Late payment interest and compensation

The right is an implied term, and it is narrower than it looks

Section 1 implies into every contract to which the Act applies a term that a qualifying debt carries simple interest. It applies where purchaser and supplier each act in the course of a business, which includes a profession and the activities of a government department or local or public authority. Consumer credit agreements, contracts operating by way of security and contracts of service are outside it.

Two exclusions in section 3 are easy to miss. A sum carrying a right to interest under another enactment does not carry statutory interest, although a court’s power to award interest does not count. And if a right to demand interest under any rule of law is exercised, the debt is treated as never having carried statutory interest.

The start date comes from section 4, not the invoice

Statutory interest starts to run on the day after the “relevant day”. Where there is an agreed payment day, that is the relevant day, subject to the caps below. Where there is none, it is the last day of a 30-day period beginning with the later of performance of the supplier’s obligation and the purchaser having notice of the amount of the debt. The caps in section 4 depend on who the purchaser is:

• where the purchaser is a public authority, the relevant day cannot be later than the end of the 30-day period;
• where it is not, the relevant day moves back to the end of a 60-day period, but only if the agreed payment day is grossly unfair to the supplier;
• where there is an acceptance or verification procedure, it is treated as complete at the end of 30 days from performance unless a longer period was expressly agreed and is not grossly unfair.

Two points follow. First, the rate is fixed once: interest runs at the rate prevailing at the end of the relevant day, and article 4 of the 2002 Rate of Interest Order sets it at 8 per cent per annum over the Bank of England official dealing rate in force on 30 June (for interest starting to run between 1 July and 31 December) or 31 December (for interest starting to run between 1 January and 30 June). A later change in the official dealing rate does not move it. Secondly, this version of section 4 does not affect contracts made before 21 June 2015, so check the contract date first.

Compensation is a fixed sum plus the shortfall in recovery costs

Once statutory interest begins to run on a qualifying debt, section 5A entitles the supplier to a fixed sum in addition to the interest: £40 for a debt of less than £1,000, £70 for a debt of £1,000 or more but less than £10,000 and £100 for a debt of £10,000 or more. Because the sum attaches to each qualifying debt, how the contract divides the price into separate payment obligations decides how many fixed sums are in play.

Section 5A(2A), inserted with effect from 16 March 2013 for contracts made on or after that date, adds the difference between the fixed sum and the supplier’s reasonable costs of recovering the debt where the fixed sum does not meet them. Separately, section 5 allows statutory interest to be remitted in whole or part where the supplier’s own conduct means the interests of justice require it.

A contractual interest clause does not automatically oust the Act

Under section 8, a term excluding statutory interest is void unless there is a substantial contractual remedy for late payment, and a contractual interest right that is not a substantial remedy is void unless the overall remedy is. Under section 7(2), these controls apply only to terms agreed before the debt is created; after that, the parties are free to agree terms dealing with the debt.

The test in section 9 is framed in favour of the contract term. A remedy is substantial unless it is both insufficient to compensate for or deter late payment and it would not be fair or reasonable to allow reliance on it. That is assessed at the time the terms were agreed, with regard to commercial certainty, relative bargaining strength, whether the term was imposed by one party to the other’s detriment and whether the supplier received an inducement. Whoever relies on a low contractual rate should expect those factors to be examined.

Pleading the claim

CPR 16.4(2) requires a claimant seeking interest to say whether it is claimed under a contract, under an enactment (and which) or on some other basis. For a specified sum it must also state the percentage rate, the date from which interest is claimed, the date to which it is calculated (no later than issue), the total to that date and the daily rate thereafter. Name the 1998 Act, plead the relevant day and how section 4 produces it, and plead the section 5A sum as a separate item. Section 1(2) treats statutory interest in the same way as interest carried under an express contract term, and the pleading should present it on that footing.

Reform is pending but not in force: the Commercial Payments Bill, introduced in the House of Lords on 19 May 2026, would impose 60-day maximum payment terms and make statutory interest mandatory, and at the time of writing it had not completed its Lords stages.