and tracing costs.

4. Payment Terms

Clear, enforceable payment terms are the foundation of effective credit control. Key principles:

• Include payment terms in your contract: Terms must be agreed (express or implied) before they are enforceable. Payment terms in an invoice alone — without prior agreement — may not be binding if the customer disputes them. Include payment terms in your written quotation, order confirmation, or contract.
• Default 30 days:If no payment term is agreed, the Act implies a 30-day payment period. Businesses can agree shorter terms — "payment on delivery" or "7 days from invoice" — but must ensure these are communicated and agreed before the contract is formed.
• Maximum 60 days (B2B): Payment terms longer than 60 days require positive justification. Large retailers and supermarkets have historically imposed 90–120 day terms on small suppliers — the Prompt Payment Code (PPC) and the Payment Practices Reporting regime (applicable to large companies) provide transparency and reputational pressure to reduce these terms.
• Maximum 30 days (public authorities): Public sector buyers must pay within 30 days. The Procurement Act 2023 includes provisions requiring public authorities to monitor and report payment performance, and to cascade prompt payment obligations to their supply chains.
• Agriculture: The Groceries Supply Code of Practice and the Code Adjudicator (GCA) regulate payment terms in the grocery supply chain; fresh produce must be paid within 30 days.

5. Retention of Title (Romalpa) Clause

A retention of title (RoT) clause (also called a Romalpa clause, after the 1976 case Aluminium Industrie Vaassen BV v Romalpa Aluminium Ltd) provides that the seller retains legal ownership of goods until the buyer pays for them in full. This is a powerful protection for suppliers of physical goods — if the buyer becomes insolvent before paying, the seller can recover the goods from the buyer's estate (subject to the goods being identifiable and not mixed with other goods).

To be effective, an RoT clause must:

• Be incorporated into the contract before or at the time the contract is formed — not added later to an invoice
• Be clearly worded — courts will not imply an RoT clause; it must be express
• Where possible, include an all-monies clause — extending the retention to all sums owed by the buyer to the seller (not just the price of the specific goods), providing protection where the buyer owes multiple debts

Limitations: RoT clauses cannot be used to recover goods that have been mixed with other materials, processed into a new product, or sold on to a bona fide third party purchaser for value. If the buyer has incorporated your goods into a manufactured product, you may have a charge over the proceeds of sale — but this requires a specific "proceeds of sale clause" and may constitute a registrable charge under the Companies Act 2006 (requiring registration at Companies House).

6. Demand Letters

Before commencing legal proceedings, sending a well-drafted demand letter is both courteous and legally important. Courts expect parties to attempt to resolve disputes before litigation, and failure to follow the Pre-Action Protocols can result in cost penalties.

A standard debt recovery sequence:

1. First reminder (overdue notice): Sent as soon as payment falls due. Polite, factual — cites invoice number, amount, due date, and payment methods. May include a statement that statutory interest will accrue.
2. Second reminder / final demand: Firmer in tone. Gives a short deadline (7–14 days) for payment. States that legal action will follow without further notice. Include the statutory interest and fixed compensation already accrued.
3. Letter Before Claim (LBC): The formal pre-action letter required under the Pre-Action Protocol for Debt Claims (applicable to business debts). The LBC must: identify the debt and its basis; include a reply form and income and expenditure form; give the debtor at least 30 days to respond (14 days for business debtors in straightforward cases); and indicate what proceedings will be issued if there is no response. Sending the LBC starts the court timetable.

The LBC does not need to be sent by a solicitor — a well-drafted letter from the creditor themselves is sufficient. However, a solicitor's headed letter often prompts swifter payment and the cost of the letter is recoverable as a debt recovery cost under the Act.

7. Small Claims Court

For debts up to £10,000, the Small Claims Track is the most proportionate and accessible route to a court judgment. The process is designed to be used without a solicitor, and legal costs are generally not recoverable by either party on the Small Claims Track.

The online Money Claim Online (MCOL) service (moneyclaim.gov.uk) allows claims up to £100,000 to be issued online; claims up to £10,000 are automatically allocated to the Small Claims Track. Alternatively, form N1 can be submitted to any County Court hearing centre.

Court issue fees (England and Wales, 2024/25):

• Up to £300: £35
• £300.01–£500: £50
• £500.01–£1,000: £70
• £1,000.01–£1,500: £80
• £1,500.01–£3,000: £115
• £3,000.01–£5,000: £205
• £5,000.01–£10,000: £455

Issue fees are recoverable as part of the judgment if you win. If the defendant does not file a defence within 14 days, you can apply for a default judgment immediately — often within a few days. If the debt is disputed, the court will list a hearing.

