Whether you are a business or an individual, when money is owed to you there's usually a clear deadline specified for when payment is expected to be made. For example, your business invoices will have a payment period detailed on them, and if you've loaned money to a friend then you will have an agreed repayment date or schedule.
But if this date passes and no payment has been forthcoming, can you claim interest on the money owed to you?
Can I charge interest on money owed?
Your legal right to charge interest on an outstanding debt depends on a few factors which we'll cover in this guide. These include:
Interest on business debts.
The ability to charge interest on an overdue invoice or order will depend on the status of your customer and the contractual terms you have agreed that deal with any late payment. If you have a contract in place that contains a provision or clause for interest to be charged, then this should be sufficient to add interest to the overdue amount at the agreed rate.
If there is no specific contract in place with your customer that dictates interest charges, you may still be able to claim interest via legislation known as the Late Payment of Commercial Debts (Interest) Act 1998 if your customer is also a business (limited company, sole trader etc.).
Late payment of commercial debts.
This late payment legislation permits you to charge 8% interest plus the Bank of England base rate on overdue debts owed by your business customers (B2B). You can begin charging interest as soon as payment becomes overdue, and if no payment date was documented or agreed payment is classed as late 30 days from the customer receiving your invoice or delivery of the service/product.
There are some exceptions and additional items that can be claimed as part of this legislation, so please read our full guide on claiming interest on unpaid invoices. Alternatively you may wish to instruct business debt recovery solicitors who will be able to calculate your late payment interest and compensation entitlement on your behalf.
Business to consumer debts.
If the customer whose payment is overdue is an individual and not a business, there is no statutory right to charge interest on the amount. So, unless you have an agreed contract or terms of business in place that specifies additional charges will be made in the event of late payment, no interest is able to be added to the debt until court proceedings are started.
When dealing with debts incurred by consumers (and sole-traders) it is also important to comply with the Pre-Action Protocol for Debt Claims. Failure to do so before commencing court proceedings may result in sanctions being imposed on you, likely in relation to court costs.
Quick Reference - Interest on Debt Claims
* Based on statutory annual interest entitlement and the base rate, details correct as at December 2020.
Interest on personal debts.
If you are owed money as an individual such as through a private sale, shared bills or a personal loan, there is no entitlement to claim interest on the debt unless you have a signed contract or agreement that permits it.
For example, in the case of lending money ideally you will have documented the arrangement in a loan agreement which should have a provision for any interest and what occurs in the event of the borrower defaulting on their repayments.
Without a written contract interest is not able to be added to a personal debt prior to court proceedings being started.
Interest on court claims.
Regardless of the status of the debtor and the absence of a right to contractual interest, if you get to the stage of issuing a court claim to recover the debt, interest will often be able to be added to the amount owed.
Section 69 of the County Courts Act 1984 permits interest to be added to most non-commercial debts at the rate of 8% per year. This is a statutory interest rate and you can usually claim it from the date the debt was due up to the date you issue the claim.
At the point of issuing court proceedings, other court fees and costs can also be added to the amount that is being claimed. However note that as with any other element of a claim, interest is awarded at the discretion of the court.
The applicable interest is just one of the items that needs to be considered and calculated as part of a court claim for a debt. Therefore, it is always advisable to seek early legal advice if you are contemplating pursuing a substantial debt.
Catalyst Law are team of legal professionals with over 20 years' experience helping businesses and people with their legal problems.
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