It can be extremely frustrating when you’re forced to recover debts from customers who refuse to pay or try to disappear without paying. It can even be damaging to your company in terms of affecting your cash flow and causing you major financial problems if the situation isn’t resolved in a timely manner. Once it has been resolved, you may, therefore, feel entitled to compensation due to the time and effort you’ve expended in recovering what you’re owed.
UK businesses can take advantage of late payment legislation to claim debt recovery costs on late payments. The Late Payment of Commercial Debts (Interest) Act of 1998 specifies that businesses can, among other things, claim reasonable costs of collecting payment when those costs exceed the compensation received.
Collecting debt recovery costs is not the same as collecting interest on late payments, though under the terms of the Act you are entitled to do that as well – the process for collecting both is much the same. All you need to do is notify the customer that you are charging them, rather than having to go through the courts. This may be an option to take later, though (see below).
If you wish to claim debt recovery costs on late payments, it also helps if you make your intentions clear in writing at all stages of your dealings with customers. You should include it in the terms and conditions of the contract you agree with them, as well as in the invoice you send. This ensures that customers cannot claim ignorance and delay paying you compensation as well.
The amount you can charge, however, is fixed depending on how much the original debt that you have recovered was.
|Amount of debt||Late payment costs you can charge|
|Up to £999.99||£40|
|£1,000 to £9,999.99||£70|
You have up to six years to claim your debt recovery costs, after which your legal right to claim expires.
Can my right to compensation for debt recovery costs be sold to a third party?
Like every other part of the debt, your right to compensation for debt recovery costs (if part of the original agreement) can be sold to a third party, who would then pursue the debt recovery costs along with any other total yet to be paid. Your part in the dispute would be finished.
Can I take the customer to court if they refuse to pay debt recovery cost compensation?
You can escalate your debt recovery cost claim through the courts in the same way that you would escalate a normal claim for payment. However, it is worth considering whether it is worth doing so, given the relatively small amounts you can claim. It should always be a last resort – explore all the options available before asking the courts to get involved.
If it will be relatively simple to collect debt recovery costs, by all means attempt to do so. However, if it will be added hassle just when you’ve managed to resolve the outstanding debt, think about whether the amount you’re entitled to will be worth chasing up.