Unpaid invoices, legal action and how much interest can I charge?

Unfortunately, many businesses have to deal with the increased administration costs of chasing unpaid invoices. We regularly hear from clients who, through no fault of their own have ended up with cash-flow problems due to unpaid invoices. The knock on effect this has, especially for sole traders, micro and small businesses cannot be understated. Cash flow is the life blood of any company but to smaller businesses, its absence can be deadly.

Table of Contents.

The late payment culture
What is considered a late payment?

How much interest can I charge on late payments?
Should I charge for compensation on a late payment?
What to do if my client has not paid an invoice?
Step 1. Check your invoice & the company details
Download sample invoices
Step 2. 1st unpaid invoice letter
Step 3. 2nd unpaid invoice letter
Step 4. Final Demand (3rd unpaid invoice letter)
Step 5. Statutory Demand 21 day notice
How do I make a court claim for money?

The late payment culture that exists between businesses in the UK means that:

  • A third of payments to small businesses are late
  • The overall  average value of each payment is £6,142
  • 20% of small businesses have run into cash flow problems due to late payments
  • If small businesses were paid on time, the economy could be increased by an estimated £2.5 billion annually

The Small Business Commissioner (SBC) is an independent public body that was set up by the Government under the Enterprise Act 2016 to tackle late payments and unfavourable payment practices on behalf of small businesses who are having trouble getting paid from larger organisations. It also makes a point of calling out some of these larger organisations who have failed to act appropriately. This service is available if your company has less than 50 employees and you have unpaid invoices from a larger organisation who has more than 50 employees.

You can contact the SBC directly and find out their complaints criteria here.
You can check how long large businesses take to pay their suppliers here.

What is considered a late payment?

You can set your own payment due date on your invoice but in the absence of a date being set; the law says that the payment is considered late 30 days after either:

  • The customer gets the invoice
  • You deliver the goods or provide the service (if this is later)

How much interest can I charge on late payments?

1. Statutory Interest

If a business is late paying for your goods or services then you can charge them ‘statutory interest’ – this is 8% plus the Bank of England base rate for B2B transactions. The only exception here is if you have made a separate contract with alternative details.

Currently (25th September 2019) the Bank of England base rate is 0.75%

So if you are owed £1,000 it would equate to;

£1,000 x 0.0875 = £87.50 annually

£87.50 / 365       = 24p per day

For example 100 days late = 100 x £0.24 = £24.00

2. Compensation charge.

You can also add a compensation charge;

Unpaid InvoiceCompensation Charge
Up to £999.99£40
£1,000 – £9,999.99  £70
£10,000 or more£100

You may also add a further charge on top of the statutory interest and compensation charge above which is to cover any “reasonable costs” associated with recovering the late payment. This could include the fees for a debt collection agency or other professional you have had to hire.

Should I charge for compensation on a late payment?

Charging interest and compensation is optional, and may not always be the right choice. This is something you will need to decide for yourself based on the circumstances surrounding the initial recovery and your future relationship with regards to continued trade.  You may not want to damage a long-term trading relationship with your customer if this was an isolated incident and decide it’s best to leave it as it is.

What to do if my client has not paid an invoice?

Below I will list an example of the steps you can take to recover your unpaid invoices. How long you leave it between letters is up to your own judgment. It should be noted that there are other methods that a business may use to increase working capital in the short term such as Invoice Factoring and Invoice Discounting.

There are also alternatives to going to court that you should look at before pursuing court action. If you do take your case to court you will be expected to show some supporting evidence (emails, letters etc) showing that you tried to find a solution but had no option but to take legal action. Take a look at the  Alternative Dispute Resolution (ADR).

If you follow the steps below and keep copies of all your documents you will have performed all the necessary tasks in the eyes of the law. You then only need to go through the motions until payment is received, the client agrees to payment terms or insolvency proceedings are initiated.

If the sum of money you are expecting is large, it may be a good idea to contact the client one week before the payment is due just to make sure everything is alright and to remind them that you are expecting payment.

Steps to follow for legal action

Step 1.

Check your invoice & the company details

Before you begin to pursue the matter in earnest you should check that the company who owes you money is not experiencing financial difficulty. Search the register on Companies House website as all companies who have charges against them or are entering insolvency proceedings will have their records updated to reflect this.

If there are no red flags at Companies House you should also check the original invoice was sent and completed correctly. If there was a mistake then the customer could use this as an excuse to delay things further or cause you a problem should you go down the legal route.

If something is missing or a mistake made, then reissue the invoice. Be aware that this could reset the clock if the client wants to be difficult about it but at least you will know that your invoice is completed correctly should matter end up in court.

