In 2013 new legislation came into force changing how late payment of commercials debts can be handled by the creditor. To make sure you’re handling your credit control right, here’s an update on the rules.
Cashflow is often a very personal issue for freelancers, contractors and SMEs, and can sometimes mean the difference between making and missing this month’s rent, or being able to afford to eat.
While clients might not care about your financial problems (and more than likely you will not want to discuss it with them), that doesn’t mean they don’t matter. Luckily, the recently-introduced Late Payments Directive gives you more power than ever when taking action on unpaid invoices.
Under the new laws you no longer need to specify payment deadlines, and you can include additional charges in the amount you claim back from a delinquent client.
It’s best practice to agree strict payment deadlines (as well as any late payment penalties) before you begin working for a new client. However you might not always do so, depending on the nature of your business.
Under the updated legislation, the payment deadline on most invoices is set at thirty days from the date the contract is completed (meaning the day you deliver the goods or services you were hired for), even if no payment schedule is decided upon before work begins.
That means there will be no doubt over when your invoice is due to be settled – unless you agree to longer terms upfront. However, there is no reason you should be forced into accepting your client’s payment terms retrospectively if they are too long to be practical.
What additional costs can I claim?
There are three costs you can now add to overdue invoices. Two were already set out in law, and one is new as of March 16th.
Statutory interest at 8% above the Bank of England base rate can be added on the most recent of either December 31st or June 30th; so, for example, if you are in the first six months 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. For reference, the base rate is currently at 0.5%.
Fixed fees can also be added to the total amount owed:
- £40 for debts up to £999.99
- £70 from £1,000 to £9,999.99
- £100 for £10,000 and above.
If the cost of chasing your payment is greater than the fixed fee you are eligible to claim, you can also claim back the extra expense as reasonable costs, which should mean you are never left out of pocket for chasing a payment.
So what’s new?
The right to claim ‘reasonable costs’ of debt recovery was not previously enshrined in law. This meant smaller businesses faced the dilemma of whether the likely charges involved in chasing a payment would mean it was not worth their time. Now that financial burden has been rightly shifted on to the non-paying client.
For freelancers and contractors who take a hard-line approach to delinquent clients, the updated legislation could be seen as a licence to act with impunity, safe in the knowledge that any overdue invoices can be chased without incurring excessive costs.
You can see the full Government guidance here (PDF).
Photo by János Balázs