If a customer has missed the payment date on a B2B invoice, you have immediate legal rights that most small-business owners do not know they hold. The Late Payment of Commercial Debts (Interest) Act 1998 (c. 20) gives every business supplier the right to charge statutory interest and claim fixed compensation on an overdue commercial debt, automatically, from the day after the due date, with no court order and no contract clause required. That right cannot be contracted away.
This guide explains the exact figures, shows the worked arithmetic, and covers the tax and VAT relief available when a debt eventually has to be written off. The topic is B2B late payment only: HMRC late-payment interest on unpaid tax is a different regime governed by different legislation and is not covered here.
What the Law Gives You
The 1998 Act creates a statutory right to interest on qualifying commercial debts. The right exists independently of your contract: you do not need a clause in your terms and conditions to assert it, though including one is sensible. Any contractual term that purports to exclude the right is void (section 8 of the Act).
The Act applies where both parties are acting in the course of a business (business-to-business). It does not apply to consumer (B2C) debts, contracts of employment, financial-services contracts regulated by the FCA, or contracts for an interest in land. If your customer is another business and the contract is for goods or services, the Act almost certainly covers the transaction.
The Late Payment of Commercial Debts Regulations 2013 (SI 2013/395) amended the 1998 Act to add the fixed compensation right (section 5A) and implement the retained EU Late Payment Directive 2011/7/EU. Both the interest right and the compensation right now sit in the same statute.
When Does Statutory Interest Start?
Statutory interest begins to run from the day after the "relevant day" under section 4 of the Act. The relevant day depends on whether there are agreed payment terms.
Where you have agreed payment terms (for example, 30 days): interest starts to run from the day after the agreed due date. If your invoice is dated 1 April and your terms say 30 days, the due date is 1 May and interest starts on 2 May if unpaid.
Where there are no agreed payment terms: the default under the Act and the gov.uk guidance is that payment is due 30 days after whichever is later: the date you performed your obligation (delivered the goods, completed the service) or the date the customer received the invoice. Interest starts from day 31.
Public authorities (central government, local government, NHS bodies and similar): the same 30-day default applies. Interest runs from day 31 if unpaid.
Maximum agreed terms for B2B contracts: the Act permits parties to agree payment terms longer than 30 days but caps agreed terms at 60 days unless the extended term is not grossly unfair to the supplier. An agreed term of 90 or 120 days may be challengeable (see the FAQ below on grossly unfair terms).
One common misconception: the 60-day cap is not a default of 60 days. If you have agreed 30-day terms, interest starts from day 31, not day 61.
How Much Interest Can You Charge?
The statutory interest rate is set by section 6 of the Act and the Late Payment of Commercial Debts (Rate of Interest) (No. 3) Order 2002 (SI 2002/1675). The formula is fixed: 8 percentage points above the Bank of England official dealing rate (base rate) in force on the reference date.
The reference date is determined semi-annually (Article 4 of SI 2002/1675):
- For interest starting to run between 1 January and 30 June: use the BoE base rate in force on the preceding 31 December.
- For interest starting to run between 1 July and 31 December: use the BoE base rate in force on the preceding 30 June.
This semi-annual mechanic means the statutory rate does not change mid-period for a given debt: the rate that applies when interest first starts to run stays fixed for that debt until it is paid.
Current rate (1 January to 30 June 2026): the BoE base rate in force on 31 December 2025 was 3.75% (confirmed via HMRC statutory interest definitions verified at gov.uk on 2026-07-09). The statutory late-payment rate for this period is therefore 11.75% per annum. This rate resets on 30 June 2026 when the reference date becomes the base rate in force on that day.
To find the daily rate: divide the annual rate by 365. At 11.75%, the daily rate is approximately 0.03219% of the outstanding debt per day.
Fixed Compensation Per Invoice
In addition to statutory interest, section 5A of the 1998 Act (inserted by the 2013 Regulations) gives the creditor a right to a fixed compensation sum, payable once per invoice, as soon as statutory interest starts to run. The bands are:
| Debt amount (the invoice value) | Fixed compensation |
|---|---|
| Under £1,000 | £40 |
| £1,000 to £9,999.99 | £70 |
| £10,000 or more | £100 |
The compensation is charged once per invoice, not per chasing letter. If your actual reasonable debt-recovery costs (for example, a debt collection agency's fee or a solicitor's letter) exceed the fixed compensation amount, you may also claim the difference under section 5A(2A). The fixed sum is the floor, not the ceiling, on recoverable costs.
Verify the bands at: gov.uk late commercial payments: claim debt recovery costs.
