Freelancers’ Questions: Are clients legally required to pay within 30 days?

Freelancer’s Question: Are there any details available on the apparently new law that requires end-clients to pay suppliers like us self-employed freelancers within 30 days?

Personally, I find having to wait a month to get paid for services I have already provided a little difficult. But knowing 30 days will be the absolute maximum wait to be paid for services rendered is slightly better. The reason I’m asking? I have three clients not paying invoices on time and each is blaming their own internal cashflow issues for not paying! Please help.

Expert’s Answer: Chancellor Kwasi Kwarteng announced a lot of different things at his Mini-Budget last month, but a new law dictating all organisations must abide by 30-day payment terms (and not a day longer), was not one of them!

Confusing, and not super-helpful for the self-employed

The existing law in the UK on when exactly a commercial payment becomes late is a little confusing. As you may know, 30 days is the default -- but there’s nothing in law to say an invoice must be paid within 30 days. Like I said, confusing – and perhaps not super helpful to freelancers.

Let’s unpick that a little more. Despite legislation being in place around late payment, the law says that payment terms agreed between parties take precedence.

The government recommends terms of 30 days for public authority payments, and a maximum of 60 days for private business transactions. Be aware that, in the recommendation, the government uses the unhelpfully vague term ‘must usually be’ paid.

What the government says...

These are therefore guidelines only, not law. The official blurb from the government states:

“You can agree a longer period than 60 days for business transactions - but it must be fair to both businesses.”

And predictably, perhaps, there isn’t much detail on what ‘fair’ to both businesses means, in practice.

Generally speaking when it comes to self-employed sole traders like yourself, if you agree longer payment terms at the start of an engagement -- and then try to claim it’s unfair to you at a later date, you’re not going to be arguing from a position of strength.

When does a freelancer's payment become late?

So it’s important to negotiate payment terms that suit your cashflow needs right from the very start of a contract.

Whether that’s 7 days, 10 days, 30 days or 60 days or any other period of time, the law is clear that a payment becomes ‘late’ the day after the agreed period expires.

If you haven’t agreed payment terms with a client, then the payment window defaults to 30 days by law. This only applies if there is nothing in your contract, in correspondence, or actually written on your invoices, specifying another period of time.

Act fast, and use the penalty charge options available

In terms of action to take once a payment does become late, we always advise freelancers and other self-employed people to act immediately. Get in touch with your client the day after the agreed (or default) payment period runs out to confirm when payment will be made. Be prepared to escalate if the delays continue.

The biggest weapon you have in recovering overdue money is your legal right to add late payment charges. This legal right includes interest, statutory fixed penalty costs and the ability to also recover “reasonable costs” incurred in you chasing the debt. These apply from day one of a payment being late, which is why you should act fast.

In terms of interest, you are entitled to charge what is known as ‘statutory interest’, or 8% plus the Bank of England base rate.

Strength in numbers: an example of how much the unpaid self-employed can claim

Based on the current BoE base rate of 2.25%, that’s 10.25% interest you can charge for an overdue invoice. For an overdue invoice of £1,000, that works out at £0.28p extra -- per day -- for every day the debt goes unpaid.

Fixed charges are applicable even if you don't incur any costs chasing the money you are owed. They are scaled (as below) depending on the size of the amount outstanding.

Again, you are legally entitled to add this charge the moment an invoice becomes overdue.

Up to £999.99 = £40, £1,000 to £9,999.99 = £70, £10,000 or more = £100

'Reasonable costs' often equate to getting a fair bit of help with your overdue invoice

As far as “reasonable costs” for debt recovery go, again the definition of “reasonable” is left open-ended in government guidance. But positively for those who want assistance, this does now leave the door open for freelance workers to seek the help of a debt collection agency or solicitor, given the freelancer knows they can now potentially claim the agency’s or solicitor’s costs back from the client.

Hopefully, it doesn’t get this far. Nine times out of 10 a nudge to a client telling them that a payment is late, together with a polite but firm warning that you intend to add interest and debt recovery charges to what they already owe, should be enough to shake them into paying. If not, don’t be afraid to seek outside assistance, especially as you can pass any costs on to your errant client.

The expert was Adam Home, senior collections manager at Safe Collections.