# The Legal Way to Charge Interest on Unpaid Invoices

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Unpaid invoices are a big deal, especially when you are running a small business or are self employed. They can cost you your cashflow, your reputation with your own suppliers and cause disappointment from broken promises but there is a legal way to charge interest on unpaid invoices.

## The Legal Definition of When a Payment Becomes Late

As with any legal matter, there are statutory rules that determine when an invoice is considered late which is crucial because this is needed to calculate the amount of late interest that can be charged.  According to the rules an invoice becomes late from the point where:

• Payment has not been received in accordance with payment terms clearly set out on the invoice or contract;
• In the absence of any payment terms the payment is considered late after 30 days for public authorities and 60 days for business transactions after either:
• the customer gets the invoice or;
• you deliver the goods or provide the service (if this is later).

## Who Can You Charge Late Payment Interest To

Interest on unpaid invoices can be charged only on business to business transactions, therefore if you have supplied something to a consumer you are unable to charge interest on any late payments.

## Late Payment Interest Rate

The late payment interest rate on unpaid invoices is set by law.  It is currently 8% over the Bank of England base rate.

You can find the Base Rate of Interest on the Bank of England website HERE, but it is set at 0.5% as of November 2017.

## Debt Recovery Costs

In addition to late payment interest you can also claim a fixed amount for debt recovery. The amount you can claim is based on the gross invoice value:

 Amount of debt What you can charge Up to £999.99 £40 £1,000 to £9,999.99 £70 £10,000 or more £100

## How to Calculate Late Payment Interest on an Unpaid Invoice

Late payment interest is calculated from the point that the unpaid invoice became due for payment on a daily basis.

If you are owed £1,000 and the Bank of England base rate is 0.5%:

• the annual statutory interest on this would be £85 (1,000 x 0.085 = £85)
• divide £85 by 365 to get the daily interest: 23p a day (85 / 365 = 0.23)
• after 50 days this would be £11.50 (50 x 0.23 = 11.50)

In addition you can charge £70 for debt recovery costs so the total that is now due is £1,081.50.

## VAT and Late Payment Interest

If you are VAT registered, late payment interest is calculated on the gross invoice value.  However the interest charge itself is outside the scope of VAT as this is considered a credit charge.

## How to Invoice for Late Payment Interest

If you need to charge your customer for late payment interest, then your first step is to contact them in writing advising them that you are going to begin charging late payment interest until the point that the unpaid invoice is paid.  You should provide them with details of the invoice, outstanding amount, how you chased the debt and the interest charge.

Once you customer has paid you should raise a final invoice which includes the original debt amount and the interest the has been applied, detailing how it was calculated.

## Should You Charge Late Payment Interest on Unpaid Invoices

Deciding whether you should late payment interest is a business decision that you should consider carefully:

• You could erode a valuable business relationship;
• Late payment interest, when done correctly, is legally enforceable however extracting it from your customer can be a different matter.  You could find yourself fighting for a relatively small amount of money but recovering the full debt;

If you find that you are experienced slow late payments on a regular basis then consider looking at your invoicing system and whether you need to make some improvements.

10 Steps to Setting Up the Perfect Invoicing System