Why late-paid contractors can now claim more money

With all the many announcements that have aired in this Budget month, contractors would be forgiven for missing The Late Payments Directive taking effect from March 16th 2013, writes Adam Home, of debt recovery specialists Safe Collections.

While many of its provisions were already part of UK law, the directive’s rules around late fees could mean that, as a contractor, you may now claim significantly more back when you are forced to chase for payment.

Under the new rules, you are permitted to add ‘reasonable’ recovery costs to your claim when a customer does not pay you in time - and that's on top of the existing three-tiered fixed fees and statutory interest.

The rules also mean that, unless mutually agreed otherwise, most contracts are subject to an automatic 30-day payment period, after which you can chase for payment and begin adding interest and other charges.

What can I charge for?

Statutory Interest

The law allows for statutory interest to be charged at 8% above the 'reference rate'.

For January 1st to June 30th each year, the 'reference rate' is set at whatever the Bank of England base rate was on December 31st.

For July 1st to December 31st each year, it is set based on the base rate from June 30th.

In recent years the turbulent economy has seen the base rate remain at a record low of 0.5% so, unless that changes in the near future, it is likely that 8.5% will remain the appropriate statutory rate of interest on overdue invoices throughout 2013.

Fixed fees

The pre-existing three-tiered system of fees on overdue payments has been retained under the new law, meaning you can charge:

  • £40 on overdue amounts up to (but not including) £1,000
  • £70 on amounts from £1,000 up to (but not including) £10,000
  • £100 on amounts of £10,000 and above

Elsewhere in Europe, a standard charge of €40 has been introduced on overdue payments; however, in the UK it was decided that the existing three-tiered system should be retained to offer some continuity.

Reasonable Costs

If the costs you incur in chasing the payment are more than the fixed fees outlined above, you can reclaim the difference - the first time this has been specifically permitted in UK legislation.

For example, if your collections agent works on a recovery fee of 10% of the total, and the amount you are owed is £20,000, you would previously have faced a fee of £2000.

You can now claim the fixed £100 plus the remainder of your recovery costs - so, in this example, the additional 'reasonable' costs would be £1,900, which can now be claimed from the debtor.

When can I claim?

The legislation is not retroactive, which means that you can only apply it to contracts completed after its introduction on March 16th 2013.

You can begin applying statutory interest and fixed fees from the day the invoice goes overdue, and add reasonable additional costs as they are incurred.

However, while the old laws no longer apply, the unspoken rules of good business practice are worth remembering - and it may not be wise to jeopardise a long-term positive working relationship with a valued client by chasing too aggressively on a single overdue invoice.

Instead, continue to adopt a flexible attitude where appropriate, and know that the new directive is in your arsenal when a relationship goes sour and more stringent sanctions are required in order to reclaim your money.

 

Article provided by Safe Collections, a debt recovery specialist for contractors and small businesses.

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