Claiming reasonable costs of recovering a late invoice

The fixed sum of £40, £70 or £100 is not always the whole of what you can claim for the cost of getting a late invoice paid. Where the reasonable costs of recovering the debt are higher, section 5A(2A) of the Late Payment of Commercial Debts (Interest) Act 1998 gives you the difference. This page is about that difference. It is for an invoice between two businesses. It does not apply where the customer bought as a consumer, and it is not the interest HMRC charges on late VAT or other tax.

Statutory interest, which grows by the day, is separate. The fixed sum is a single amount, set by the size of the debt. The calculator works out those two. It does not work out the difference on this page, because that depends on costs you have to show.

What section 5A says

Once statutory interest begins to run on a qualifying debt, the supplier is entitled to a fixed sum in addition to the interest (section 5A(1) and (2)). The sum is £40 for a debt 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. GOV.UK sets out the same three amounts and says you can only charge the business once for each payment.

Section 5A(2A) then says that if the reasonable costs of the supplier in recovering the debt are not met by the fixed sum, the supplier is also entitled to a sum equivalent to the difference between the fixed sum and those costs. Regulation 3 of the Late Payment of Commercial Debts Regulations 2013 inserted that subsection. The explanatory note calls it a right to compensation for the reasonable costs of recovering a debt where that amount exceeds the fixed sums. The explanatory memorandum says regulation 3 implements Article 6(3) of Directive 2011/7/EU and allows creditors to recover their reasonable costs in excess of the fixed sum.

Section 5A(3) treats the obligation to pay a sum under the section as part of the term implied into the contract by section 1(1). The 2013 Regulations changed the words from the fixed sum alone to a sum under the section, so the difference is included.

The difference, not the costs again

You do not add the full costs on top of the fixed sum. You add the part the fixed sum does not already meet. The amounts below are not in the Act. They only show the subtraction.

• An invoice of £2,500 takes the £70 fixed sum, because the debt is £1,000 or more and less than £10,000. The compensation guide and the compensation checker cover the edges of the bands.
• If the reasonable costs of recovering it are £250, the difference is £250 minus £70, which is £180. That £180 is the section 5A(2A) sum. Together with the £70 it equals the £250 costs. It does not equal £320.
• If the reasonable costs are £50, the £70 already meets them. Section 5A(2A) adds nothing. The £70 is still due.

Interest is worked out on the unpaid debt, not on this difference, at 8% a year over the Bank of England base rate. Use the calculator for the interest and the fixed sum, and add the difference yourself if you are claiming it.

When you can claim the difference

• The contract is for the supply of goods or services, and the purchaser and the supplier are each acting in the course of a business (section 2). A sale to a consumer is outside the Act. A contract of service or apprenticeship is not a supply of goods or services, so employment and apprenticeships are outside it too (section 2(4)).
• Statutory interest has begun to run. Section 5A(1) makes the fixed sum due once that happens, and the difference is the shortfall against that fixed sum. Interest starts to run on the day after the payment date (section 4). The interest guide covers the 30-day rule where no date was agreed. Where section 8 means the debt does not carry statutory interest, because the contract has a substantial remedy for late payment, that starting point is not reached. Section 9 says what a substantial remedy is.
• The contract was made in time for the 2013 change. For England, Wales and Northern Ireland the Regulations came into force on 16 March 2013 and do not affect contracts made before that day. For Scotland, the Late Payment of Commercial Debts (Scotland) Regulations 2013 inserted the same subsection. They came into force on 29 March 2013 and do not affect contracts made before that day. The fixed sum itself was inserted by the 2002 Regulations.

What “reasonable” means

The Act does not define it. It sets no percentage of the debt, no hourly rate and no cap above the fixed sum. GOV.UK says a supplier can claim for reasonable costs each time you try to recover the debt. It gives no examples and no ceiling. That is not a fresh £40, £70 or £100 for every letter. The fixed sum is once for each payment, and section 5A(2A) is the difference between the reasonable costs and that one fixed sum.

Article 6(3) of Directive 2011/7/EU, which the explanatory memorandum says regulation 3 implements, says the creditor is entitled to reasonable compensation for recovery costs exceeding the fixed sum and incurred because of the late payment. It says this could include expenses incurred, inter alia, in instructing a lawyer or employing a debt collection agency. Those are examples. The Article does not close the list, and it is not a table of UK fees. The Directive states a minimum fixed sum of EUR 40. The UK Act already set, and still sets, the fixed sum at £40, £70 or £100.

The Court of Justice considered Article 6 in Case C-287/17 (judgment of 13 September 2018). That case is about the Directive, in a claim between two Czech companies. It is not a decision of a UK court on section 5A. The court held that the costs of sending reminders can be recovered for the part that exceeds the Directive’s fixed sum, and that reasonable compensation covers neither the part of the costs already met by the fixed sum nor costs which appear to be excessive in the light of the facts of the case in point as a whole. The UK subsection already states the claim as the difference. It still does not say what is excessive on a given invoice. If the customer disputes the figure, that turns on the facts.

If the contract tries to shut it out

Section 8 and section 9 are about terms that exclude or vary statutory interest. The compensation sum is dealt with in section 5A itself. Subsections (4) and (5), added in 2013, apply section 3(2)(b) of the Unfair Contract Terms Act 1977 to a contract term relating to a sum due under section 5A, whether or not the term is in the purchaser’s written standard terms. In Scotland, section 5A(4) refers to section 17(1)(b) of that Act instead. The explanatory note says that this reference to section 3(2)(b), like the references to grossly unfair in the payment-period rules, requires a consideration of all the circumstances of the case. Article 7(3) of the Directive, which the explanatory memorandum says those subsections implement, says a term or practice which excludes compensation for recovery costs is presumed to be grossly unfair. Section 8 uses void for a term that excludes statutory interest where there is no substantial remedy. Section 5A does not.

How to claim it, and what to keep

• Take the fixed sum for that debt. The compensation checker will pick the band from the amount.
• List the costs of recovering that debt, with dates. That can include an invoice from a solicitor or a debt collection agency, if you used one, and any other cost of recovering that debt that you are including. GOV.UK’s each time is a reason to keep the list. It is not a reason to repeat the fixed sum.
• If the total is higher than the fixed sum, the extra claim is the difference. Show the subtraction, so the customer can see the fixed sum has not been counted twice.

GOV.UK says to send a new invoice if you decide to add interest. The letter and invoice template is a starting point for the interest and the fixed sum. It has no line for the difference. Add one only if you are claiming it, with your own figures. Using the illustration above, the line would be: reasonable recovery costs under section 5A(2A), £250 less the £70 fixed sum, £180. Keep a copy of what you send, the list and the receipts.

Section 5A and the GOV.UK page on debt recovery costs do not say whether VAT is charged on the difference. On this site the fixed sum and statutory interest are treated as outside the scope of VAT. A solicitor’s or agent’s own invoice may include VAT. The Act does not say whether you can pass that VAT on. Check with your accountant if you are unsure.