Once again we are focusing on some of the commonly asked questions regarding late payment charges. For Scottish businesses this can be a key tool in avoiding bad debt.

Can My Purchaser Avoid Paying Interest?
Basically if your purchaser says the Late Payment legislation does not apply the court will declare this to be void.
If this happens you will still be entitled to take advantage of all the remedies the Act provides. This is because the intention behind the legislation will be avoided if purchasers were to say the late payment of interest legislation did not apply at all, or that some sort of lesser remedy should be substituted. If allowed this would completely circumvent the legislation.

Can Your Purchaser Offer An Alternative To Interest Under The Act?
It is not unlawful for your purchaser to provide their own remedy if payment is late but if they do it must be "substantial". If a court finds the remedy not to be "substantial" then it will be declared void and the late payment legislation will apply.
The contractual term will be void if it:
• fails to provide a contractual right to interest which is not a substantial remedy for late payment of the debt; or
• varies the right to statutory interest which fails to provide for a substantial remedy for late payment of the debt.
How will the court decide if the purchaser's remedy is substantial?
Basically the court will want to ensure the seller has, in all the circumstances, a substantial remedy in the event of a purchaser failing to settle their account on time. The following are non-exhaustive examples which will be deemed unfair. In these examples the late payment legislation will apply:
• Credit periods which avoid the possibility of late payment.
• Credit periods which greatly differ from established practice in a particular industry.
• Variations in credit periods offered to other suppliers by the same purchaser.
• Interest rates lower than the statutory rate the effect of which means the supplier does not receive from the purchaser interest for a sufficient amount to over the theoretical cost of borrowing the cash.

How Can Representative Bodies Help?
If you are a small to medium enterprise a representative body can question whether a purchaser's terms give the effect of undermining the purposes of the late payment legislation.
What they can do is take the issue before the court on your behalf. Indeed in certain circumstances they can do this on your behalf without your even having to make the request. For this to happen the representative body will have to demonstrate a relevant link with you such as acting for similar organisations such as yours; for a particular industry sector or geographical area.

Can you Charge for Interest Retrospectively?

This is a question we are asked a lot and not just by the many Scottish businesses we work with. The answer is "Yes" although you will have to watch limitation periods – this is 6 years in England and 5 years in Scotland.

When will your purchaser be "late" in paying?
Again we are asked to clarify what actually constitutes ‘late payment’ regularly and for all businesses operating in Scotland it really is something you should know. Payment will be late in the following circumstances:
•If you have agreed a credit period with the purchaser, their payment will be late if made after that agreed date. The agreement can be made orally or in writing.
•If no credit period has been agreed interest will commence 30 days after the later of the following:- 1.You have delivered the goods or performed the service; or 2.The day on which your purchaser has received notice of what is owed to you.
This 30 day period is known as "the 30 day default period". The moral is to both invoice accurately and as soon as possible. If you do not invoice at all or your invoice is inaccurate the default period will not start and you will lose some interest.

What if your contracts provide for advance payment?
•If your contract provides the whole price has to be paid before the goods are delivered or service performed and payment is not made then interest will commence as soon as you have performed your part of the bargain.
•If you have an instalment contract then interest will commence on the day after the instalment is due.

Unlike previous legislation which differentiated between different types and sizes of organisation all businesses, notwithstanding their size, including public sector bodies, can use the law. So if you are a Scottish business trading with another business, government or local authority you will be able to use the Act and benefit from being able to recover interest as well as reasonable recovery costs.
Are you obliged to use the Act?
The answer is "no" although it is hoped the more often the Act is used the greater businesses will be aware they will have to pay their bills on time leading to a new culture of payment being required within credit periods.

Can You Use An Alternative to the Legislation?
There is no reason why you cannot contractually agree the amount of interest you wish to charge your customers in which case the late payment legislation will not apply.
So, for example, your terms and conditions may stipulate you are entitled to an agreed defined rate in the event of your account being overdue by 21 days following delivery of goods or performance of services.

Note: (1) If you do make your own provisions for contractual interest then the late payment legislation will not apply.

(2) If you do not make any arrangements for interest then the legislation will apply and you can use it.

The Yuill + Kyle website at www.debtscotland.com gives users the option to download free demand letters. These letters provide the option to:
1.Charge no interest;
2.Charge contractual interest or
3.Charge Interest under the legislation.
4.Add collection cost, where appropriate.
These can be found in the ‘DIY Toolbox’ part of the site at http://www.debtscotland.com/recover.cfm

A recent client query has prompted us provide a few blogs dealing solely with late payment legislation. 

What is the Legislation?
The Late Payment of Commercial Debts (Interest) Act 1998 has been amended by European Directive 2000/35/EC. This amended legislation is in force as from 7th August 2002.
Basically the legislation, gives you as supplier, the statutory entitlement to charge interest at 8% over the Bank base lending rate as well as reasonable collection charges from a purchaser who is late in settling accounts.

The legislation was designed to reverse the bad practise of deliberate late payment, often ascribed to large companies and organisations using their power over small business although all businesses and the public sector will be able to use it.

How Will the Legislation Help You Recover Cash?
Basically the legislation provides suppliers with:
• The right to claim interest for late payment
• The right to claim reasonable recovery costs (unless you as the supplier have acted unreasonably).
The amount of compensation depends upon the amount you are due:

RECOVERABLE COSTS

Amount Due to You           Amount to Paid By Creditor
Up to £999.99                             £40
£1,000 to £9,999.99                    £70
£10,000 +                                  £100

• A right to challenge contractual terms which fail to provide a substantial remedy against late payment.
• A right for "representative bodies" to challenge grossly unfair contractual terms.

Your Terms and Conditions
Whilst the right to claim is automatic to encourage prompt payment from your purchases, to ensure you benefit from the legislation, you may wish to remind your purchasers of your entitlement to make the claim by adding the following to your terms and conditions:
“We hereby notify you of our rights in terms of the Late Payment of Commercial Debts (Interest)Act 1998 as amended to claim interest and compensation for debt recovery costs if we are not paid according to the credit terms agreed between us."

At Yuill + Kyle we automatically ask for ‘interest and collection costs’ when chasing business debts, helping to ensure we get the best possible outcome for clients.