The Potential Scale of Late Payment Fee Compensation

White Paper

New research from Satago has found that small businesses in the UK could be owed hundreds of millions of pounds in Late Payment compensation.

The Late Payment of Commercial Debts Act was introduced in 1998 and most recently updated in 2013. Under this legislation, businesses have the statutory right to charge their commercial customers compensation (depending on the size of the invoice) and interest at 8% above base rate when an invoice remains unpaid after its due date.

Unfortunately, many small businesses remain unaware of their rights and, even those that do, are often reluctant to use them for fear of antagonising their customers, even if they are habitual late-paying customers. Download this whitepaper to find out how British SMEs could claim surprisingly large amounts of Late Payment Fees from their customers.

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For instance, all debts smaller than £1,000 incur a £40 compensation charge if paid late, even if they are paid only one day late. A business could be sending hundreds of small invoices per month, each of which is paid only 1 day late, and whilst the interest charge would be negligible, the business would have the right to charge £40 for each late paid invoice. It is easy to see how this can add up.

Satago’s software calculates all the Late Fees a small business could claim for invoices already paid over the past year. Many Satago users are surprised when they discover that they could, if they wanted, claim tens of thousands of pounds in Late Payment Fees.

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How much compensation could SMEs claim?

To understand the scale of Late Fees, Satago looked at over 1 Million invoices using two different measures.

First, a top-down analysis suggested that the amount of Late Fees that could be claimed could be nearly £900 Million per month (see calculation in appendix). This figure was recently quoted by Lord Stevenson of Balmacara during a House of Lords Grand Committee discussing the issue of late payment in the forthcoming Enterprise Bill.

Second, we looked at Satago’s user-base and found that each small business could on average, have claimed £32,000 of late fees over the past year. This suggests that if every VAT or PAYE registered business in the UK (2.45 Million businesses3 ) claimed all the late fees they are entitled to, there would be £78.4 Billion in Late Fees due every year - over £6.5 Billion per month.

However, with most trade taking place between SMEs, it is clear that much of these Late Fees would cancel each other out. One would expect that only those companies that paid all, or at least the majority of their suppliers on time, could expect to make a net gain from these Late Fees. It is clear, though, that under certain circumstances some companies could be exposed to very large liabilities.

Who might owe lots of Late Fees?

Customers of insolvent businesses

Most companies are reluctant to collect Late Payment fees for fear of antagonising their customers but companies that have entered insolvency have no such qualms and are the most likely to claim these fees. If you have made a habit of paying a supplier late for invoices, you may find an insolvency practitioner contacting you to claim late fees for every invoice you ever paid late. The fact that the invoices have actually been paid, albeit late, is in fact proof that the goods or services were accepted, thus leaving little excuse to avoid the Late Payment fees.

Under the Statute of Limitations Act, Insolvency Practitioners could claim 6 years’ worth of late fees. Therefore, the average insolvent company could be sitting on £192,000 of Late Fees due for collection from long-standing customers.

Large Companies with lots of Suppliers

A large company with 1,000 suppliers could well be invoiced by each supplier once a month. If every invoice is paid a few days late, the Late Payment liabilities, without accounting for interest, could be £40 x 1,000 x 12 = £48,000 a year. Under Statute of Limitations that could be £288,000 of Late Fees.

Customers of ex-suppliers

Similar to insolvent businesses, a company that is no longer supplying a particular customer will not be reluctant to claim accumulated Late Fees. Have you acrimoniously ended your relationship with a particular supplier recently? It might be worth checking that you don’t have excessive Late Fee exposure to them.

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Does anybody claim these Late Fees?

We know that many of the companies using the Satago platform add the automatically calculated Late Fees to the automated invoice reminders and statements that we send on their behalf to their customers. However, we understand that the majority of these Late Fees are not actually collected from their customers.

An interesting test case is that of Blue Autumn Ltd, a company from Northern Ireland that used the Late Payment Fees and the Statute of Limitations to claim over £100,000 from all their customers . This example shows the scale of Late Fees that can actually be collected if a company puts its mind to it.

Identifying potential liabilities?

At Satago, we believe that companies should be required to publish their potential Late Payment Fee liabilities in a public database, run by the Government. This does not mean that these companies would be obliged to pay these Late Fees, but it would give an indication of their relative level of late payments to their suppliers, perhaps more so than just revealing when they pay suppliers on average. The reality is that many smaller companies are held hostage to larger companies’ common practice of paying their invoices late and naming and shaming might improve the situation for the smaller players.

Furthermore, prudent accounting practices would suggest that because suppliers have the legal right to claim Late Payment fees, this potential liability should form part of a company’s year-end financial statements and that shareholders would find this information useful. Shareholder pressure may, in time, incentivise larger companies to pay suppliers on time, every time.

How can Satago help?

Satago is a free cashflow management solution that automates and manages the process of chasing customers for payment and identifies the risk level of sales ledgers. The software will also automatically calculate the late payment fees that could be claimed for each invoice (see screenshot on page 1). Companies can quickly and easily sign-up and connect their cloud accounting software to Satago to see how much Late Fees they could potentially claim.

Satago is not a law firm nor debt collection agency but we work with solicitors that specialise in the collection of Late Fees and are happy to introduce companies who wish to claim potential Late Fees to these specialists.

We have been actively contributing to the Late Payment consultations run by the Department of Business Innovation and Skills (BIS). We believe late-payment to SMEs is a major injustice and a drag on our economy and so we work tirelessly to develop software and financial products to help SMEs improve cashflow and beat late payment.

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