Interest on Late Payments

5. Calculating the Interest

Calculating the interest due is a straightforward, step-by-step process.

5.1 Calculate what the interest would be for a full year, by multiplying the amount owed by the total rate of interest (base rate plus 8 per cent).

• For example, if the debt is £1,000 and the base rate remains at 4.5 per cent from the six month period when the debt became late, then the interest would be £1,000 x 12.5 per cent = £125.

5.2 Calculate the daily interest by dividing the annual interest by 365.

• For example, the daily interest on this £1,000 debt is £125 ÷ 365 = 34p.

5.3 Calculate the interest due by multiplying the daily interest by the number of late days.

• For example, if the £1,000 debt were paid 30 days late, you could charge 34p x 30 = £10.27.

5.4 If there is no specific agreement to indicate otherwise, any part payment will go towards reducing the interest before it starts to be applied to reducing the original debt.

• For example, if you received payment of £1,000 in respect of the £1,010.27 now being charged, the amount outstanding would be £10.27 of the original debt.Interest on the £10.27 would continue to accrue.

5.5 The amount outstanding changes on a daily basis. Be practical, as payer or payee, about settling the debt.

• For example, agree that if the debt is paid within one week, then no further interest will be charged.

5.6 Your VAT position is unaffected. You charge interest on the gross amount of the debt (including any element of VAT), but you do not pay VAT on this interest.

Nor do you pay VAT on any debt-recovery costs you claim.

• In the example in 5.1 (above), the original £1,000 debt may be made up of £851.06 plus £148.94 VAT.