Thursday, 31 July 2014

Late payment penalties, too late?

As some of you may know we charge late payment penalties on commercial debts. This is not uncommon (people like BT charge late payment penalties), and is even a legal requirement to be part of every commercial contact due to Late Payment of Commercial Debts (Interest) Act 1998.

If you are paying a commercial supplier late then they could charge you penalties - you are accumulating a liability!

We have a fully automated system to charge the penalties by issue of an invoice (no VAT). New customers we often credit the first charge and from then they pay on time. Ironically Direct Debit has cost us tens of thousands in collected late payment penalties each year as it means most people don't pay late now.

Now, for various historical reasons we have a couple of very long standing customers who were set up not to charge the penalties. Some of them have finally started to change their organisation and move some services away - shame. But I have picked up on one recently and realised they owe well over £3500 of penalties. So we invoiced them.

The only snag is the Limitation Act 1980 which means you can't take legal action (court) if the cause of action is more than 6 years old. In this instance some of the late payments are more than 6 years old. Some are only last month! It seems FedEx habitually pay late, what can I say.

Now, they have realised that the Limitations Act may be an issue. But I am not convinced.

In this case the action would be a county court claim for an unpaid invoice and the cause of action is that we raised an invoice, this month, so well within 6 years. Yes, the cause of the invoice was more than 6 years ago, but the limitations act does not limit such things, and the statute just makes the penalties part of the contract.

I don't know - may be interesting to find out and see what a judge says.

It also has odd issues if it is the case - the debt exists, in contract, we are just barred from using court to enforce it. If ever we owe them for something I see no reason we cannot offset against the debt we have, effectively using that as enforcement instead of court.

Either way, it is well worth making sure you don't leave you late payment charges too long, just in case.

P.S. An evil thought - they have a few services still. If they pay money the terms are clear it goes against oldest unpaid debt. Even if unenforceable via a court it is a debt, so the payments go against the late payment penalties, and leave the current invoices unpaid. Those recent bills can be enforced by court. Hmmm. Evil thought.

22 comments:

  1. This is correct, but I think you had to have decided to apply the payments against the debt from way back when, otherwise your accounting may be a bit skewed. I do wonder, you might be able to apply current payments against the historical debt, as long as they pay enough now to cover the debt, it would avoid the limitations act I think.

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  2. A judge may question why you let it go on so long without chasing them. Ignoring the debt until they cancel services sounds bad.

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  3. I would think that the cause of action is non-payment of a debt, not the raising of an invoice to document the existence of that debt.

    Also you're lucky that there is no VAT involved since otherwise they'd rightly point out that VAT invoices must be issued within 30 days of the date of supply.

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    1. You may be right. I suppose it may also depend on the terms of the contract.

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  4. It's an interesting question of law, certainly.

    Whilst I can't stand people that pay late (and have little respect for those will drag paying an invoice until the last possible moment), I can honestly say I don't think I would apply the charges in this case.

    I think it's fine to say "Look, we've not charged you late payments fees up until now, but we're going to start charging them from now on" or even "from last month" - but after (I assume) failing to mention or charge those fees for 6+ years I think it is a bit off to suddenly issue an invoice for the whole lot. (I'm unclear if they were even told their payments were late - you have no legal obligation to tell them.)

    I believe, technically, it also means you now need to consider going back and restating your last 6+ years accounts to companies house and HMRC - they are now incorrect as they had not included the amounts owed, and you have likely under paid corporation tax for the applicable periods. [though I think accountants often apply some rule about just applying "small" corrections in the current year instead.]

    We tend to follow a "Always do for other people everything you want them to do for you." principle. We generally pay invoices as soon as we get them (unless we have direct debits setup, which I wish more companies would support!), but we have on occasion messed up and paid an invoice a day or two late and have never been charged late charges.

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    1. Yeh, we take care to pay suppliers on time.

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    2. The HMRC point is interesting - you say you would not charge but if a commercial debt then the late payment penalties are an asset you have and you can collect on that (up to 6 years at least) so should be declaring it on your accounts as everyone else should.

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  5. True, albeit if we are clear that we are writing it off at the time we would not have to declare it.

    We have one customer who has an invoice that's almost 2 months overdue at the moment. We've not applied late fees (the customer is Swiss and for various reasons the contract is more vague on these points than our usual contracts, so I I'm not certain UK law would apply). The conversation so far has been a polite "We like working with you guys but we're rather worried about the lack of payment", but it could quickly escalate to the point where we fire them as a customer.

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    1. I presume your T&C's would say that UK Law would apply, in which case you can apply the late payment directive. It's a EU wide thing anyway for late payment interest.

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    2. Sadly not - for various reasons the customer's standard contract was used, which (surprisingly, given this is a very big corporate) doesn't specify a jurisdiction - so it would be one of UK or Swiss, and I don't believe the EU rules apply in Swiss law.

      It's not something that particularly bothers me enough to ask for legal advice on; we'll just specify the payment terms (which will likely now include that a substantial portion is paid prior to work commencing!) clearly on subsequent statement of works.

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    3. Re-read the contract and I'd missed a phrase that Swiss law applies.

      http://www.lexology.com/library/detail.aspx?g=fecf9b94-5418-469f-ac41-e4c291a6d740 suggests that the EU law applies to Swiss law too, so there is a definitely temptation there to invoice them for late payment.

      (sorry revk, I've rather strayed from your original point!)

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  6. I have an odd set of circumstances.

    After a customer had a rant at me that left me exceedingly miffed (due to his view of late payment was that "it is just the way business works and that I should just live with it if I want his custom"), he insisted (on a recorded phone call) that we "do not send" him these late payment penalties.

