The statutory rate, the fixed compensation per invoice, and what a weaker contract clause gives up before anyone pays late.
Under the UK's late payment legislation, interest on an overdue business invoice is simple interest at 8 per cent over the Bank of England reference rate, charged daily from the day after the due date, plus a fixed sum of £40, £70 or £100 per invoice. With an illustrative 4.00 per cent base rate, an invoice of £48,000 paid 75 days late carries £48,000 × 12.00% × 75 ÷ 365 = £1,183.56 of interest, plus £100. A contract clause at base plus 2 would recover half that interest, £591.78.
Worked in full in Contract Management by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
The Late Payment of Commercial Debts (Interest) Act 1998 implies a right to statutory interest into business-to-business contracts for goods and services. Three rules do the arithmetic:
The parties can agree their own late payment clause instead, but a term that ousts statutory interest is void unless it gives a substantial remedy. That is why the contract rate is worth pricing before it is signed: it is what the supplier is accepting in place of the statute. The base rate below is illustrative, so check the reference rate for the relevant half-year before claiming.
| Invoice | Amount, £ | Days late |
|---|---|---|
| INV-1041 | 48,000.00 | 75 |
| INV-1057 | 6,500.00 | 41 |
| INV-1063 | 850.00 | 20 |
| Statutory rate: 4.00% reference rate + 8.00% | 12.00% |
"Days late" counts from the due date, not the invoice date. INV-1041 was due on 30-day terms and paid on day 105, so it is 75 days late.
Interest = invoice amount × (reference rate + 8%) × days late ÷ 365
Claim = interest + fixed compensation for the invoice's band
Excel, amount in B2, days late in C2, reference rate in F1: =B2*($F$1+8%)*C2/365+IF(B2<1000, 40, IF(B2<10000, 70, 100))
Step 1, the daily amount. 12.00 per cent over 365 days is 0.032877 per cent a day. On £48,000 that is £15.78 a day.
Step 2, the days. £15.78 for 75 days is £1,183.56, unrounded: 48,000 × 0.12 × 75 ÷ 365.
Step 3, the fixed sum. £48,000 is in the top band, so add £100. The claim on INV-1041 is £1,283.56.
| Invoice | Amount | Days late | Interest | Compensation | Claim |
|---|---|---|---|---|---|
| INV-1041 | 48,000.00 | 75 | 1,183.56 | 100 | 1,283.56 |
| INV-1057 | 6,500.00 | 41 | 87.62 | 70 | 157.62 |
| INV-1063 | 850.00 | 20 | 5.59 | 40 | 45.59 |
| Total | 1,276.77 | 210 | 1,486.77 |
On small invoices the fixed sum is most of the claim: on INV-1063 the £40 is seven times the interest. It is due per invoice, so a customer that pays a run of small invoices late owes a fixed sum on each of them.
The same £48,000, 75 days late, under different terms, against what the delay actually costs a supplier funding itself at 9.00 per cent:
| Basis | Annual rate | Interest, £ |
|---|---|---|
| Contract clause: base + 2 | 6.00% | 591.78 |
| Supplier's own cost of funding | 9.00% | 887.67 |
| Statutory: base + 8 | 12.00% | 1,183.56 |
| US-style clause, 1.5% a month | 18% | 1,775.34 |
The statute over-compensates this supplier by £295.89 against its funding cost; the base plus 2 clause under-compensates it by exactly the same amount. A supplier that accepts the customer's standard terms has given up the difference, £591.78 on one invoice, before anyone has paid late. Whether a given contract rate is a substantial remedy is a legal question; what it costs is not. Outside the UK the logic is the same and the inputs differ: the EU directive sets at least 8 points over the ECB reference rate with a minimum of €40 of compensation, and US contracts commonly set a monthly rate, subject to state usury limits.
| Days late | Statutory interest | With £100 compensation | Base + 2 clause | 18% a year clause |
|---|---|---|---|---|
| 15 | 236.71 | 336.71 | 118.36 | 355.07 |
| 30 | 473.42 | 573.42 | 236.71 | 710.14 |
| 60 | 946.85 | 1,046.85 | 473.42 | 1,420.27 |
| 90 | 1,420.27 | 1,520.27 | 710.14 | 2,130.41 |
| 120 | 1,893.70 | 1,993.70 | 946.85 | 2,840.55 |
Interest is linear in days, so the fixed sum matters most for short delays. The reference rate moves the answer at the margin: at a 3.00 per cent base the 75-day interest is £1,084.93, at 5.00 per cent £1,282.19.
Payment terms are one of the clauses the book prices in its case, and the payment-terms calculator in the free workbooks for this book turns conceded days into money and tests any settlement discount against your cost of capital. For the other side of the same clause, see whether a 2/10 net 60 discount is worth taking.
Statutory interest under the UK late payment legislation is simple, charged daily on the unpaid amount from the day after the due date. On 48,000 pounds at an illustrative 12.00 per cent for 75 days that is 1,183.56. Compounding monthly would give 1,192.25, a small difference that a debtor can use to dispute the whole claim.
It depends on the size of each invoice: 40 pounds below 1,000, 70 pounds from 1,000 to 9,999.99, and 100 pounds at 10,000 or more, in addition to interest. It is due per invoice, so three late invoices of 48,000, 6,500 and 850 pounds carry 210 pounds of compensation, not a single 100.
The Bank of England base rate in force on 31 December where interest starts to run between 1 January and 30 June, and on 30 June where it starts to run in the second half of the year, plus 8 per cent. It is fixed for the debt. At a 3.00 per cent base, 48,000 pounds 75 days late carries 1,084.93; at 5.00 per cent, 1,282.19.
This article is one calculation from Contract Management. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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