Worked Example: £10,000 Invoice, 90 Days Overdue
Scenario: Your VAT-registered business (standard-rated) raised a £10,000 invoice (excluding VAT) on 1 April 2026. Agreed payment terms: 30 days. The due date was 1 May 2026. The customer has not paid. Today is 30 July 2026 (120 days from the invoice date, 90 days past the due date).
Step 1: Confirm the trigger
Payment terms are 30 days. The relevant day is 1 May 2026. Statutory interest started running on 2 May 2026. You can also issue a compensation notice from 2 May 2026.
Step 2: Identify the applicable reference-date rate
Interest starts to run in the period 1 January to 30 June 2026. The reference date is therefore 31 December 2025. The BoE base rate on 31 December 2025 was 3.75%.
Statutory rate: 8% + 3.75% = 11.75% per annum.
Step 3: Calculate the interest
Interest has accrued from 2 May 2026 to 30 July 2026: 89 days.
Interest = £10,000 x 0.1175 x (89 / 365) = £10,000 x 0.1175 x 0.24384 = £286.51
Step 4: Add the fixed compensation
The debt is £10,000 or more, so the fixed compensation under section 5A is £100.
Total now chargeable to the customer: £10,000 (invoice) + £286.51 (interest) + £100 (compensation) = £10,386.51.
Step 5: VAT on the interest and compensation
Statutory interest and fixed compensation under the 1998 Act are outside the scope of VAT. They are not consideration for a supply of goods or services. Do not add VAT when issuing a statutory interest or compensation notice.
Step 6: VAT bad-debt relief (not yet eligible)
VAT on the original invoice: £10,000 x 20% = £2,000, already paid to HMRC on your VAT return.
The debt has been overdue since 1 May 2026. Six months will not have elapsed until 1 November 2026. Bad-debt relief cannot be claimed yet as at 30 July 2026. Action calendar: write the debt off in your accounts on or after 1 November 2026 and reclaim the £2,000 VAT in Box 4 of your next VAT return covering that period. The 4-year deadline for claiming runs from 1 April 2026 (the date of supply), expiring 1 April 2030.
Step 7: Corporation tax or income tax bad-debt deduction
If you write off the £10,000 (ex VAT) as irrecoverable in your accounts, the write-off is a deductible trading expense. For a company paying corporation tax at 19%, that is up to £1,900 in tax relief. For a higher-rate sole trader, up to £4,000.
Summary
| Item | Amount |
|---|---|
| Invoice (excluding VAT) | £10,000.00 |
| Statutory interest (89 days at 11.75% per annum) | £286.51 |
| Fixed compensation (s.5A, debt £10,000 or more) | £100.00 |
| VAT bad-debt relief (eligible from 1 November 2026) | £2,000 VAT reclaim |
| CT bad-debt deduction on write-off (at 19%) | Up to £1,900 tax relief |
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How to Chase: Escalation Timeline
The table below models a single B2B invoice with 30-day agreed payment terms. For public-authority invoices, substitute a 30-day default (same table applies; interest begins on day 31).
| Day (from invoice date) | Recommended action | Statutory rights available? |
|---|---|---|
| Days 1 to 30 | Issue invoice promptly; send a friendly payment reminder at around day 25. | Not yet. |
| Day 31 | Payment term breached. Send a formal chaser referencing your right to add statutory interest under the Late Payment of Commercial Debts (Interest) Act 1998. State the daily rate and that interest has started to run. | Yes: statutory interest accruing from today (s.4). |
| Day 31 (immediately) | Issue a compensation notice: state the fixed sum (£40, £70 or £100) is now due in addition to the invoice. One charge per invoice. | Yes: s.5A fixed compensation. |
| Days 31 to 60 | Second formal chaser. Reference the Act by name, state the daily interest rate, the accrued interest total to date and the compensation already added. Give a clear deadline for payment (7 to 14 days). | Interest accruing daily. |
| Days 61 to 90 | Final demand by email and recorded post. State the total now due (invoice + accrued interest + compensation). Give 7 days before escalation. Consider engaging a credit-control service or debt recovery specialist. | Same. |
| Day 91 onward | Escalation: (a) statutory demand for debts over £750 from a company (or £5,000 from an individual), giving 21 days; (b) Money Claim Online for debts up to £10,000; (c) debt collection agency; (d) solicitor's letter before action. | Interest continues to accrue throughout. |
| Month 6 onward (from supply date or due date, whichever later) | Write off the debt in accounts; claim VAT bad-debt relief in Box 4 of next VAT return. | VATA 1994 s.36 VAT reclaim. |
| Accounting period or tax year end | Deduct the written-off specific debt as a trading expense in the period of write-off. | ITTOIA 2005 s.35 / CTA 2009 s.55. |
For template letters at each stage, the gov.uk late commercial payments hub at https://www.gov.uk/late-commercial-payments-interest-debt-recovery provides starting-point guidance on wording. The important thing is to reference the Act by name, state the daily interest rate and the compensation sum, and give a clear deadline.
