From August 8 UK businesses will benefit from new European legislation. The new Directive was introduced by the European Commission on June 29, 2000 and, following a two-year consultation period, will be introduced to help reduce the incidence of late payment throughout the European Union.

The new legislation will complement the UK’s existing Late Payment of Commercial Debts (Interest) Act, which was introduced on November 1, 1998. The Act was to have been phased in in three parts and, at each stage, the range of businesses and organisations that could use it has been widened.

The first phase in November 1998 gave small businesses a statutory right to claim interest from large businesses and the public sector on debts incurred under contracts agreed after that date. In November 2000, the second phase allowed small businesses the additional right to claim interest from other small businesses on debts incurred under contracts agreed after that date.

The third and final phase was due to be implemented in November 2002, to allow all businesses and the public sector the right to claim interest from all other businesses and the public sector.

The EC Directive will bring forward this final phase thereby giving all businesses, regardless of size, the right to claim interest on late payment. It also has additional benefits including:

  •  A statutory right to interest at a rate of at least 7% over the European Central Bank base rate for euro area countries. European countries outside the euro area will use their own national bank rate. The UK will continue to add 8% to the Bank of England‘s base rate;

  • The right to reasonable compensation for debt recovery costs incurred as a result of late payment;

  •  Grossly unfair terms and conditions can be challenged where these undermine the terms of the legislation.

    Critical importance

    The EC Directive was introduced after the European Commission and parliament recognised the critical importance of the late payment problem to small- and medium-sized businesses. An extensive consultation conducted by the Commission during 1993 found that there was an increase in the number and seriousness of delays in payments causing problems among these businesses. The implications for businesses’ cash flow requirements and administrative costs were among many of the concerns expressed. The Commission felt it was vital, for both the competitiveness of businesses and for the success of the internal market, that reasonable payment periods should be maintained throughout the EU.

    Upon the invitation of the European parliament, the Commission created a Recommendation which aimed to establish common minimum guarantees for all businesses operating within the EU – which included the right to claim interest on late payment and right for the creditor to be compensated for the cost of pursuing debts. The European parliament called on the Commission to transform the Recommendation into a Directive in 1997 following further consultation which revealed wide support. The Directive was then adopted in June 2000.

    It is hoped that the EC Directive will provide UK exporters with greater certainty in their trading activities with other EU countries.

    Practice makes perfect

    The Better Payment Practice Group was formed in 1997 as a partnership between the public and private sectors. Its aim is to improve the payment culture of the UK business community and reduce the incidence of the late payment of commercial debt. This is being achieved through the delivery of a package of measures, including:

  • A Better Payment Practice Code, outlining the principles of good payment procedures, with a logo which businesses will be able to use if they adopt the Code, accompanied by a major cam-paign to highlight the economic reasons for paying on time.

  • Support for the publication of private and public sector payment performance tables.

  •  An extensive education campaign to help businesses with late payment problems, including free guides on credit management, a website with credit management and debt recovery information and national seminar programme on credit management.

  • Promoting awareness of the Late Payment of Commercial Debts (Interest) Act.

    A full list of signatories to the Better Payment Practice Code can be found on the campaign website www.payontime.co.uk.