EU Late Payment Directive

17 October 2012

The EU Late Payment Directive was originally brought into UK law in 1998 by way of the Late Payment of Commercial Debts (Interest) Act.  It was designed to standardise the right to claim late payment interest on overdue commercial debts throughout all member states.

The scope of the Directive is now being extended (2011/7/EU) and must be implemented by each member state by 16 March 2013.  Last month the UK government issued a consultation paper in preparation for the change in law.

What does it mean for the UK?

The main points of the Directive are as follows:

  • Payment terms for business-to-business transactions should not exceed 60 days, unless otherwise expressly agreed in a way which is not considered ‘grossly unfair ‘to the supplier.  This is likely to mean that buyers cannot simply change their standard terms of business to allow for longer payment terms.  It will also be interesting to see how the ‘grossly unfair’ restriction will be policed;
  • Public authorities will be required to pay suppliers within 30 calendar days of receipt of an undisputed invoice – although certain exceptions (e.g. the healthcare sector) may be allowed.  This is consistent with the Government’s current best practice for the public sector;
  • It retains current UK practice that where specific payment terms have not been agreed, a default of 30 days (from date of invoice) will be assumed; and
  • Should a supplier charge interest for late payment, a minimum entitlement of €40 will apply.  Under existing legislation, there are three levels of compensation according to the value of the debt due.  As before, the supplier will also be able to claim for ‘reasonable’ debt recovery costs.

It is our expectation that the new legislation will not apply retrospectively to contracts agreed prior to 16 March 2013.

How will this affect Corporate Treasurers?

  1. Companies which have previously had to extend their customers’ payment terms beyond 60 days will now have an opportunity to benefit.  This is particularly relevant for UK companies selling to customers in southern Europe, where long payment terms have been the norm.  In sectors where formal contracts are commonplace, payment terms will have to be negotiated as before.  But where products and services are provided on more informal terms, suppliers will have a much better opportunity to limit the terms to 60 days or less.
  2. For companies which have enjoyed long payment terms from their suppliers, it will now be more difficult to maintain them.  In particular, companies offering supply chain finance facilities (typically in return for longer payment terms) will certainly need to consider how they approach the new restrictions.
  3. Within very short timescales companies will need to make sure they are compliant with the new legislation.  This will need careful planning and may involve significant administrative costs – especially if they are not ready.

It’s important that Corporate Treasurers assess fully the impact of this new legislation and decide how they will respond.  Until the consultation period is completed and the Government provide its final response, there are still a number of outstanding points on exactly how the proposed measures will be implemented in the UK.

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