For the most part, contractors invoice recruitment agencies and end clients on a regular basis and receive regular payments. This ensures that there is sufficient cash flow in the business to fund training, buy equipment and invest in the business’ future prosperity. If your new agency works on a self-billing basis for VAT, they will ask you to sign a self-billing agreement for your company. This is an administrative process that allows the agency to raise their own invoice for VAT purposes.
There are occasions where agencies and/or clients don’t pay and contractors are left with limited options to secure payments in a cost effective way. Here we discuss the options available, the likely costs involved and the commercial consequences behind each option.
As soon as you fear that your agency or client are unable to pay you within the period you have agreed, it is essential that you talk to them directly to establish the reason for the late payment.
If your initial enquiries uncover a problem with the payroll provider or bank used by the agency/client, you can seek reassurances from the agency/client that you will be paid within 7 days. It is also reasonable for you to ask your agency/client to refund any costs or charges you may incur as a direct result of not being paid on time. This may include any bank charges, late payment charges from utility companies or other costs that you incur and can evidence.
You can only reclaim any costs or charges that are reasonably foreseeable and directly incurred as a result of the agency/client’s failure to pay you on time. Seeking compensation for any potential damage to your credit rating which may affect your ability to apply for credit are unlikely to be recoverable as it is not possible to quantify these losses at this stage.
Some contracts may provide a right to claim interest on late payments. However, if your contract does not contain such a right, there is still hope…
In the absence of any contractual right, there is a statutory right for businesses to claim interest on commercial debts in the form of The Late Payment of Commercial Debts (Interests) Act 1998.
For contracts dated on or after 7th August 2002, all businesses can charge interest at a rate of 8% above the late payment reference rate.
Businesses using the late payment legislation should calculate the amount of interest using the debt + VAT but do not add VAT onto the interest itself.
| Period | Reference Rate | Interest Rate (Reference Rate Plus 8%) |
| 1st July - 31st December 2013 | 0.5% | 8.5% |
The compensation entitlement varies in accordance with the size of the debt.
| Size of unpaid debt | Sum to be paid to the creditor |
| Up to £999.99 | £40.00 |
| £1,000.00 to £9,999.99 | £70.00 |
| £10,000.00 or more | £100.00 |
Compensation is only charged once per outstanding debt, not each time it is chased and is only applicable for business-to-business transactions.
If you have unsuccessfully sought payment from the agency/client amicably through negotiations as discussed above, you may pursue payment through the courts.
Where the amount owing to you is uncontested, you can use a debt recovery process which is low cost, quick and easy to administer. However, this can only be used where there is no dispute as to the amount owed or the services provided.
You should think carefully before taking legal action against an agency/client as the interest, in addition to your legal fees, will increase the amount you are owed which will ultimately have an effect on your commercial relationship with the agency/client. This could affect their willingness to continue to use the services of your company in the future.
Where the debt is not disputed by the agency/client and they are clearly not in a position to make payment to you, you can file a Statutory Demand giving the agency/client 21 days to submit payment to you.
You will incur legal and court fees should you chose this avenue, but these can be recovered if you are successful.
However, a Statutory Demand will destroy any commercial relationship you may have with the agency/client, so you should consider this course of action very carefully.
Another word of warning here is that if you issue a Statutory Demand for payment where the debt is either disputed or there is no evidence that the agency/client is unable to meet its liabilities, you risk having to pay the agency/client’s costs in defending the process which may include costs incurred in bringing an injunction against you to prevent you from advertising the Statutory Demand or preventing you from pursuing the insolvency process any further.
It is an abuse of process to issue a Statutory Demand as a way of circumventing the normal debt recovery process and you will be criticised by the courts and subject to significant costs being awarded against you.
If you have followed items 1-4 above and have obtained a judgement from the court that the debt is payable, it is usual for payments to be made relatively quickly.
However, where the debt has not been settled within the period specified by the court, you can apply to the court for enforcement action to be taken. This may involve using Bailiffs to recover property up to the value of the debt, or orders for the agency/client to pay money into court to cover the debt owed.
Again, you are able to recover your costs incurred when instructing Bailiffs or obtaining orders from the court, but you should factor such costs into the debt you are owed as it is unlikely that you will receive a speedy payment from the agency/client where you need to take enforcement action against them.
