Contractors’ Questions: How to calculate late payment interest amid the COVID-19 outbreak?
Contractor’s Question: A recruitment agency I get work through has failed to meet their 28-day payment terms. They have told me that due, to the COVID-19 outbreak, they won't be able to pay me for a number of additional days, despite my payment being overdue.
As regards, the 8% plus base rate interest that us victims of late payment are allowed to charge, is this a flat rate or compound? I.e. do you calculate it as (8%+ Base)/365 multiplied by the invoice total, so you add the same amount each day it is overdue? Or do you calculate the interest each day using the invoice total plus the interest already accrued, so the amount you charge escalates every day?
Lastly, is there something I might say to my client to stop them lapsing into further non-compliance and accruing more charges? I am shocked that they are continuing to withhold payment so any guidance is appreciated.
Expert’s Answer: The government’s guidance on late payment interest is that it has to be charged as a flat rate. So the calculation, and indeed the amount accrued each day, remains the same until you are paid in full.
Just to run through some of the detail of how it works, we say that late payment interest (8% + base rate) is always charged on the ‘principal’ debt amount, i.e. the value of the invoice at the point it becomes overdue.
This principal amount doesn’t change, up or down -- so just as you don’t include interest already accrued in subsequent calculations, you can still charge the same amount of interest each day even if a client pays half of what is owed. This only stops once the original amount (plus interest) is paid in full.
Bear in mind that in order to charge interest on an overdue payment, you should issue a new invoice.
In terms of what you can do to encourage the agency to pay up, we always advise that it is a good idea to tell debtors that you will be charging late payment interest plus other applicable fees. In particular, the fixed sum sanctioned for every late payment and ‘reasonable costs’ if you have to go down the route of involving a debt collection agency.
Reminding people that the amount they owe will go up the longer they don’t settle an overdue payment, and pointing out that all of this is set out clearly in legislation, is often enough to hurry them into paying. For advice and some handy letter templates to use when contacting people about late payments, click here.
Finally, it's also worth considering the stated reasons for non-payment before you decide to add on any late payment charges, as adding on charges without regard for their reasoning can harm a commercial relationship. This is particularly a risk if you appear to penalise a client for circumstances genuinely out of their control.
Due to the UK officially being on an “emergency footing” due to coronavirus, these are unparalleled times. In fact, many businesses that have never had operational issues before are now experiencing significant interruptions with their cash-flow and staffing levels. If the client/agency in question is part of a supply chain impacted by the recent social distancing measures, or has seen a significant drop in income due to the government’s other instructions in relation to COVID-19, then looking like you're attempting to profiteer from their situation is unlikely to speed up payment. As a result, treading carefully, and sensitively when exercising your rights is highly recommended.
The expert was Adam Home, managing director of contractor fee recovery agency Safe Collections.