If you are a contractor or freelancer working through your own limited company it can be useful to know that legislation exists to ensure that you, as a small or medium sized business (SME), are paid promptly for the work you perform and that legislation exists to ensure that when you are not paid on time suitable compensation and remedies are available. This legislation is also particularly useful if you are supplying services to the public sector or public bodies that generally are required to you within 30 days.

The UK follows the European Directive 2011/7/EU (combating late payment in commercial transactions) which was introduced to make pursuing payment a simpler process and hence reduce the culture of paying late and making paying on time the norm. Previously it was too easy for some large businesses to force their payment terms on smaller business that were actually in greater need of the cashflow.

In summary the directive and the UK legislation (Late Payments of Commercial Debts (Interest) Act 1998, the Late Payment of Commercial Debts Regulations 2002 and the Late Payment of Commercial Debts Regulations 2013) mean your debtors (the companies that owe you money) will have to pay interest and reimburse reasonable recovery costs, if they do not pay for goods and services on time (60 days for services to other businesses and 30 days for services to public authorities). Of course you can still agree quicker contractual payment terms.

The interest charge is calculated as 8 points above the Bank of England Rate. The recovery cost compensation is £40 for debts under £1,000 and £70 for debts between £1,000 and under £10,000. As the supplier it is still up to you whether you apply these penalties and charges.

Tip for Ensuring Prompt Payment of Debts:

• Set-out payment terms in your contract or terms and conditions and ensure clearly communicated in discussions. Make sure you are happy with these terms.
• Ensure you invoice for your work done as soon as you are contractually able to as this is often when the clock starts ticking.
• Include payment terms on your invoice and how payment can be made.
• Consider making a courtesy call (reminder) in the week before payment is due. Take payment there and then if possible.
• Call late payers immediately.
• Look at options to make cash collection easier i.e. set-up a paypal account, discuss with your bank how you can accept card payments etc.
• If all else fails then consider a compromise especially if it is a valued customer or they genuinely are struggling to find the funds and if that still fails a solicitor can often be the best form of debt collection.

Discounts for prompt payment could be considered but in practice these often just mean that you get paid less. Even when people are late paying they still deduct the discount!

Umbrella provide accountancy services to small businesses across the UK. For further information please call 0800 121 6513