What is the UK Late Payment of Commercial Debts (Interest) Act 1998?
A UK statute that lets businesses charge statutory interest, late payment compensation and reasonable debt-collection costs on commercial debts paid late. Statutory interest is 8% above the Bank of England base rate (currently 3.75%), so the effective rate is 11.75% per year. Compensation is a flat fee of £40, £70 or £100 depending on the debt size. Applies to B2B contracts where no contractual rate exists, and overrides contracts with rates set too low to be a 'substantial remedy'.
What this means for your business
In practice, this Act gives a UK business the legal right to charge interest and compensation when a customer pays a commercial invoice late, without needing a clause in the contract that says so. If a customer is a business (not a consumer) and payment terms are not agreed, the debt becomes late 30 days after delivery or invoicing, whichever is later.
From that point, statutory interest starts accruing daily at 11.75% a year (8% plus the Bank of England base rate of 3.75%), and a fixed compensation fee is automatically owed on top. For invoice finance users, this matters because unpaid invoices sitting with a factoring or discounting provider can be chased using these statutory rights, adding pressure and cost to slow-paying customers and helping offset the cash-flow impact of late payment.
Key points
- The right to charge statutory interest and compensation applies automatically to UK business-to-business contracts unless the parties have agreed a different remedy.
- Statutory interest is currently 11.75% a year, calculated as 8% plus the Bank of England base rate of 3.75%.
- Compensation is a fixed fee of £40 for debts under £1,000, £70 for debts between £1,000 and £9,999.99, and £100 for debts of £10,000 or more.
- A business can also claim reasonable debt-recovery costs beyond the fixed compensation if those costs exceed the fee already charged.
- Contract terms that set an unreasonably low interest rate or exclude the right to claim can be overridden if a court finds they do not provide a 'substantial remedy' for late payment.
Common pitfalls
Businesses often assume they must chase the debtor for permission before applying statutory interest, but the right exists automatically once payment is late, no separate agreement is needed. A common mistake is forgetting to apply the fixed compensation fee alongside interest, or miscalculating interest by using the wrong base rate if it changes mid-debt.
Some suppliers also fail to realise that agreeing a contractual rate lower than the statutory one can still leave them protected, since courts can strike out clauses that undercut a 'substantial remedy'. Always check the current base rate before invoicing for interest.
Related questions
Can I use the Late Payment Act if my invoices have already been sold to an invoice finance provider?
Yes, the right to statutory interest and compensation belongs to the business owed the debt, and this typically transfers alongside the invoice under most factoring or invoice discounting arrangements. Many providers include late payment interest claims as part of their debt collection process on your behalf.
Do I have to charge statutory interest, or is it optional?
It is optional. The Act gives you the right to charge statutory interest and compensation, but you can choose not to enforce it, for example to preserve a customer relationship. Many invoice finance clients only apply it when a customer is persistently late.
What happens if the Bank of England base rate changes while a debt is outstanding?
Statutory interest under the Act uses the base rate that applied on the date the debt became late (the reference date), typically 30 June or 31 December, depending on when the payment fell due. This means the rate used can differ from the current base rate if it has since moved.
Founder & Managing Director, Muswell Rose, founder and PSC of Best Business Loans Ltd
Adam is the founder and managing director of Muswell Rose and a founder of Best Business Loans Ltd, the company behind Market Invoice. He spent over three years as managing director of Penny, a UK invoice finance business, and his career runs through insurance, mortgages, commercial finance and fintech lending. He writes the Market Invoice library.
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