VAT Bad-Debt Relief: Reclaiming the VAT You Already Paid
When you raise an invoice on standard or reduced-rate VAT terms, you pay the output VAT to HMRC on your next VAT return, even if the customer has not paid you. If the customer never pays, you have effectively funded HMRC's share of a transaction that never generated cash for you. VATA 1994 section 36 allows you to reclaim that VAT as bad-debt relief.
The conditions are cumulative:
- At least 6 months have elapsed since the later of the date of supply and the original payment due date.
- The debt (or the unpaid portion) has been written off in your accounts as a bad debt.
- You have adjusted the VAT output account and made the reclaim via Box 4 of your VAT return.
- The supply was at the standard or reduced rate (zero-rated and exempt supplies carry no VAT to reclaim).
- The claim is made within 4 years of the later of the date of supply and the original tax point.
If the customer later pays (in full or in part), you must repay the relief, or the proportionate share of it, on the next VAT return. Keep records of the original invoice, the write-off entry in your accounts, and the VAT return period in which you claimed the relief: HMRC can request these on a VAT inspection.
One operational note: if you use the VAT cash accounting scheme (available to businesses with taxable turnover of £1.35 million or less), you already account for VAT on payments received rather than invoices raised. That means you have not paid the output VAT on unpaid invoices, so the formal bad-debt relief claim is not required under that scheme. The VAT threshold and scheme details are covered separately at VAT registration: the £90,000 threshold explained.
Income Tax and Corporation Tax: The Bad-Debt Deduction
A trade debt that you write off as irrecoverable is a deductible trading expense, reducing taxable profit in the period you make the write-off:
- For a sole trader or partner: under ITTOIA 2005 section 35 (specific bad debts written off as a trading expense), the deduction reduces income tax and Class 4 NIC.
- For a limited company: under CTA 2009 section 55, the write-off is deductible against corporation tax.
Two important boundaries. First, a specific provision (where you have identified a particular debtor and set aside an amount because it is doubtful) is deductible once the debt is formally written off. A general provision (for example, "5% of all debtors may go bad") is not deductible: HMRC requires a specific identification. Second, the deduction arises in the accounting period or tax year in which you make the write-off in your accounts. Delaying the write-off delays the tax relief; if the debt has genuinely become irrecoverable, the prudent course is to write it off promptly.
Managing cash flow and staying on top of debtor days are the first line of defence. The deductions above are the fall-back when prevention has failed.
What the Act Does Not Cover
Several categories of debt fall outside the 1998 Act:
- Consumer (B2C) debts: the Act applies only where both parties are acting in the course of a business. A debt owed by an individual buying for personal use is not covered.
- HMRC tax debts: interest and penalties on unpaid tax are governed by separate legislation (TMA 1970 and FA 2009 schedules). That is an entirely different regime. Do not conflate the two.
- Genuinely disputed invoices: statutory interest does not run on a debt where the debtor has a genuine dispute about the amount or the existence of the debt. If a customer raises a substantive dispute in writing, interest does not start to run on the disputed portion until the dispute is resolved. An opportunistic or vague dispute that is not followed up does not suspend the right.
- Debts under a consumer credit agreement: regulated consumer credit agreements carry their own interest provisions under the Consumer Credit Act 1974.
When to Escalate to a Solicitor
Self-help remedies (formal chasers, statutory interest notices, compensation claims) resolve the majority of late-payment situations without legal action. When they do not, the escalation options depend on the debt size and whether the underlying liability is disputed.
For debts over £750 owed by a company (or £5,000 owed by an individual), a statutory demand served under the Insolvency Act 1986 gives the debtor 21 days to pay or secure the debt before you can present a winding-up or bankruptcy petition. This is a powerful tool and should not be used lightly: the reputational impact on the debtor is significant, which is why it often produces payment quickly.
For debts up to £10,000, the small claims track in the County Court (via Money Claim Online) is designed to be used without a solicitor. The court fee is modest, judgment is enforceable, and accrued statutory interest is claimable as part of the claim.
For larger or disputed debts, a solicitor's letter before action (setting out the full amount claimed including accrued interest, a final deadline, and the consequences of non-payment) frequently produces settlement without court proceedings. If it does not, a solicitor can advise on the most cost-effective enforcement route.
This page is a statutory-rights guide, not legal advice. For a specific debt with unusual facts or a disputing debtor, professional advice is the right course.