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A single unpaid invoice can spell disaster for a freelancer’s finances, where cashflow is often a very personal issue, and can mean the difference between making – and missing – this month’s rent or mortgage payment, or being able to afford to eat.
While clients might not care about your personal problems, that doesn’t mean they don’t matter, and the recently introduced Late Payments Directive should give you more confidence than ever when it comes to taking the appropriate action on unpaid invoices.
Under the new legislation, which came into force on March 16th, you no longer need to specify payment deadlines in advance, and you can add more charges to the amount you claim back from a late-paying client.
It’s generally good practice to agree payment deadlines in advance, before you begin working for a new client; however, depending on the nature of your business, you might not always do so.
Under the new legislation, the deadline for payment on most invoices is now set at 30 days from the date the contract is completed (so, the day you deliver the relevant goods or services).
That means there should be no doubt over when payment is due – and, unless you agree to 60-day, 90-day, or even longer terms upfront, no reason why you should be forced into accepting your client’s payment terms retrospectively.
There are three main types of cost you can now add to overdue invoices – two of which were already set out in law, and one which is new.
Statutory interest can be added at 8% above the Bank of England base rate on the most recent of either December 31st or June 30th – so, for example, if you are in the first half of the year, and the base rate on December 31st was 0.5%, you can charge interest at 8.5% from the day the invoice became overdue.
Fixed fees can be added to the total amount at £40 for debts up to £999.99, £70 from £1,000 to £9,999.99, and £100 for £10,000 and above.
If your cost of chasing for payment is greater than the relevant fixed fee, you can also claim back the remainder as reasonable costs, which should mean you’re never left out of pocket for chasing a payment.
The right to reclaim these ‘reasonable costs’ was previously not enshrined in law, which meant freelancers faced the dilemma of whether the likely charges involved in chasing a payment would mean it was not worth the trouble.
Now that burden has rightly shifted on to the non-paying client, leaving them to bear the full cost of failing to pay on time – which is just as it should be.
For freelancers who take the hard-line approach to non-paying clients, the new legislation is a licence to act with impunity, safe in the knowledge that any demonstrably overdue invoices can be chased without incurring excessive costs – and with the potential to make the debtor pay not only the amount due, but interest, fees and reasonable additional charges on top.
You can see the full Government guidance here (PDF).
Payment on account is not something that is widely known about among people who have never been part of the Self Assessment system. Learn more now!