Late payment fees and interest
In much of the world you have a statutory right to charge interest on a late commercial invoice even if your contract never mentioned it. Most small suppliers never use it — partly from a reasonable fear of souring the relationship, but mostly because they do not know it exists.
Two different rights, often confused
Almost every argument about late fees comes from mixing up two separate things.
- A contractual late fee is one you wrote into your terms — say 1.5% per month. It binds only if the client actually agreed to those terms, and only within whatever cap local law places on such charges.
- Statutory interest is granted by legislation on qualifying commercial debts. It applies whether or not your invoice mentioned it, and it cannot be quietly removed by a client's own purchase terms in jurisdictions that treat the right as non-excludable.
The practical consequence: if you forgot to put late fees in your terms, you may still have a statutory remedy. And if you did put them in, you generally cannot stack both — you claim under one basis or the other.
How it works by jurisdiction
| Jurisdiction | Statutory interest on B2B debt | Fixed compensation |
|---|---|---|
| United Kingdom | Late Payment of Commercial Debts (Interest) Act 1998: 8% above the Bank of England base rate. | Yes — a fixed sum that steps up with the size of the debt (in the region of £40 / £70 / £100 bands), plus reasonable recovery costs above that. |
| European Union | Directive 2011/7/EU sets a floor of 8 percentage points above the ECB reference rate; member states implement it in national law and some go higher. | Yes — a minimum of €40 recovery compensation per invoice. |
| United States | No general federal statute for private contracts. Late fees are a matter of contract, constrained by state usury limits, which vary widely. | No general statutory equivalent. The Prompt Payment Act covers federal agencies paying contractors. |
| Canada | Largely contractual. The federal Interest Act supplies a default of 5% per annum where an agreement is silent on rate but interest is payable. | No general regime; prompt-payment statutes exist for federal and some provincial construction work. |
| Australia | Largely contractual for ordinary B2B work. Security of Payment legislation in each state creates a separate, faster route for construction. | No general regime. The Payment Times Reporting Scheme obliges large businesses to publish how fast they pay small suppliers. |
Rates move. Anything indexed to a central bank base rate changes whenever that rate does, and fixed compensation bands are revised periodically. Look up the figure on the day you invoice rather than reusing one from last year.
Working out what you are owed
Statutory interest is normally simple, not compound, and runs daily from the day after payment became due until the day it is paid. The arithmetic is:
- Annual amount = debt × (base rate + statutory margin).
- Daily amount = annual amount ÷ 365.
- Total = daily amount × days overdue, plus any fixed compensation.
On a £5,000 invoice with a combined rate of around 13%, that is roughly £650 a year, about £1.78 a day, so a 45-day delay adds roughly £80 of interest before the fixed compensation is added. Modest — which is the point. The purpose is rarely the money; it is that a client who is deliberately running your invoice late now has a reason to stop.
Whether to actually charge it
Having the right does not settle whether to use it. A few honest considerations:
- Signalling beats collecting. Naming the statutory right in a formal notice changes behaviour far more often than the interest itself is ever paid.
- Waive it explicitly, if you waive it. "I'm waiving the statutory interest on this one" is a concession you get credit for. Silently dropping it teaches the client that your deadlines carry no consequence.
- Distinguish a slow payer from a bad one. A corporate whose payment run is genuinely monthly is not acting in bad faith. Reserve escalation for clients who are choosing to delay.
- It changes the relationship. That is sometimes exactly what you want, and you should be clear-eyed that invoking it usually marks the end of the informal phase.
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Putting late fees in your own terms
If you would rather rely on your own contract than on statute, the terms have to be agreed before the work, not announced afterwards on an invoice footer. A term the client never saw is not a term.
- State a rate and a period — "1.5% per month on overdue amounts" — not a vague "late fees may apply".
- Say when it starts. Immediately after the due date, or after a stated grace period.
- Check the ceiling. Several US states cap the rate that can be charged on commercial debt, and an unenforceable rate can invalidate the clause rather than reduce it.
- Get acceptance recorded. An accepted quote that references your terms is worth considerably more than terms living only on your website.
Common questions
Can I charge interest if my invoice never mentioned it?
Where a statutory right exists — the UK and EU being the clearest examples — yes, because the right comes from legislation rather than from your paperwork. A purely contractual late fee, by contrast, has to have been agreed in advance.
Does this apply to consumers as well as businesses?
Usually not. The statutory regimes described here are aimed at business-to-business and business-to-public-sector debts. Consumer contracts are governed by separate, generally more protective rules.
Can a client's purchase terms cancel my statutory right?
In jurisdictions that treat the right as non-excludable, a contract term that removes or unreasonably reduces it can itself be struck down. This is exactly the kind of point worth taking advice on rather than assuming either way.
Is interest simple or compound?
Statutory interest is typically simple, calculated daily on the outstanding principal. Contractual clauses sometimes compound monthly — which is one reason they attract more scrutiny.
Do I have to charge VAT or sales tax on the interest?
Interest and late-payment compensation are generally outside the scope of VAT, because they are not consideration for a supply. Treatment varies, so confirm locally before adding tax to a late-fee line.
General information, not legal advice. Statutory rates, compensation bands and eligibility rules differ by country and change over time. Confirm the current position in your own jurisdiction, or take advice, before relying on any figure here.
Related guides
- How to chase an unpaid invoiceA five-stage escalation ladder
- Invoice payment terms explainedNet 30, EOM, 2/10 and what they cost you
- Getting paid fasterDeposits, milestones and retainers
- Sales tax and VAT on invoicesWhen to charge it and how to show it