The issue of late payments has become one of the biggest problems that not just businesses face, but private employees and even freelancers have to face too.
With the many negative outcomes that you can face due to such a delay is inconvenience of imposing interest charges on late payments is the most pertinent one.
By charging a set amount of interest per day the client extends the due date, you are able to receive compensation in the form of monetary payments for delays that you have faced from your clients not honouring their obligations.
However, before you can charge the interest, we advise knowing all the details about the matter. This is why we’ve set out to provide you with an overview of the various aspects related to late payment penalties so that you can use them to your benefit.
Each business transaction is governed by certain rules. In order to ensure smooth and unconflicting business transactions, it’s vital that payments are done within the time frame agreed upon.
This deadline is indicated with the “due day” of a contract. When this due date is over or if your contract permits, you are entitled to charge a late payment fee as well as late payment interest charges.
The charging of interest does not just benefit you with the extra amount of interest that is paid on outstanding amount however, it also makes it easier for clients to make timely payments. This is because if the client fails to pay late payment interest or delay payments after a certain duration, there can be serious legal consequences.
In the UK, the implementation of interest on late payments started after the late payment of commercial Debts (Interest) Act 1998. The law also recognized reasonable costs. There will be more about them later.
What is the best time to apply interest to a late payment?
The contract you sign with your client will clearly state the date on which you are free to start charging late payment interest.
The typical time frame to receive payments from the public sector is 30 days. However, for private sector payments , it’s 60 days. The duration of payments may have to change based on different contracts with different clients.
Before taking steps to charge interest for late payments, it is advised to be a good idea sending reminders your customer. You can do this in one of three ways. You may want to start with a reminder email at least two days following the due date has passed.
If the payment is delayed by more than seven days, it may be a suitable moment to call. Letters or messages that are formal can be sent. If you are still waiting for payment to be received, you may consider charging interest formally.
How much interest on late payments is it possible to charge?
The interest you charge on unpaid invoices you charge can depend on two aspects. It could be determined by the laws of the country or the interest rate that you have set within your agreement.
If there is a set interest rate that you have stated in the contract, then you are obliged to adhere to that. However, the duration of 60 days legally mandated is to be observed.
If there is no specifically mentioned interest rate in an contract, you’ll be required to charge the interest rate that is set by law for late payments.
For a late payment interest calculator visit this website..
HMRC has regulated interest rates
The HMRC or HM Revenue and Customs is the body responsible for collection of taxes. They also pass a law dictating the interest rates that may be charged for late payments.
The interest rate payable is 8% above the base interest rate that is set by the Bank of England. The interest rate set by the Bank of England has seen some recent reductions. This is due to the general ease in rates of interest due to the current COVID-19 pandemic.
Late charge assessment – the role of late charges
Assessing the late payment interest along with the various other elements of the payment is extremely important. If you are unaware of the exact amount due or the amount of interest you have to charge your customer, it could become difficult.
In order to avoid this from happening, you need to do a thorough analysis to fully comprehend the process in claiming claims of interest.
The first thing to review the contract that you have signed together with your client. This will allow you to assess the terms both between you and the customer have agreed to that relate to late payments as well as the interest due on late payments.
You are only able to charge the interest rate as regulated by UK law if your contract does not include the interest rates of any other type that you’ve agreed to.
In addition, this analysis will also include recognizing any time limitations which your contract stipulates. This will aid you in planning the best course of action for charging interest on the late payment accordingly.
As part of this assessment, you will also crosscheck any other details mentioned in the contract in relation to the late payment interest you have calculated.
What is “reasonable expenses”?
In accordance with UK law There are three additional compensations that you are able to be entitled to based on the amount of the payment due. They are:
PS40 for debts of less than PS1,000
PS70 for debts that fall between PS1,000 and PS10,000
PS100 for debts of PS10,000 or more
Sometimes, however chase late payments cost significant amounts of money. If you find yourself in this situation, you can claim the money you’ve spent as “reasonable costs”.
Thus, reasonable costs essentially ensure that you are not paying anything out of your pocket as you try to recover your missing payments from your client. People who use the help of a collection service to get these payments are more likely to pay more money on the process , which they can claim as “reasonable costs”.
Finally, these costs may be avoided when the rate of interest set is that of the contract, and not the one specified in UK law.
How long will this process will take?
The process of claiming tardy interest payment is an easy process.
It’s not about doing a lot of running around to fulfill certain specifications or gather numerous documents. Neither do you have to finish complicated paperwork. However, it could take a lot of time.
The time duration that this process will take is contingent on the time it needs to acknowledge the payment and process late payments and the due interest.
The time frame that the UK law allows the client is 30 days in the absence of an agreed due date within the contract. The duration starts on when the client receives the invoice that asks for payment. The interest rate is charged from the day following the due date that was promised.
In the UK public sector, customers have a period of 30 days for paying the interest due on late payments after the claim is made. For private sector customers, the deadline is 60 days.
If the deadlines you set are not met, you’ll need to wait until the next time frame that is stated on the Letter Before Action that you send. This duration of time can differ depending on what Letter Before Action you draft. You can wait for up to one week or 60 days.
What happens when a consumer does not pay interest?
There will always be the possibility of not receiving late freelance payments regardless of numerous prompts and reminders. Some clients might not acknowledge the payment due or the interest and fees which you’ve charged.
In these situations, the only resort that is left is to go with legal options. This is perhaps the most serious option you could take, and should be avoided when absolutely necessary.
When legal proceedings start and legal proceedings begin, there is a great possibility that your relationship with your client is going to end. Moreover, there are crucial factors to be aware of prior to engaging in legal proceedings against your clients for pursuing the late payment of interest.
They include significant legal costs along with time that needs to be absorbed. In this scenario, the best course of procedure is to perform an analysis of the cost-benefit.
In summary
We are aware of how smooth cash flow depends upon timely business transactions. In order to ensure smooth and efficient flow, it is essential that payments are not made late.
Interest that is charged on late payments can help facilitate this cash flow. The interest you pay is reward for not paying timely.
However, to ensure that you make the correct payments and claims of interest for your client, it is extremely important that you analyze all factors to it.
This includes how interest is calculated, the time it takes to settle the claims and what actions to take in the event that the client is not cooperative. Finding out the late payment interest deductible is vital when taking into consideration the interest rate charged.