The following items should be included on your invoice:

  • A unique identification number
  • Your company name, address and contact information
  • The company name and address of the customer you’re invoicing
  • Clear description of what you’re charging for
  • Date the goods or service were provided (supply date)
  • Date of the invoice
  • Amount(s) being charged
  • VAT amount if applicable
  • Total amount owed

Sole trader invoices should also include:

  • Your name and any business name being used
  • An address where any legal documents can be delivered to you if you are using a business name

Limited company invoices should include:

  • Full company name as it appears on the certificate of incorporation.

There are additional items you can record on an invoice that can help you recover your money more quickly:

  • The name of the contact
  • The purchase order or reference number
  • A warning that you charge interest for late payments

Having a small note at the bottom of the invoice saying something like ‘late payments will incur statutory interest & charges’ on all invoices can help later down the line. You should have an invoice template saved so it’s easy to use each time.

Download sample invoices

The Small Business Commissioner provides free invoice samples to download.

Step 2.

Due date + 1 day (1st unpaid invoice letter)

If the due date has come and gone and the invoice remains unpaid you can send a casual reminder via email outlining the details. Sometimes it can be a simple oversight or an administration error and we want to give our client the benefit of the doubt here. If there is no response to your email by the next day you can follow up with a quick telephone call to the client or their accounts department.

People are busy, and often there is no ill intentions when an invoice is unpaid and it is simply a case of it either being forgotten or pushed down your clients list of priorities. However, we wish being paid to be of top priority so a very gentle reminder here is often all it takes to have payment sent over. 

You could have to wait 5-7 days to receive funds as some bank take this long to complete a transfer.

You may want to take the opportunity here to send an email over to the company detailing who you have spoken with and what information they gave you regarding when the payment should arrive. This can all be very relaxed and casual but it also lets the client know that you are documenting everything and that you will be expecting them to do what they said.

Step 3.

One week after the reminder (2nd unpaid invoice letter)

If you cannot get an acceptable answer from the client and the invoice is still not paid; you now have to get a little more formal. Send a letter and mention that up until this time you have not been adding any statutory interest or charges however if the invoice remains unpaid after another 7 days then you will be forced to add these additional charges to cover your increased administration costs.

Step 4. 

Two weeks after the due date. Final Demand (3rd unpaid invoice letter)

If the invoice remains unpaid and no payment terms have been reached you will now issue a final demand. This letter will include reference to all previous communication and the fact that your invoice remains unpaid. You will include a breakdown of your costs; initial invoice amount +Statutory Interest + Compensation Charge.

This letter should allow enough time for payment to be made before initiating legal action. 10 business days is adequate to demonstrate to the court that you provided sufficient time to your client to facilitate payment. You will now be almost one month overdue. You can now mention in your letter that should the invoice remain unpaid then you will have no option but to pursue legal action. Mention that that they may be required to attend court where they will also be liable for all court expenses.

Step 5.

Statutory Demand 21 day notice (Statutory Demand form Scotland)

A Statutory Demand allows you to officially ask for payment of a debt from an individual or company.

If they ignore the statutory demand or cannot repay the money, you can apply to a court to:

  • Make someone bankrupt – if owed £5000 or more by an individual, including a sole trader or a member of a partnership
  • Get company wound up (liquidated) – if you and any other creditors are owed £750 or more

See how to make and serve a Statutory Demand.

This is when it gets serious for the debtor and is the final stage before you are able to petition the court. A statutory demand is an official document and one that should not be ignored if received.

Should the matter go to court, the debtor will be liable for all your costs and the court fees plus they will be faced with the very real threat of bankruptcy if they are unable to pay the debt or arrange terms.

If you are the recipient of a statutory demand and you cannot afford to pay then please get in touch as soon as possible so we can find the best solution for you and your creditors. Many businesses can end up at this point believing there is nothing they can do, however this may not be the case. A qualified financial adviser can explain all the options available to you.

How do I make a court claim for money?

You can apply to court to claim money you’re owed by a person or business.

There are two ways to do this:

Once you have applied to the court the debtor will receive a letter from the court asking them how they respond.

They can either:

  • dispute the claim,
  • admit liability for the claim and ask the court for time to pay; or
  • admit liability for the claim and settle it before the last date for a response

In most cases, people will make payment or agree terms before court proceedings begin. Once the debtor realises the seriousness of their situation they are unlikely to want to go to court unless they are disputing the invoice. Should matters actually proceed to court you can relax knowing that you have followed an acceptable legal path.

Find your local Scottish Citizens advice Bureau
https://www.cas.org.uk/bureaux

Find a Scottish solicitor
https://www.lawscot.org.uk/find-a-solicitor/

Contact the Small Business Commissioner
https://www.smallbusinesscommissioner.gov.uk/complaint-criteria/