For debts between £10,000 and £25,000, the Fast Track applies — legal costs are recoverable but solicitors are typically required, adding cost. For debts above £25,000, the Multi-Track applies.

8. County Court Judgment (CCJ) & Enforcement

A County Court Judgment (CCJ)is a court order requiring the debtor to pay a specified sum. It is recorded on the Register of Judgments, Orders and Fines for 6 years (if not satisfied within one month) and damages the debtor's credit rating significantly. This reputational effect alone often prompts payment.

A CCJ does not itself recover money — you must take separate enforcement steps:

• Warrant of control (county court):Court enforcement agents attend the debtor's premises to take control of goods (using the Taking Control of Goods Regulations 2013) and sell them at auction. Fee paid in advance (£121 in 2024); recoverable from debtor. Most effective where the debtor has tangible assets.
• High Court enforcement: For CCJs of £600 or more, the judgment can be transferred to the High Court and enforced by a High Court Enforcement Officer (HCEO). HCEOs have stronger powers, can charge enforcement fees to the debtor (not the creditor), and typically achieve higher recovery rates.
• Third party debt order (TPDO):Freezes and redirects money owed to the debtor by a third party (e.g., funds in a bank account, money owed by a trade debtor). Requires knowledge of the debtor's bank account details. Effective for targeting liquid assets.
• Charging order:Secures the judgment debt against the debtor's property (land or investments). Once registered at the Land Registry, prevents the debtor selling or remortgaging without discharging the judgment. An order for sale can be sought if the debtor fails to pay, though courts are reluctant to order sale of a debtor's home.
• Attachment of earnings order:Requires the debtor's employer to deduct regular amounts from wages. Only available against individual debtors (not companies). Most useful for consumer debts.

9. Statutory Demand & Winding-Up Petition

For significant undisputed debts, the threat of insolvency proceedings is often the most powerful debt recovery tool — and the creditor may not need to follow through.

Statutory demand: A formal written demand under section 123(1)(a) of the Insolvency Act 1986, requiring the debtor company to pay a debt of at least £750 within 21 days. If the company fails to comply, pay, or compound the debt, it is deemed unable to pay its debts — giving the creditor grounds to present a winding-up petition. Statutory demands must be served correctly (in person or by first-class post to the registered office). A statutory demand is not filed at court and carries no court fee.

For individual debtors (sole traders, partners), a bankruptcy petition can be presented if the debt exceeds £5,000. Statutory demands on individuals allow the debtor to apply to court to set aside the demand within 18 days.

Winding-up petition: Filed at the Companies Court (part of the Business and Property Courts), with a court fee of £2,600 (2024/25). The petition must be advertised in the London Gazette (which can trigger bank account freezing). On the hearing date, the court can make a winding-up order, adjourn, or dismiss the petition. The Official Receiver is appointed liquidator, or a licensed insolvency practitioner is appointed by creditors.

Winding-up proceedings should only be used for undisputed debts — presenting a petition for a disputed debt is an abuse of process and can result in an immediate injunction and adverse costs order against the petitioner.

10. Invoice Factoring & Debt Collection Agencies

Where internal credit control is insufficient or debts are difficult to collect, external services offer an alternative:

Invoice factoring and invoice discounting:The business sells its invoices (book debts) to a finance provider (factor) at a discount — typically 70–90% of the invoice value upfront, with the balance (less the factor's fee) paid when the customer pays. Factoring involves the factor managing the sales ledger and chasing payment (disclosed to customers). Invoice discounting is confidential — the business retains control of credit control. Factoring provides immediate cash flow but reduces margin. The factor's fee is typically 0.5–3% of invoice value plus an interest charge on the advance. Factors will assess the creditworthiness of the customer base before agreeing terms.

Debt collection agencies (DCAs): Specialist agencies that chase overdue debts on behalf of creditors, typically on a no-collect, no-fee (contingency) basis, charging 10–25% of the amount recovered. DCAs must be FCA-authorised(consumer debts) or operate in accordance with credit industry guidance (commercial debts). They add resource and persistence to the recovery process without upfront cost — but recovery rates for aged debts are lower than for fresh debts, and aggressive tactics that breach the FCA Consumer Credit sourcebook (CONC) or ICO guidelines can expose the creditor to regulatory risk if the DCA acts improperly on the creditor's behalf.

Before appointing a DCA, ensure they are reputable, hold appropriate authorisations, and have a clear written agreement covering their authority, fee structure, and complaints process.

Key rights & thresholds at a glance