Changes to the late payments regime

The Late Payment of Commercial Debts Regulations 2013 came into force on 16 March amending the previous legislation which had been in place since 1998. This article explores the changes to the late payment regime that organisations including charities should be aware of.

Key changes

Under the previous legislation if a purchaser of goods or services in a business to business contract was late paying, the supplier could recover interest on the outstanding amount at a rate of Bank of England base rate plus 8 per cent. The parties could however agree an alternative amount provided it gave the supplier a "substantial remedy" for late payment of the debt.

The main changes affecting contracts concluded after 16 March 2013 under the new legislation are:

• Payment terms –the period for payment for business to business contracts of the price fixed in the contract must not exceed 60 calendar days. The parties may agree a different payment period provided this is not "grossly unfair".
• Public sector payment terms – in commercial transactions where the purchaser is a public authority, the payment period must not exceed 30 calendar days following receipt by the purchaser of the invoice.
• Verification periods – the length of time for accepting goods or services must not exceed, as a general rule, 30 calendar days.
• Cost recovery - suppliers’ costs can be recovered for enforcing payment in excess of the fixed payments that suppliers are currently entitled to.

Payment Terms

Under the new legislation there are now different rules depending on whether the purchaser is a business or a public authority. If the contract is silent on the time for payment then statutory interest will start to run on overdue payments from 30 days after the latest of receiving the supplier's invoice, receiving the goods or services or acceptance of the goods or services if provided for within the contract or by statute.

In a business to business contract, the parties may agree a payment date of up to 60 days from the latest of these events. However, if the parties seek to agree payment terms longer than 60 days this will only apply if it is not "grossly unfair" to the supplier. Whether a payment period is grossly unfair will depend on the circumstances including a consideration of good commercial practice, nature of the goods or services and whether the purchaser has any objective reason for the deviation.

If the customer is a public authority the parties may agree a payment due date of up to 30 days from the latest of the events listed above but there is no right to agree an extension.

It should also be noted that there is no change to the statutory interest rate which remains at 8 per cent above base. The parties can still agree a different rate provided it is a "substantial remedy".

Acceptance timescales

The legislation also limits the time a customer has to verify, for the purpose of calculating when interest will run from, the conformity of goods or services to 30 days. The parties can agree a longer period providing it is not "grossly unfair" to the supplier. This will mean that a party has 30 days to accept and then a further 30 days to pay.

Cost recovery

The existing legislation allows suppliers to claim a fixed sum of £40 to £100 depending on the size of the debt to compensate them for the costs of recovering late payments. The new legislation provides that a supplier can now claim the difference between the reasonable costs it incurs in debt recovery and that fixed sum.

Application of the new legislation

The new requirements only apply to contracts made on or after 16 March 2013.

All EU territories were required to implement the Directive into their national law by 16 March 2013. The 1998 Act as amended by the new legislation only applies to organisations doing business in the UK. If an organisation is doing business in Europe, however care must be taken to ensure that implications in that particular territory are understood.