    I noted the wording - he did not ask for them not to be issued, just not to be sent, so I finished the phone call as diplomatically as I could.

    So I'm wondering that I should issue the late payment penalties on our books, but not send them (as specifically requested by the customer). Then if and when the customer leaves us, I could legitimately send the customer all of the late payment invoices (within the last 6 years).

    This way, if questioned by a judge as to why they were not sent over the years, I could submit the phone call as evidence of the request by the customer :)

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    1. Indeed - even this customer is paying the penalties up to 6 years. And I have seen plenty of other people do the same. Paying late is building up a liability even if the supplier is totally unaware that they can charge late payment penalties a later change of accountant or management or appointing of a liquidator could mean 6 years of penalties applied. I did have a case go to court and was asked why I waited so long - my answer was "I knew I had 6 years as per Limitations Act" and that seemed to be an acceptable reply to the judge!

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    2. Issue the late payment invoice, and just apply the next payment he gives you to that invoice until it is cleared, then apply against the next oldest invoice. Rinse, repeat until they are underwater and then sue.

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  7. I would have thought that it's easier just to refuse to supply a customer that persistently pays late even if there is the opportunity to collect late penalties. The amount of time taken to chase the penalties and attend court etc must surely not be worth the hassle.

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  8. Apart from a couple of accounts, the system is automated. Chasing is automatic for a lot. People get the message that they have to pay on time. Court is very rare.

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  9. boliston,
    "Just refuse to supply a customer that persistently pays late" is actually a harsher measure and is more hassle. Not less.

    My personal experience is that customers, like children, will pay late if they think they can get away with it. A Late Payment Penalty (LLP) is like a slap on the wrist, whereas refusing to supply your service is almost cutting your nose off to spite your face.

    You have a customer that consistently pays late with physical goods. Either they have it in their possession,so "Refusing to supply" has very little meaning here, whereas a penalty charge does.Or you refuse to supply them ever again - lost customer!

    You are supplying the customer with a service. When they pay late you cut off the service. The more they rely on the service, the more effect it has, but it can cause more "bad blood" compared to a simple charge (which can always be credited the first time after a stern talk).

    If I cut off a customers email,DNS or website service (or RevK with Internet service) due to an unpaid bill,then yes they'd probably pay it rather quickly, but they'd be a lot more annoyed than a £40 charge. As the service would be going down a lot in their eyes (regardless of the reason), they would probably move to a different service quicker than just receiving LLP's.

    I've not had anyone move service yet due to LLP's, just this one guy who thinks they shouldn't be sent to him. I've had a few people that say "this isn't legal" until you point out the (10 year old!) legislation to them.

    Lastly, "The amount of time taken to chase the penalties" is actually the amount of time taken to chase the original bill, which this charge is meant to cover the costs of. Attending court is a rarity, if you want to go that far (but the law is there and on your side)...

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  10. If a customer pays late it is reasonable to invoice them with a late payment fee - no problem there; this both discourages them from paying late and it covers your costs associated with (essentially) extending them a line of credit.

    However, waiting for this to mount up for years before invoicing seems completely unreasonable to me. The customer probably didn't even realise that this was happening (even if its buried in the T&Cs somewhere) and therefore didn't have the opportunity to take corrective action. IMHO suppliers have a duty to invoice in a timely fashion and there's no way I would pay a supplier something that they allowed to mount up over a period of years without bothering to inform me at the time.

    As for the 6 year limit: Invoicing for really ancient stuff would lead to situations where the customer has no way to know whether the invoice is correct or not since the paperwork from that era may have been destroyed (the HMRC recommend keeping personal financial paperwork for 6-7 years, for example. These days all my paperwork gets scanned and the electronic copies kept indefinitely, but there's no reason to expect everyone to do this).

    In my opinion, if a supplier doesn't bother to invoice within a year or supplying something then they obviously didn't want the money and it should be forfeit. Collecting stuff that *was* invoiced in a timely way but never paid, is, of course, a completely different matter. But again, a 6 year limit seems reasonable here simply so that all parties still have access to any relevant paperwork to prove/disprove the existence of the debt.

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    1. I suspect the HMRC recommendation is based around the limitations act. Fair or not, the 6 years is definitely allowed, and I suspect that beyond 6 years is not. The "didn't realise it is happening" argument is bogus though, as it does not even have to be in the T&Cs - being the law an all...

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    2. Correct me if I'm wrong, but I believe the legislation says that suppliers *may* charge for late payments, not that they *will*. If you don't get an invoice within a reasonable amount of time I think it's fair to assume that you're not being charged. Suddenly getting invoiced for 6 years' worth of amounted debt that you were never informed of at the time seems pretty unreasonable to me.

      The consumer credit act mandates that debtors are sent regular statements reminding them about the debt, and whilst (I don't believe that) late payment penalties are covered by the act, I don't see why the same should not be expected of any credit (including late payment penalty fees).

      (To be clear: I think late payers should be penalised. However, I'm fundamentally against "surprise" charges that mount up over long periods of time without anyone telling you that its happening - if you want to penalise a late payer, invoice them at the time, don't just sit on it for years and then surprise them)

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    3. The legislation makes late payment penalties a mandatory part of the terms of all commercial contracts. That is not optional. Obviously, if and when one pursues such a liability, and even how long one waits before doing so, is optional. This is no different to any debt that is owed. There is no need to "inform you of the debt" as the law informs you - you know the debt exists for every late paid commercial bill ever because you have to know the law. You would have to come to some specific and enforceable agreement after the fact of each debt to dispose of that liability. It is not a surprise, it is in the law and has been for a long time. As for whether up to 6 years later is allowed, that is where the limitations act comes it, it defines the limit.

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