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The Late Payment of Commercial Debts (Interest) Act 1998 provides small businesses with a statutory right to claim interest on late payment of commercial debts. In November 1998, small firms were first given the right to charge large companies and public sector organisations interest. Then in November 2000 the Act was extended to allow small firms to charge other small firms interest on late payments. The right will be extended to large companies in November 2002. Research by the Institute of Credit Management Research at Leeds University Business School shows, however, that despite the provisions being in place, only 5% of firms are charging interest. Professor Nick Wilson, head of the institute, says: "The intention to use the law has increased by 30% over last year. We also found that one third of firms threaten to use it when they send out reminder letters." The Government wants to encourage businesses to agree their own contractual terms giving a right to interest if bills are paid late. The legislation, therefore, gives precedence to contractually agreed provisions. However the Act contains provisions to prevent parties to a contract "contracting out" of the legislation by setting very low rates of interest on late payments, or by extending credit terms excessively or by any other terms which result in no substantial remedy for late payment. The provisions apply a test of "reasonableness" to such terms. A Late paymentis defined as being late when it is received after the expiry of the contractually agreed credit period; or the credit period in accordance with trade custom and practice or in the course of dealing between the parties; or the default credit period defined in the legislation. Where no credit period is defined in a contract, or no contract exists, the Act sets a default credit period of 30 days from delivery of the invoice for payment or of the goods and service, whichever is the later. The Act applies to a debt under a contract for the supply of goods or services where the purchaser and the supplier are each acting in the course of a business. A 'small is defined as being "small" if it has no more than 50 full-time employees, or part-time equivalents. The legislation seeks to recompense the creditor for the cost of the delay of payment . It provides a power for the Secretary of State to set the rate of statutory interest. The rate of interest is currently set at 8% above the 'official dealing' rate. This rate is published by the Monetary Policy Committee of the Bank of England. This is a rate at which the smallest and most vulnerable businesses are generally able to borrow from the banks. It will be possible to amend the interest rate. |
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