The dangers of late payment of commercial debts

Late payment of commercial debts remains a persistent issue in the UK, particularly for small and medium-sized enterprises. Despite longstanding legal protections, many businesses continue to suffer from delayed payments that disrupt cash flow and threaten financial stability.

The Late Payment of Commercial Debts (Interest) Act 1998

 The Late Payment of Commercial Debts (Interest) Act 1998 was introduced to address this problem by providing statutory remedies for creditors, and recent government proposals aim to strengthen these protections even further.

The 1998 Act applies to contracts for the supply of goods or services where both parties are acting in the course of business. Crucially, the debtor does not need to be a company – it is sufficient that the contract was made in the course of trade or business. Under the Act, creditors are entitled to claim interest on overdue payments at a rate of eight percent above the Bank of England base rate. In addition to interest, the legislation provides for fixed compensation depending on the size of the debt. Creditors may also recover reasonable costs incurred in pursuing the debt, beyond the fixed compensation.

Interest begins to accrue the day after the payment due date if one is specified in the contract. If no date is specified, interest typically starts 30 days after the latest of delivery, invoice, or acceptance of goods or services, provided the contract was entered into after 14 May 2013. While parties may agree to a different rate of interest or remedy for late payment, the courts will assess whether the contractual remedy is substantial. If it is not, statutory interest under the Act may still apply.

Future reform

In July 2025, the UK Government launched a consultation aimed at reforming late payment practices. The consultation, which runs until 23 October 2025, seeks to address the economic damage caused by delayed payments, which reportedly cost the UK economy £11 billion annually and result in the closure of 38 businesses each day. The proposed reforms include mandatory statutory interest for late payments, a cap on payment terms at 60 days, and the introduction of deadlines for disputing invoices to prevent delay tactics. The government also proposes increased board-level accountability for payment practices in large companies, financial penalties for repeat offenders, and expanded powers for the Small Business Commissioner.

For legal practitioners, the 1998 Act remains a vital tool in commercial debt recovery. When preparing court actions, it is essential to confirm whether a contractual interest rate applies and to include statutory interest and compensation where appropriate. Ensuring that the contract falls within the scope of the Act is equally important. As the consultation progresses, legal professionals and businesses alike should remain informed about potential legislative changes. The proposed reforms could significantly alter how interest and compensation are calculated and enforced, making it more important than ever to understand the current framework and anticipate future developments.

How we can help

Our Commercial Litigation team has extensive experience advising on late payment and debt recovery issues. We can help you assess your options under the current legislation and prepare for the changes that may follow the government consultation.

For tailored advice, please contact Gillian Murray at Gillian.Murray@andersonstrathern.co.uk or get in touch with us here. You can also view the consultation process on the government website here.