Debt Collection Guidance

Debt Collection Guidance

Overview

There are various ways of getting your debtors to pay on time.  However, despite your best efforts, you may find that some still end up paying late.

If this happens, you should get in contact with them to resolve the issue and review your procedures to reduce the possibility of customers paying late again in future.

Note that you have rights under the late payment legislation to charge:

• Interest
• Debt recovery costs
• You can exercise these rights at your discretion

This section looks at the various ways to manage your debtors.  Your choice may depend on who the debtor is, the size of the debt and how late the debt is.

When Does A Debt Become Late?

You can agree any credit period you want with customers - the agreement can be verbal but it should preferably be in writing.

It may be that in your industry it is custom and practice for purchasers to pay before the end of the month following the invoice month, ie the credit period could be up to 60 days.  However, you can still set earlier payment terms by having a separate written agreement.

Where there is neither an agreement in place nor custom and practice in operation, the law sets a default period of 30 days.

This period starts from whichever of the following is later:

• The date on which the goods are delivered or the service is performed
• The date on which the customer receives notice of the amount of the debt
• Purchasers cannot contract out of the late payment legislation, ie they cannot deny the supplier their statutory right to, for example, charge statutory interest

Charging Interest On Late Payments

You have a statutory right to claim interest on late payment as well as a contractual right to claim interest if your terms and conditions of payment allow.  Use the statutory interest calculator and contractual interest calculator to work out how much statutory or contractual interest to charge.

Purchasers cannot contract out of the late payment legislation, ie they cannot deny the supplier their statutory right to, for example, charge statutory interest.

Should I Charge Interest On A Late Payment?

You can charge interest on all late payments.  However, even if you indicate in your terms and conditions that you will charge interest on all late payments, it is up to you whether you actually do so or not.

You should address each debt on a case-by-case basis and:

• Consider the relationship with the customer
• Get the opinion of customer-facing staff
• Assess your credit management system
• With persistent offenders, you may need to start charging interest to act as a deterrent in the future.

What Rate Of Interest Should I Use?

Rates for calculating interest are called reference rates and are fixed for six-month periods.  The Bank of England base rate on 31 December is used as the reference rate for debts becoming overdue between 1 January and 30 June of the following year.  The rate in force on 30 June is used from 1 July to 31 December.

You can calculate the interest payable on overdue bills by taking the relevant reference rate and adding 8%.

Alternatively, you can set a contractual rate that may be higher or lower than the statutory rate.  If you set a contractual rate, the statutory rate no longer applies.

Interest should be charged on the outstanding gross amount inclusive of VAT.  No VAT is chargeable on the interest itself.

Charging Interest

If you don't already charge interest, you may need to:

• Adapt your credit management and billing systems
• Amend invoices and terms and conditions so that they state you reserve the right to charge interest - even if you don't intend to or normally do so
• Notify customers of your plans and check that they understand the new terms and conditions
• Contact habitual late payers to discuss how they'll be affected
• Make sure invoices include an agreed payment date so customers know when interest will start being charged - let customers know if interest starts to accumulate.
• Before charging interest, you could issue a letter stating that the payment is late and if it is not paid within, eg seven days, interest will be charged.
• Present the customer with a final receipt once the interest and the original sum have been paid, outlining details of interest charged.

Charging Debt Recovery Costs

As well as charging interest - see charging interest on late payments - under the late payment legislation you can also claim costs for the recovery of late payments.

The costs, which are fixed, are as follows:

However, before applying the charge, you should:

• Consider the relationship with the customer
• Get the opinion of customer-facing staff
• Assess your credit management system
• Find out what industry practice generally is

If you decide to apply the charge, you should notify the customer in writing.  You should also send them a new invoice with the charge itemised as an additional amount and the outstanding total debt adjusted accordingly.

Purchasers cannot contract out of the late payment legislation, ie they cannot deny the supplier their statutory right to, for example, charge statutory interest.

Taking Non-Court Action To Collect Debts

Before you take court action, you should consider the alternative methods of recovering debt outlined below.

While you consider the alternatives, you should continue trying to recover the debt using the usual methods, eg telephoning the debtor to remind them that the payment is now overdue.

Involvement of one of the following may also assist:

• An accountant - some offer debt collection services as well as advice on credit control and debt collection procedures
• A solicitor - some solicitors specialise in debt collection.  They can issue powerful letters in a short space of time.  Agree a fee for this service in advance

Another alternative is to use a debt collection agency.

The advantages of using an agency are that:

• They have the time, expertise and resources needed for the job
• It can be a fast method of recovering debts so will save you time
• If the debt collection agency is polite and professional, you may retain the customer - assuming you want to.  This is unlikely to be the case if you take legal action
• The agency can instruct solicitors on your behalf if the customer still refuses to pay

The disadvantages are that:

• An agency can be costly - the commission on the money recovered is typically 8 to 10% for commercial debts
• You may lose the customer
• If the agency is heavy-handed, your reputation may be damaged

It is advisable to check that your agency is registered with the Credit Services Association on the CSA website.

A further alternative is for you or your debt collection agency or solicitor to issue a statutory demand promising an application to court for the formal winding-up of the customer's business if payment is not made within 21 days.

Finally, you could consider:

• Negotiation
• Mediation
• Conciliation
• Arbitration

Download information about the alternatives to going to court from the Community Legal Advice website (PDF)

Taking Court Action To Collect Debts

Taking legal action to recover your money should be a last resort.

Therefore, consider all other alternatives before going to court - see taking non-court action to collect debts.

If court action still seems the best solution, consider whether making a claim is cost-effective.  It might be cheaper to write-off small sums.  If a customer is likely to place large orders in future, it may be better to let things lie if only a relatively minor amount is in dispute.

If court action still seems the best solution, make sure you've resolved any disputes over the goods or services you've provided.  If you don't do this, the debt will be difficult to recover.  You also need to make sure that customers have the means to settle.  If they're bankrupt or in liquidation, your debt is probably irrecoverable.

For sums that are under £100,000, you can start a claim at the HM Court Service (HMCS) Money Claim Online website (registration required).

In Northern Ireland, you can use an online service for making a claim through the Small Claims Court.  Find out what services are available online from the Northern Ireland Court Service website (registration required).

Debts of up to £5,000

Debts of up to £5,000 are dealt with by the small claims track at your local County Court.  Find your local county court on the HMCS website.  This offers a quick and inexpensive way of making claims for unpaid debts, as you don't have to employ a solicitor.

In Scotland, claims are dealt with by the Sheriff Court.  Find information on how to make a claim in Scotland on the Adviceguide website.

The maximum amount differs in Northern Ireland.

Debts over £5,000

Claims from £5,000 to £15,000 must be issued in a county court, while claims of more than £15,000 can be issued in the High Court.  It's advisable to get legal advice about this.

In Scotland, debts over £1,500 are raised as ordinary cause actions.  However, if your debt is particularly large or complex, you might want to raise proceedings with the Court of Session in Edinburgh.