Decide what you're charging first: statutory interest and fixed compensation, which apply to every business invoice by law, or a late payment rate your customers agreed to in your terms, but not both. Then set the rules once (due date, grace period, exceptions) and let your payment software add the charge to overdue invoices and update the amount as interest builds. Late fees only apply to business customers.
In this article
The short version
- Decide your route first: statutory interest and compensation, or a contract rate, not both.
- Late fees under the Act apply to business customers only.
- Set the due date, grace period, exclusions and reviewer once, and apply them to everyone.
- With Adfin, the payment link updates as interest builds; you receive the interest and Adfin the fixed compensation.
- Keep waivers and hardship calls for a person, per customer.
What you can charge automatically
Automating a charge doesn't make it enforceable, so start with what you're entitled to. For business customers you've got two options.
The statutory route needs nothing in your terms. Under the Late Payment of Commercial Debts (Interest) Act 1998, any late business invoice carries interest at 8% above the Bank of England base rate (11.75% a year for invoices that go late before 1 January 2027), plus fixed compensation of £40, £70 or £100 depending on the invoice amount. It's the easiest route to automate, because the rules are the same for every customer.
The contractual route means charging a late payment rate or fee set out in terms your customer agreed to before the work. If you agree your own interest rate, it replaces statutory interest, so your system should charge one or the other, never both. A flat late fee of your own design has to be proportionate to your interest in being paid on time, because a charge that's out of all proportion can be unenforceable as a penalty.
Two more points before you switch anything on. Late fees under the Act only apply to business customers, so private individuals need to be excluded. And HMRC treats late payment interest as outside the scope of VAT, so you don't charge VAT on it. A flat fee of your own is less clear-cut, so ask your accountant how to treat it.
The rules to set before you switch it on
The point of automating is that every customer is treated the same way on the same day, so decide these once and write them down:
| Setting | What to decide |
|---|---|
| Due date | The date in your terms, or 30 days after the customer receives the invoice if you agreed none |
| Grace period | How many days after the due date before the charge starts |
| What's charged | Statutory interest and compensation, or your contract rate |
| Who's excluded | Consumers, plus any business customers you've decided to exempt, with the reason recorded |
| How it's shown | A separate interest invoice or an updated payment link, so the customer can see what's the debt and what's the late fee |
| Who reviews | Anyone who should see a charge before it goes out, for example on large invoices |
A short grace period helps. Payment runs often land a day or two either side of a due date, and a grace period keeps the charge for genuinely late payments and is likely to cut down the emails asking why a fee appeared.
Tell customers before you start. A line on your invoices and in your terms saying you charge statutory interest on late payments won't change what you're owed, but customers who know the fee will arrive have a reason to pay before it does.
How automatic late fees work in practice
Adfin applies statutory late payment interest and fixed compensation to overdue business invoices automatically, from the due date or after the grace period you set. Instead of raising a second invoice, the payment link your customer already has updates as the interest builds. On a £2,000 invoice, that's about 64p a day, or £19.32 after 30 days.
You can waive late fees for any individual customer and switch them on or off per customer alongside chasing and statements. Every payment, including the late fee, is matched back to the invoice and synced to Xero or QuickBooks, so there's no extra line to reconcile by hand.
Be clear on where the money goes. When a customer pays a late fee this way, you receive the interest and Adfin receives the fixed compensation, as its pricing page sets out. Automatic late fees are part of the enhanced credit control option, which costs 0.3% per paid invoice, only when used.
The fees sit alongside chasing: collection agents follow up overdue invoices over email, SMS and WhatsApp on the schedule you set, within rules you approve, so the fee and the reminders come from the same place.
What to keep for a person
Some decisions don't belong in a rule. A customer who's paid on time for six years and slips once, someone who rings to say they're in difficulty, or a dispute about the work itself: those calls are better made by someone who knows the relationship. It helps to agree in advance who makes them and how quickly.
When one of those comes up, pause reminders for that customer or waive the fee on their account instead of switching the whole system off. Everyone else keeps getting the same treatment.
Common questions
Can I add late payment fees to invoices automatically? Yes, for business customers. Statutory interest and fixed compensation apply to late business invoices by law, so software can add them using rules you set.
Do I need a late fee clause in my terms? Not for statutory interest and compensation on business invoices. A late fee or rate of your own needs a term your customer agreed to before the work.
Can I charge statutory interest and my own late fee together? No. If you charge your own contractual interest rate, it replaces statutory interest, so set your system up for one route.
Should I use a grace period? It usually helps. Payments often land a day or two either side of the due date, and a grace period keeps the charge for genuinely late invoices.
Is VAT charged on late payment interest? No. HMRC treats late payment interest as outside the scope of VAT. Check a flat fee of your own with your accountant.
Can I apply late fees to consumers? Not under the Late Payment Act, which covers business customers only. Adfin's late fees are for business invoices.
Sources
- legislation.gov.uk - Late Payment of Commercial Debts (Interest) Act 1998 (accurate as of October 2026) https://www.legislation.gov.uk/ukpga/1998/20/contents
- GOV.UK - Late commercial payments: interest on late commercial payments (accurate as of October 2026) https://www.gov.uk/late-commercial-payments-interest-debt-recovery/charging-interest-commercial-debt
- HMRC - VAT Supply and Consideration manual, VATSC06810 (accurate as of October 2026) https://www.gov.uk/hmrc-internal-manuals/vat-supply-and-consideration/vatsc06810
- Supreme Court - Cavendish Square Holding BV v Makdessi; ParkingEye Ltd v Beavis (accurate as of October 2026) https://www.supremecourt.uk/cases/uksc-2013-0280
- Adfin - Pricing (accurate as of October 2026) https://www.adfin.com/pricing
- Adfin - Credit control (accurate as of October 2026) https://www.adfin.com/credit-control
