Late-payment clauses: interest, payment terms and overdue invoices

A late-payment clause explains what happens when a customer does not pay an invoice on time. It may set an interest rate, allow recovery costs, restrict set-off, permit suspension, or define when an invoice becomes due. For a small business, those details can matter as much as the headline price: a profitable sale can still create a cash-flow problem if payment is delayed for months.

This article is general information, not legal advice. It focuses on business-to-business contracts in England and Wales. Consumer, construction, public-procurement and insolvency rules may produce different results.

When is a business payment late?

Start with the contract. A payment clause should identify:

• when the supplier may issue an invoice;
• what information makes an invoice valid;
• the payment period, such as 14, 30 or 60 days;
• whether time runs from the invoice date, receipt, delivery, acceptance or another event;
• how invoice disputes must be raised; and
• whether the customer may withhold or set off amounts it says are owed.

Under the current statutory regime, an agreed payment date must usually be within 30 days for a public authority or 60 days for a business transaction. Businesses can agree a period longer than 60 days, but it must be fair to both businesses. If no payment date is agreed, GOV.UK states that payment generally becomes late 30 days after the customer receives the invoice or the supplier delivers the goods or provides the service, whichever is later.

Official guidance: Late commercial payments: when a payment becomes late.

Statutory interest on late commercial payments

The Late Payment of Commercial Debts (Interest) Act 1998 gives suppliers a statutory interest regime for qualifying debts arising from commercial contracts for goods or services.

The statutory rate is 8% a year above the Bank of England base rate. It is simple interest, calculated for the period the qualifying debt remains unpaid. Because the base rate changes, check the applicable rate rather than copying an old worked example.

GOV.UK states that statutory interest cannot be claimed where the contract provides a different interest rate. The contractual remedy therefore needs to be read carefully: a low contractual rate may replace a more valuable statutory entitlement, while badly drafted wording may create uncertainty about which regime applies.

A clause might say:

Interest will accrue on overdue undisputed amounts at 4% per annum above the Bank of England base rate, calculated daily from the due date until payment.

Check whether the clause applies only to undisputed sums. That wording may be sensible where there is a genuine invoice dispute, but it can also encourage a customer to label an invoice “disputed” without promptly explaining why.

Fixed compensation and recovery costs

For qualifying late commercial payments, a supplier can generally claim a fixed recovery sum in addition to statutory interest:

| Amount of debt | Fixed sum | |---|---:| | Up to £999.99 | £40 | | £1,000 to £9,999.99 | £70 | | £10,000 or more | £100 |

The fixed sum applies once for each qualifying payment, not once for every reminder sent. GOV.UK also states that a supplier can claim reasonable recovery costs. Whether particular internal, agency or legal costs are recoverable will depend on the statutory rules and the facts.

Official guidance: Claim debt recovery costs on late payments.

Clauses that delay the real payment date

A contract can say “30 days” while still producing a much longer wait. Look for provisions that delay when the clock starts:

• Invoice prerequisites. Payment time may not begin until an invoice includes a purchase-order number, timesheets, acceptance records or other documents.
• Customer acceptance. The customer may control when work is treated as accepted, especially if the criteria or review period are vague.
• Pay-when-paid wording. A supplier may be told it will be paid only after its customer receives money from someone else. Special rules apply in construction contracts, and the commercial risk is serious in any sector.
• Dispute notices. The customer may be able to dispute part of an invoice and withhold all of it.
• Set-off rights. The customer may deduct alleged losses under this or another contract before paying.
• Payment runs. Wording tied to a monthly payment cycle can add weeks after the stated approval date.
• Portal requirements. An invoice emailed to the usual contact may not count if the contract requires submission through a procurement system.

The practical question is not only “How many days are the payment terms?” It is “What must happen before day one begins?”

Can a supplier suspend work for non-payment?

Do not assume that an unpaid invoice automatically gives a supplier the right to stop work. Suspension may itself breach the contract unless the agreement or applicable law permits it.

A workable suspension clause usually addresses:

1. whether only undisputed overdue sums trigger the right;
2. whether the supplier must first give written notice;
3. the length of any cure period;
4. which services may be suspended;
5. whether charges continue during suspension; and
6. what happens if non-payment continues.

For a customer, immediate suspension of a critical service may be disproportionate. For a supplier, continuing indefinitely while arrears grow may be commercially unsafe. The clause should create a clear escalation route rather than leave both sides guessing.

A practical late-payment checklist

Before signing, check:

1. When can the invoice be issued? Tie invoicing to a clear milestone or recurring date.
2. What makes it valid? Avoid avoidable rejection based on missing administrative details.
3. When does payment time start? Distinguish invoice date, receipt, delivery and acceptance.
4. How long is the payment period? Model the actual cash-flow effect, not just the legal wording.
5. What interest applies? Compare the contractual rate with the statutory regime.
6. Can recovery costs be claimed? Check both the contract and statutory rights.
7. How must disputes be raised? Require prompt detail and payment of any undisputed balance.
8. Is set-off allowed? A broad cross-contract set-off right can make payment unpredictable.
9. Can performance be suspended? Check notice, cure periods and operational consequences.
10. What records will prove the debt? Keep the signed contract, order, delivery evidence, invoice and communications.

Proposed reforms are not yet current law

As at 26 July 2026, the Commercial Payments Bill [HL] was still before Parliament and had not received Royal Assent. It proposed significant changes, including maximum payment terms and stronger rules on statutory interest and late invoice disputes. Those proposals should not be treated as current law unless and until the legislation is enacted and the relevant provisions are brought into force.

Current bill status: Commercial Payments Bill [HL].

A strong late-payment clause cannot guarantee prompt payment. It can, however, remove ambiguity, preserve useful remedies and make it harder for administrative processes to turn a 30-day term into a 90-day wait.