In a recent post, we explored the pros and cons of taking out invoice protection insurance, in the context of Irish businesses facing a surge in overdue or unpaid invoices.
Late payments now affect an estimated 58% of all B2B invoices, putting businesses under considerable cash flow pressures. The fact that Ireland now ranks in the top 5 worst countries in Europe for late payments has understandably triggered calls for the government to step in and take action.
But in the meantime, what can you actually do if an invoice isn’t paid on time?
Whatever your stance is on whether you think the rules on late payments are robust enough, the law is very much on the creditor’s side. EU law, in fact.
Under the terms of the European Communities (Late Payment in Commercial Transactions) Regulations, businesses are entitled to charge interest on overdue payments and claim compensation for any recovery costs incurred. These entitlements are activated as soon as the agreed payment deadline passes. You don’t need to send reminder letters before charging interest or compensation, and you don’t need to prove you have incurred any costs in recovery. It’s an automatic entitlement.
When does an invoice become overdue?
Agreed payment deadlines are those set out in the payment terms in a contract between two parties. An invoice becomes overdue the day after the specified period lapses. In practice, many contracts don’t specify payment terms or deadlines. In that case, a standard payment period of 30 days applies. This is usually 30 days after the invoice is received, switching to 30 days after the provision of goods or services if the invoice is sent in advance.
For contracts with public authorities, 30 days is the maximum payment period allowed. Terms that allow for payment 60 days or more after the delivery of goods and services must be expressly agreed in the contract, and meet the standard of not being ‘grossly unfair’ to the supplier. Businesses are entitled to challenge any terms they believe are grossly unfair.
How much interest and compensation can you charge?
Late payment interest is charged at 8% above the European Central Bank’s reference rate (currently 4.5%). To calculate the interest payable, you multiply the total amount owed by the number of days late, and then multiply again by the daily statutory interest rate (12.5% or 0.125 divided by 365). So for a €1000 invoice that was 30 days late, you could levy interest of €10.27 (1000 x 30 x 0.0003424658).
Late payment compensation is payable at a fixed rate depending on the amount owed – €40 for debts up to €1000, €70 for debts between €1000 and €9999, and €100 for amounts of €10000 and over.
What happens if an invoice remains unpaid?
Where suppliers complain that the rules are not clear or robust enough is on how you go about securing payment of interest or compensation – or dealing with a client that refuses to pay an invoice outright.
The guidelines suggest that you should not issue a new invoice with interest and compensation added, but simply inform a debtor that they now owe you the extra on top of the invoice due.
But this runs into practical difficulties when you consider that the amount of interest added on top changes with each passing day. Most accounts departments are simply not set up to process payments in this way.
Statutory support for anyone faced with a client who refuses to pay an invoice is similarly vague. If the invoice is disputed, the regulations state that “the onus is on you to resolve the dispute.” In practice, this usually means contacting the client informally, and then formally in writing if necessary, asking for the reasons for non-payment, and whether you can discuss a resolution.
If you are satisfied that a client has no grounds for withholding payment, you can appoint a debt collection agency to take it up on your behalf. But ultimately your only legal recourse is to make a claim through the District Courts (for sums up to €15000) and have the dispute settled before a judge. Note that this is very likely to cost more than the late payment compensation rates.
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