At present (1st September, 2005) the late payment interest rate is 9% pa (that is the current ECB rate of 2% plus the margin of 7%). That rate equates to a daily rate of 0.0247%. Penalty interest due for late payments should be calculated on a daily basis. The ECB rate can be checked on the Central Bank and Financial Services Authority of Ireland website www.centralbank.ie

Q1. Who do the Regulations apply to?

The Regulations apply to commercial transactions in both the public and private sectors. They do not apply to contracts made before 7 August 2002, claims for interest of less than €5, transactions with consumers or debts that are subject to other laws, e.g. insolvency proceedings.

Q2. What should I do now?

If you run a business, you should:

Review current payment practices. Make sure contracts are in writing as far as possible, and agree payment terms in advance that both parties will be happy with.

Agree a fair penalty interest rate for late payment and indicate the compensation you will charge if you were to collect late payment interest. Put both in the contract.

Ensure that a system is in place that will highlight unpaid debts before they become late and start to accrue penalty interest.

Q3. What is the interest rate and how do I calculate the interest charge?

Unless otherwise specified in an agreed contract, the penalty interest rate is the European Central Bank main refinancing rate plus 7 percentage points. The ECB rates in force on 1 January and 1 July apply for the following six months in each year. Only one rate will apply to a late payment - that is the rate in force on the payment date.

The interest rate in force on 1 July 2003 was 9% pa (that was and is the current ECB rate of 2% plus the margin of 7%). That rate equates to a daily rate of 0.0247%. Penalty interest due for late payments should be calculated on a daily basis.

To calculate the interest due on a late payment the amount of the debt should be multiplied by the number of days in excess of 30 for which the payment is late and by the daily interest rate in operation at the time.

For example

On a debt of €1000 that is outstanding for 55 days (i.e. payment is late by 25 days), the calculation is as follows; €1000 X 25 X 0.0247 = 6175 = €6.18

The purchaser settling the debt at that stage should pay €1006.18 plus compensation for recovery costs if applicable.

You may of course set your own interest rate and payment period in agreement with the purchaser.

Q4. Do I calculate inclusive or exclusive of VAT?

You should charge interest on the gross amount of the debt including any element of VAT.

Q5. How much compensation am I allowed and how do I claim it?

Compensation may be claimed for the recovery costs of the debt if such costs arise. The Regulations provide that the following 'Flat Rates' can be used:

Q6. Can the purchaser wait until the supplier claims late payment interest before paying it?

The Purchaser should pay the interest without being asked or else risk legal proceedings.

Q7. What is the relationship between late payment interest and compensation for recovery costs?

If late payment interest is payable in respect of a payment the supplier is also entitled to compensation for recovery costs as outlined in the schedule to the Regulations. The supplier should inform the purchaser that recovery costs have actually been incurred before the purchaser pays compensation as requested However, the supplier is not required to cite evidence of having incurred recovery costs.

Q8. How should I inform purchasers that they will be charged interest and/or compensation for recovery costs if they pay late?

You should inform your purchasers that interest and compensation for recovery costs will be charged on late payments under the new Regulations in much the same way as you would normally remind them that payment is due within a specified time limit. In general it is recommended that you be 'up front' with the terms and conditions of trade.

If you are a supplier who has been paid late for a commercial transaction you are now legally entitled to be paid interest on the amount outstanding and compensation for debt recovery costs. It is a matter for a supplier to decide how, or if, they wish to recover a debt, including any late payment interest or compensation associated with it.