Charging Interest On Commercial Debts

When your customer has failed to pay in a business-to-business debt, you may be entitled to claim interest on the sums outstanding to compensate you for late payment. It can be tricky to know exactly how much you can charge, and this will depend on a few factors.

What are your rights when charging interest

When deciding whether you can charge interest on late payments and at what rate, your first consideration should be your contract.

Many contracts will contain an explicit clause stating your payment terms, and at what rate interest can be charged. If so, you should use these when calculating interest. It should be noted that if the matter ends up in front of a judge, they have some discretion to disallow extortionate interest rates if found to be unfair.

Care should also be taken to avoid unenforceable “penalty clauses” which activate a higher interest rate on default, and the recent case of Ahuja Investments Ltd v Victorygame Ltd in 2021 widens the scope for a Court to disallow these punitive clauses, even if it is not defined as a penalty clause in the contract. However, notwithstanding a few exceptions, you will generally be entitled to charge interest at your contractual rate.

What if there is no interest clause in your contract?

If you do not have an explicit interest clause, you may still be able to charge interest. The Late Payment of Commercial Debts (Interest) Act 1998 allows for the charging of statutory interest in the absence of an interest clause, under certain conditions. This only applies to business-to-business debts, and will not apply if there is a different interest rate set out in your contract. For qualifying debts, you will generally be entitled to interest at a rate of 8% + the Bank of England Base Rate, which currently sits at 5.25%.

Calculating statutory interest

Figuring out how much interest you can claim can be a complex process, particularly considering the 14 consecutive rises in the Bank of England Base Rate since the end of 2021. You will only be able to charge interest using the Base Rate on that particular date. It may be possible to calculate this yourself, but it is always best to speak to a legal debt recovery specialist to ensure this is correct and gives you the best chance of recovering interest.