Late Payment of Commercial Debts Regulations (UK)

Prompt payment is a persistent concern in public procurement, particularly for small and medium-sized enterprises that lack the cash reserves to absorb payment delays. The Late Payment of Commercial Debts Regulations (UK) form the primary legal instrument addressing this problem, giving creditors statutory rights to interest and compensation when invoices go unpaid beyond agreed or statutory payment terms.

What are the Late Payment of Commercial Debts Regulations?

The legal framework has two principal components. The Late Payment of Commercial Debts (Interest) Act 1998 established the core right for businesses to claim statutory interest on overdue commercial debts at a rate of 8% above the Bank of England base rate. The Late Payment of Commercial Debts Regulations 2013 then implemented EU Directive 2011/7/EU on combating late payment in commercial transactions, strengthening the regime by setting maximum payment terms and adding a right to claim debt recovery costs.

Under the regulations, public authorities must pay valid invoices within 30 days. Commercial businesses contracting with each other may agree longer payment terms, but any contractual term exceeding 60 days is subject to challenge if it is grossly unfair. Where no payment terms are agreed, the statutory 30-day period applies by default.

The right to claim statutory interest is automatic. A creditor does not need to state in the contract that they will claim interest; the right arises as soon as payment is overdue. In addition to interest, creditors can claim a fixed compensation amount for the cost of recovering the debt: 40 GBP for debts below 1,000 GBP, 70 GBP for debts between 1,000 and 9,999.99 GBP, and 100 GBP for debts of 10,000 GBP or more.

In the context of public procurement, the 30-day rule applies not only to direct payments from contracting authorities to prime contractors, but also to payments from prime contractors to subcontractors, and from subcontractors to their own supply chain. Procurement Policy Note 09/15 required that public contracts include provisions obliging prime contractors to pay subcontractors within 30 days of receiving a valid invoice, and to report on payment performance. This obligation was strengthened by the Small Business, Enterprise and Employment Act 2015, which gave the government powers to require reporting on payment practices.

Why it matters for bidders

For SMEs operating as subcontractors in public sector supply chains, the late payment regime provides both a legal remedy and a practical lever. Knowing that statutory interest accrues automatically means that a prime contractor who delays payment is incurring a growing liability, which can be a useful negotiation point. The fixed debt recovery compensation amounts, while modest, reinforce the message that late payment has a cost.

Equally important is what bidders should check at the pre-contract stage. Tender documents for large public contracts will typically include standard terms on payment timescales. Suppliers should verify that the stated terms comply with the 30-day obligation and that cascading payment provisions are included for subcontractors. Contracts with unusually long payment terms (45 or 60 days) should be scrutinised carefully against the regulations.

Example

A small engineering firm acts as a subcontractor on a central government construction framework, supplying specialist survey services. The prime contractor receives payment from the authority within 25 days but delays payment to the subcontractor for 55 days. Under the regulations, the subcontractor is entitled to statutory interest at 8% above base rate on the overdue amount from day 31, plus the fixed debt recovery compensation. If the overdue invoice is for 45,000 GBP, the compensation alone is 100 GBP, with interest accruing daily until payment is made.

Frequently Asked Questions

Can a contract exclude or limit the right to statutory interest?

No. The statutory right to interest under the 1998 Act cannot be excluded by contract. Any contractual term that purports to remove or limit this right is void. Parties can agree a higher rate of interest than the statutory rate, but not a lower one.

Does the 30-day rule apply to all public sector bodies?

Yes. Public authorities in England, Wales, Scotland, and Northern Ireland are all subject to the 30-day payment obligation under the regulations. The obligation applies to invoices for goods, services, and works.

What happens if a prime contractor does not pass prompt payment obligations down the supply chain?

Procurement contracts let by central government must include provisions requiring prime contractors to pass the 30-day payment obligation to subcontractors. If a prime contractor fails to do so, the authority may have grounds to treat this as a breach of contract. The freedom of information regime also means that payment performance data held by public bodies may be disclosable on request, providing a further transparency mechanism.