The issue of late payments has become one of the biggest problems that not just businesses have to deal with, but also private employees as well as freelancers must confront too.
In addition to the many negative effects that you can face due to delays, burden of imposing interest charges on late payments is the most significant one.
By charging a set amount of interest per day the client is over the deadline, you will receive monetary compensation for delay that you’ve experienced due to your clients not honoring their obligations.
But, prior to charging this kind of interest, we suggest having a thorough understanding of the matter. This is why we’ve set out to provide you with an in-depth overview of all aspects of late payment interest , so that you can use the process to your advantage.
Every business transaction must adhere to the same set of rules. To ensure smooth and non-conflict transactions, it is essential that all payments are made within the time frame agreed upon.
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The time period is defined in”due date” or “due day” of the contract. When this due date is over and, if the contract permits it, you’re allowed to charge a late payment fee as well as late payment interest costs.
The charging of interest does not just benefit you by allowing an additional cost of the amount due however it also it encourages customers to pay on time. This is because if a client does not pay the late payment interest or delay payments for a specific period of time it could result in serious legal consequences.
In the UK the UK, the introduction of this interest rate on late payments was introduced following the late payment of commercial Debts (Interest) Act 1998. The act also recognized reasonable costs. The law will provide more information about these later .
What is the best time to be charged interest for a late payment?
The contract you negotiate with your client will clearly state the date on which you are free to begin charging late interest on payments.
The standard timeframe for receiving payments from the public sector is 30 days, whereas for private sector payments , it’s 60 days. The duration of payments may have to change based on various contracts that are available to different customers.
Before you begin to charge interest for late payments, it’s recommended that it is an excellent idea sending reminders your customer. This can be done by using one of three methods. It is possible to begin with a reminder email within two or three days of the due date has expired.
If the delay in payment is by more than 7 days, it could be an appropriate moment to call. formal letters or messages may also be sent. If the payment has not been received, you may consider charging interest in a formal manner.
What is the amount of late payment interest are you able to charge?
The interest rate on invoices that are not paid you charge is contingent on two aspects. It could be governed by the laws of the country or by the interest rate you specify within your agreement.
If you have a fixed interest rate stated in the contract, then you are bound by it. However, the time period of 60 days that is stipulated by law must be adhered to.
If there is no specified interest rate in the official contract, you’ll be required to charge the interest rate that is set by law for late payments.
HMRC controlled interest rates
The HMRC or the HM Revenue and Customs is the agency responsible for the tax collection. The HMRC also passes laws which regulates the interest rates that are charged for late payments.
The rate of interest paid is 8% over the base interest rate established by the Bank of England. The interest rate set by the Bank of England has seen numerous reductions in recent times. This is due to the general relaxation of rates of interest by the COVID-19 pandemic.
Late charge assessment and the role of late charge
Examining the late payment’s interest as well as the other aspects of the late payment is crucial. If you don’t know the exact amount of payment due or the amount of interest you must charge to the customer, it could become difficult.
To avoid this, you must do a thorough analysis to understand the procedure of claiming the interest.
The first thing you need to examine the contract you signed with the client you are dealing with. By doing this, you’ll examine the terms that the client and you have signed that deal with the late payment and the interest on late payments.
You are only able to apply the interest rate that is governed by UK law if the contract does not contain an additional interest rate that you have agreed to.
Furthermore, this review will also be able to identify any deadlines in your contract. This will assist you in planning the best course of action to charge interest on late payment in accordance with the.
In the course of this evaluation it is also a good idea to cross-check the other information in the contract with the late payment interest that you have calculated.
What is “reasonable expenses”?
In accordance with UK law There are three additional damages you may be entitled to based on the amount of the payment that is overdue. They are:
PS40 for debts less than PS1,000.
PS70 for debts that fall between PS1,000 and PS10,000
PS100 for outstanding debts of more than PS10,000.
But, in some cases the process of chasing late payments can cost a lot of money. If you happen in this circumstance, you may declare the amount you spent as “reasonable expenses”.
Therefore, reasonable costs basically assure that you’re not paying any money out of your pockets while trying to collect your missing payments from your client. People who use an debt collection company to collect these payments will most likely spend more money for the process , which they could be able to claim “reasonable expenses”.
Finally, these costs may not be incurred when the rate of interest applied is the rate of the contract, and not the rate mentioned in UK law.
How long will this process be expected to take?
Claimant for the late payment of interest is a straightforward procedure.
It doesn’t require you to be having to rush around to meet certain specifications or gather numerous documents. You don’t have to fill out complicated forms. But, it could take a lot of time.
The length of time this process will take is contingent on the amount of time it needs to acknowledge the payment and process late payment and due interest.
The period of time that UK law permits the client to use is thirty days in case of an agreed due date in the contract. The period begins on the date the client receives an official invoice requesting payment. The interest will be charged on the day following the date of due.
In the UK the public sector, clients have a period of 30 days to pay interest due on late payments after the claim is made. Private sector clients have a shorter time frame. the time frame can be 60 days.
If the deadlines aren’t adhered to, you will need to wait until the next time period that is specified within the Letter Before Action that you send. The length of time you have to wait for can be different according to your Letter Before Action you draft. It is possible to wait just one week or as long as 60 days.
What happens if a client does not pay interest?
There is always the possibility of not receiving freelance payments on time regardless of numerous prompts and reminders. Some clients might not acknowledge the payment in progress or the interest and fees you’ve charged.
In these circumstances the only option that remains is to pursue legal options. This could be the most serious option you could take, and should not be taken unless absolutely required.
When legal proceedings start it is a good likelihood that your relationship with the client you are dealing with will end. Additionally, there are important factors to be aware of prior to engaging in legal proceedings against your clients who have been pursuing the late payment of interest.
They include significant legal costs along with time that needs to be absorbed. In this instance the most effective course of course of action is to conduct an analysis of the cost-benefit.
In the summary
We know that a cash flow flows are dependent on the timely payment of business invoices. To ensure smooth flow it is essential to avoid late payments.
The interest charged for late payments aids in the flow of cash. The interest is your payment for not being made on time.
To ensure that you have made the right repayment and claim for interest to the customer it is crucial to evaluate all the factors to it.
This is a consideration of how the rate of interest will be calculated, the time it takes to process the claims and what to do in the event that the client is not cooperative. Finding out the interest deduction for late payments is essential when taking into consideration the interest rate that is charged.