Late payment as a freelancer: How to fight unpaid self-employment

Of all the occupational hazards freelancers and the self-employed face, clients not paying on time has to be the most demoralising and potentially the most financially-damaging, writes Adam Home, senior collections manager at Safe Collections.

Late payment: an age-old but massive menace

Late payments are rife. Three in five small businesses in the UK say they are owed money from overdue invoices. And according to another study, SMEs waste 56.4million hours a year chasing these debts!

Being paid late has an enormous debilitating impact on productivity and cashflow as a self-employed sole trader. If you don’t get paid on time, it easily leads to you not being able to pay your own bills. A staggering 400,000 small traders are in danger of being forced to close as a direct result of issues caused by late payments, according to the Federation of Small Businesses.

Even more sobering, one in four freelancers are actually considering quitting self-employment because of persistent problems with late payments.

But what is important to remember -- or to learn if you are new to freelancing -- is that you don’t need to take late payments lying down.

How to use anti-late payment law

The law is on your side. Agreed payment terms are treated as a legally binding contract between parties.

And if a client fails to stick to those terms, there are remedies you are entitled to take.

Here is a quick rundown of late payment law in the UK.

Late payment law timeline for freelancers and sole traders

The first legislation on late payments was passed in 1998.

The Late Payment of Commercial Debts (Interest) Act gave businesses the power to charge interest on an overdue payment at a rate of 8% plus whatever the Bank of England base rate was at the time.

Interest is added for every day the debt is late and The Small Business Commissioner has a calculator you can use to calculate the interest.

The legislation was updated in 2002 to introduce 'statutory compensation' for any late payment. The fixed sums that can be charged to a debtor who fails to pay on time vary according to the amount owed.

Then, the law was amended again in 2013, adding a provision for suppliers to charge for 'reasonable costs' incurred in chasing the debt.

So as things stand, if a client doesn’t pay on time, you are entitled in law to seek compensation from them in three ways -- by charging interest on the overdue amount, by applying a fixed sum penalty charge, and by adding costs you have incurred in chasing the debt (if there are any).

When does a payment become late?

A payment is legally classified as late if it hasn’t been paid the day after the agreed payment terms expire.

The law leaves it up to suppliers (like self-employed freelancers) and clients to agree payment terms between themselves.

However, a further amendment in 2018 set out a process for suppliers to challenge terms that were deemed ‘grossly unfair’, to combat the habit that big businesses have of insisting on long payment terms -- sometimes stretching to several months!