Late Payment Interest Explained

When a commercial customer pays an invoice late, the money owed has been working for them instead of for the supplier. Late payment interest compensates for that time. In the EU and the UK it is not something a supplier has to negotiate: the law grants it on overdue commercial debts whether or not the contract mentions it. In the United States, the federal rule covers federal contracts; for ordinary business-to-business invoices, the contract and state law decide.

This guide explains how the statutory rates in the UK, the EU, Germany and Spain are built, when interest starts, what fixed sums come on top, and how to turn the rule into a figure. It is the companion to the Late Payment Interest Calculator.

The UK: 8 percent over the official dealing rate, plus a fixed sum

Under the Late Payment of Commercial Debts (Interest) Act 1998, statutory interest runs on a qualifying business-to-business debt from the day after the relevant day, which is the agreed payment day or, if none was agreed, the last day of a 30-day period beginning with the later of performance and notice of the amount (section 4). The Late Payment of Commercial Debts (Rate of Interest) (No. 3) Order 2002 sets the rate at 8% a year over the official dealing rate, the rate the Bank of England's Monetary Policy Committee announces, in force on 31 December for interest that starts to run between 1 January and 30 June, and on 30 June for interest that starts between 1 July and 31 December. If that reference rate were 4.75%, the statutory rate would be 12.75%.

On top of interest, section 5A adds a fixed sum once statutory interest starts to run: 40 pounds for a debt under 1,000 pounds, 70 pounds for a debt from 1,000 to under 10,000 pounds, and 100 pounds for 10,000 pounds or more, plus reasonable recovery costs above that sum. A contract can replace statutory interest with its own remedy only if that remedy is "substantial": under section 8, terms that exclude statutory interest are void unless there is a substantial contractual remedy for late payment, and section 9 sets out when a remedy is not substantial.

The EU: the reference rate plus at least 8 points, set nationally

Directive 2011/7/EU, the EU's late-payment law, defines statutory interest for late payment as simple interest at the reference rate plus at least eight percentage points (Article 2(6)); for a member state whose currency is the euro, the reference rate is the European Central Bank's rate for its most recent main refinancing operation (Article 2(7)). The creditor is entitled to interest without a reminder (Article 3) and to a fixed sum of at least 40 euros for recovery costs (Article 6). Article 12 required member states to bring national laws into force to comply by 16 March 2013, and allows them to keep or adopt rules more favourable to the creditor, so the rate a supplier actually applies is its own country's:

• Germany: § 288 BGB sets interest during default at five percentage points over the Basiszinssatz, and nine points for payment claims in transactions without a consumer, plus a flat 40 euros against a debtor that is not a consumer (§ 288(5)).
• Spain: Ley 3/2004 sets, where nothing was agreed, the European Central Bank's rate plus eight percentage points (article 7) and a fixed 40 euros for collection costs (article 8); default is automatic on missing the agreed or legal deadline (article 5).

The United States: federal contracts only

US federal law sets a late-payment interest penalty for federal agencies paying their own contractors. Under the Prompt Payment clause, FAR 52.232-25, the designated payment office pays an interest penalty automatically, without a request from the contractor, if payment is not made by the due date. That clause governs federal contracts. For private business-to-business invoices, the rate comes from the contract and from state law, which this guide does not cover; the calculator treats the US as a contractual-rate jurisdiction for that reason.

Why the rates move

The UK, EU, German and Spanish rates are each a reference rate plus a fixed margin. The margin is written into the law; the reference rate underneath it is set by a central bank. So the headline rate changes when the central bank changes its rate, and a figure on a demand should name the reference rate it used and the date it applied. The UK order fixes the reference date twice a year; Ley 3/2004 uses the ECB rate in force before the first day of each half-year.

Turning the rule into a number

Interest equals the principal multiplied by the annual rate, multiplied by the number of overdue days divided by 365. A 5,000 invoice that is 30 days overdue at 12.75% accrues 5,000 x 0.1275 x 30 / 365, about 52, before any fixed sum. A 2,000 invoice at 12% that is 40 days late accrues 2,000 x 0.12 x 40 / 365, about 26.

The Late Payment Interest Calculator computes the interest for the jurisdictions it lists, at the statutory rate where its data holds one and at your contract rate otherwise, and shows a fixed recovery sum where its data includes one. Once you have the figure, the guides on how to follow up on an unpaid invoice and what to do when a client won't pay cover the next steps, and the guide on how to charge late fees covers the contractual side.

FAQ

What is statutory late payment interest?

It is interest a creditor can claim on an overdue commercial debt because the law grants it, even when the contract says nothing about late payment. Directive 2011/7/EU requires it across the EU at the reference rate plus at least eight percentage points, and the UK Late Payment Act grants it at 8% over the official dealing rate.

How much interest can I charge on a late UK invoice?

Under the Late Payment of Commercial Debts (Interest) Act 1998 and its rate order, statutory interest is 8% a year over the official dealing rate in force on 31 December or 30 June before interest starts to run. Section 5A adds a fixed sum of 40, 70 or 100 pounds depending on the size of the debt.

How does the EU late payment rate work?

Directive 2011/7/EU sets statutory interest at the reference rate, for the euro the ECB's main refinancing rate, plus at least eight percentage points, and a fixed sum of at least 40 euros. Each member state applies it through its own law: in Germany § 288 BGB sets nine points over the Basiszinssatz between businesses, and in Spain Ley 3/2004 sets the ECB rate plus eight points where nothing was agreed.

Is there a federal late payment interest rate in the United States?

For federal contracts, yes: under FAR 52.232-25 the government pays an interest penalty automatically when it pays a contractor late. For private business-to-business invoices, the rate comes from the contract and from state law, which this guide does not cover.

Can I charge interest if my contract doesn't mention it?

In the EU and the UK, yes: Directive 2011/7/EU and the UK Late Payment Act grant interest by law, and in Germany § 288 BGB and in Spain Ley 3/2004 do the same. In the UK a contract can replace statutory interest only with a substantial remedy of its own (sections 8 and 9). Elsewhere, state a late-payment rate in the contract and on the invoice.

How do I calculate the exact interest owed?

Multiply the principal by the annual rate and by the number of overdue days divided by 365. A 2,000 invoice at 12% that is 40 days late owes about 26. The Late Payment Interest Calculator does the same for the jurisdictions it lists.