Writing Off Bad Debt: When to Walk Away

‍‌​​​​‌​‌​‌‌​‌‌​​‌​​​‌‌‌‌‌​​​‌‌‌‍For a limited company, chasing debt is the same game as for a sole trader – just with a bit more distance between you and the money. You still get 8% + base rate interest, fixed fees per invoice, and a clear court route if they won't play ball.

This is for when your limited company has done the work, sent the invoice, and another business hasn't paid. The key law is still the Late Payment of Commercial Debts (Interest) Act 1998, plus normal court rules on pre-action conduct.

This is general guidance only and is not legal advice. Always get proper legal advice before sending formal letters or issuing court proceedings.

1. WHEN YOUR COMPANY CAN USE THE LATE PAYMENT ACT

Your company can use the Late Payment Act when:

• The debt arises under a commercial contract for supply of goods or services.
• The debtor is a business or public authority (not a pure consumer).
• The contract doesn't already give a fair ("substantial") remedy for late payment – e.g. a sensible contractual interest clause.

If the Act applies, your company can claim:

Statutory interest:

• 8% above the Bank of England base rate ("official dealing rate").
• Runs from the day after the payment became late until it's actually paid.

Fixed compensation per invoice:

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

Additional reasonable recovery costs if your real costs are higher than the fixed sum.

The right to statutory interest and compensation is automatic if the Act applies – you don't need to write it into the contract.

2. WHEN IS THE INVOICE OFFICIALLY LATE?

Government guidance says:

• If you agreed a payment date, it must usually be:
  • Within 30 days for public authorities.
  • Within 60 days for business transactions, unless a longer period is agreed and is fair.
• If you didn't agree a date, payment is normally late 30 days after:
  • The customer receives the invoice; or
  • You deliver the goods/provide the service (whichever is later).

Once it's late you can:

• Start charging statutory interest at the 8% + base rate, using the correct reference rate for when interest started.
• Add the fixed compensation per invoice and, where justified, extra recovery costs.

There are online calculators (e.g. Small Business Commissioner's interest calculator) that help you get the numbers right.

3. PRACTICAL CHASING STEPS FOR A LIMITED COMPANY

Confirm the basics

• Who owes you? (Company/LLP/sole trader?)
• What's the contract? (PO, T&Cs, email trail.)
• What's the due date and how far past it are you?

Calculate interest and compensation

• Principal debt: £[amount].
• Statutory interest:
  • 8% + reference base rate for the period starting the day after the invoice became late.
• Fixed compensation per invoice: £40/£70/£100 depending on size.
• Any additional reasonable recovery costs (e.g. external debt collector fees) if above fixed sums.

Send a firm "commercial" chaser Short letter/email from "Accounts":

• Lists invoices, due dates, total outstanding.
• Warns that statutory interest and late payment charges are being applied under the Late Payment Act.
• Gives a short deadline (e.g. 7 days) before you escalate.

Then a formal Letter Before Action If they still don't pay or respond sensibly, send a straightforward Letter Before Action:

• Sets out the debt and interest/charges.
• References the Late Payment Act (if applicable).
• Gives a clear final deadline (usually 14 days) before you issue a claim.

Issue proceedings if needed

• Money Claim Online / County Court for most routine debts.
• For larger undisputed company debts you can also consider a statutory demand / winding-up threat, but that's heavy artillery and needs proper advice.

4. USING STATUTORY INTEREST INTELLIGENTLY

The 8% + base rate is deliberately chunky – it's meant to be a deterrent.

Good ways to use it:

• As leverage: you calculate interest and fixed sums, tell them what it adds up to, and offer to waive part of it if they pay the principal now.
• As a floor: if they want time to pay, you can use interest as a bargaining chip in a settlement or payment plan.

But:

• If your contract already has a fair interest clause, you may not be able to stack statutory interest on top – you'll be stuck with the contract rate.
• Courts expect you to be realistic – don't use penalties or obviously unfair deals; it can backfire on costs.

5. WHEN YOUR COMPANY SHOULD BRING IN A SOLICITOR

Good times to get help:

• The debt is large (say £10k+).
• There are rumblings of a counter-claim or quality dispute.
• You want to use heavier tools (statutory demand, winding-up petition) rather than just small claims.

A litigation/commercial lawyer can:

• Check whether the Late Payment Act definitely applies and whether your contract has "contracted out" with a substantial remedy.
• Draft a sharp Letter Before Action that often unlocks payment without going to court.
• Help you choose between small claim, fast-track claim or insolvency tactics.

This page is guidance only and does not constitute legal advice. Using it does not make us your legal adviser. Always get advice from a qualified solicitor before starting formal debt recovery as a company.

What to do next

• Calculate the total owed: principal debt, statutory interest (8% + base rate), and the fixed compensation per invoice (£40/£70/£100).
• Send a firm "commercial" chaser from Accounts listing invoices, due dates, and total outstanding · warn that statutory interest is being applied.
• If they still don't pay, send a formal Letter Before Action giving a clear final deadline (usually 14 days).
• For routine debts, issue a claim through Money Claim Online or County Court. For larger undisputed company debts, consider a statutory demand (with legal advice).
• Get a litigation solicitor involved if the debt is large (say £10k+) or there are rumblings of a counter-claim.

Sources

• Late Payment of Commercial Debts (Interest) Act 1998 · statutory interest at 8% above base rate, fixed compensation, and recovery costs
• Late Payment of Commercial Debts Regulations 2013 · updated rules on maximum payment terms and recovery costs
• Insolvency Act 1986 · statutory demands and winding-up petitions for undisputed company debts

This topic is sponsored by The Online Accountant.

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