Interest on a late commercial payment

Late-payment interest needs a valid basis and an auditable calculation. For qualifying commercial debts, official guidance explains statutory interest and its relationship with a contractual interest provision. ^[1]

Establish the applicable rate

Identify the contract, supply, invoice, payment term and date the debt became overdue. Check whether the statutory regime applies and how any contractual remedy affects it. Do not add contractual and statutory interest together on the assumption that both are independently recoverable for the same delay.

The statutory headline rate is 8 percentage points above the Bank of England base rate, but the correct calculation must use the applicable reference-rate rules and period. Verify those inputs rather than inserting today's rate into every historic invoice.

Show the changing balance

Calculate interest separately for each invoice and account for credits or part-payments from the appropriate dates. Distinguish interest from any eligible fixed compensation or recovery costs.

Invoice reconciliation establishes the principal. A pre-action demand should explain the basis and amount of the additional claim. Retain the calculation so it can be updated to payment or issue without changing assumptions silently.

Establish the first day of the calculation Gather the evidence that fixes when payment became due, including the agreed terms and relevant receipt or performance dates. The invoice issue date is not always enough to answer that question. If the parties changed the payment arrangement, preserve the correspondence and identify what it changed. Mark any uncertainty for legal assessment before calculating a confident total. A spreadsheet can perform arithmetic accurately while still producing the wrong demand because the starting date or assumed contractual entitlement is incorrect.

Treat each invoice as a separate calculation record. Give it an identifier linking back to the original account and show the date from which interest is said to run. Where payment depends on an agreed milestone, identify the evidence of that milestone instead of borrowing a date from another invoice. If several invoices were consolidated for convenience, retain the underlying breakdown. This makes it possible to explain why different items have different periods of delay and prevents a later summary statement from obscuring their history.

Record the legal source for the rate For the statutory regime, the relevant rate is selected under reference-date rules, rather than by following every subsequent Bank of England announcement. The 2002 rate order for England and Wales and Northern Ireland refers to the preceding 30 June or 31 December according to when interest starts to run. Record the applicable reference date and the evidence of the rate used. For a Scottish transaction, check the relevant Scottish instrument and governing circumstances instead of treating this particular order as UK-wide legislation. [2]

If the contract contains an interest clause, have its relationship with the statutory remedy assessed before choosing a rate. Preserve the agreed version of the terms and the evidence that they formed part of the contract. A clause added only to a late reminder is not the same factual starting point as a clause accepted when the order was placed. Keep contractual calculations distinguishable from statutory ones, and explain any change of basis. Do not combine alternative calculations into a single cumulative demand for the same delay.

Show how payments change the amount outstanding An interest schedule should reveal changes to the principal rather than applying one original balance across the entire period. Suppose a customer makes a transfer that your records allocate to part of an invoice. Record the amount and effective date, then establish how that allocation affects the subsequent calculation. If the remittance covers several invoices, resolve the allocation before updating them. A credit note also needs explanation: correcting an overcharge can raise a different timing question from granting a later commercial concession.

Retain calculation precision and apply a consistent rounding method to the final figures. For a simple annual-interest calculation, the inputs include the relevant principal, annual rate and number of days, with the appropriate daily convention checked. Label the cut-off date so the recipient knows what the figure covers. The government's example illustrates the daily calculation approach, but its sample base rate is illustrative rather than a current rate to copy. Have another person reproduce a representative invoice calculation from the source inputs. ^[1]

Explain additions without hiding the original debt Present principal, interest and any separately justified compensation or recovery costs as distinct items. Link an additional demand to the invoice concerned so it cannot be mistaken for another charge for the same goods. If you use an online calculator, preserve the inputs and output, and check whether it handles the actual payment history. The Small Business Commissioner describes its calculator as guidance, which makes it a useful cross-check rather than a substitute for resolving disputed dates or contractual assumptions. [3]

Before sending an updated figure, compare it with the previous version and explain material changes. A larger total may follow additional days of delay, but a correction to the principal or legal basis should not be disguised as routine accrual. If settlement discussions include waiving interest, record whether that is a proposal or an agreed concession and what conditions apply. Keep the underlying schedule even after payment so the final account can be reconciled without rebuilding the calculation from memory or an overwritten spreadsheet.