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Part 3 of 7 · Late payment interest claimer series ~5 min read

The rate, and the date it was fixed on

This is the smallest rule in the system and the one most reliably got wrong, because the wrong answer is the intuitive one. Applying today’s rate to an old debt feels obviously right and is obviously wrong the moment you write down why the rule exists.

Key takeaways

  • The rate is base rate plus eight percentage points.
  • The base rate is the one in force at the reference date, not today’s.
  • There are two reference dates a year and each governs the following six months.
  • Once a debt is late, its rate is fixed for the life of the debt.
  • A substantial contractual remedy displaces the statutory rate entirely.

How a rate gets pinned to a debt

How the statutory interest rate is fixed at a reference date and pinned to a debtA horizontal row of five boxes joined by arrows. Reference date, being the thirty-first of December or the thirtieth of June. Base rate that day, whatever it was, recorded once. Plus eight percentage points, which is the rate for the half-year. A debt goes late inside that half-year. Pinned: that rate applies for the life of the debt. A note says a base rate change in March does not touch a debt that went late in February, and does not touch one that went late in April either.TWO DATES A YEAR DECIDE EVERY RATEReference date31 December, or30 JuneBase rate that daywhatever it was,recorded oncePlus eight pointsthat is the rate forthe half-yearA debt goes lateinside thathalf-yearPinnedthat rate, for thelife of the debtA base rate change in March does not touch a debt that went late in February. It does not touch one that went late in April either.
Fig 1. Five boxes, and the last one is the rule people miss. The rate attaches to the debt, not to the calendar.
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Why it works that way

Because a debt that is chased for three years across five base rate movements would otherwise need a rate schedule rather than a rate, and every claim would become a piecewise calculation that neither side could check. Fixing the rate at the start makes the entitlement a single multiplication that anybody can verify with a calculator.

The cost of that simplicity is that the fixing happens twice a year rather than continuously, so the rate on a debt can be materially different from the rate on an otherwise identical debt that went late eight weeks later. That is not an anomaly to be smoothed over; it is the rule working, and the system stores the reference date alongside the rate so the difference explains itself.

The same invoice, three rates

Interest on the same invoice at three different pinned statutory ratesThree vertical bars showing the interest owed on a single four thousand eight hundred pound invoice paid ninety days late. Pinned at eight point seven five per cent, about one hundred and four pounds. Pinned at twelve point two five per cent, about one hundred and forty-five pounds. Pinned at thirteen point two five per cent, about one hundred and fifty-seven pounds. A note says it is the same customer, the same invoice and the same ninety days, and the only difference is which half-year the debt went late in.GBP 0GBP 50GBP 100GBP 150GBP 200~GBP 104Pinned at 8.75%~GBP 145Pinned at 12.25%~GBP 157Pinned at 13.25%Interest on one 4,800 invoice paid 90 days lateSame customer, same invoice, same ninety days. The only difference is which half-year the debt went late in.
Fig 2. One invoice, three possible rates, fifty per cent between the ends. This is why the reference date is stored on the debt rather than looked up when somebody asks.

One ledger, several rates

The immediate consequence is that a business chasing two years of late invoices holds four different rates at once, and there is no single number to put at the top of the statement. Spreadsheets deal with this by picking one, which is where most of the errors in hand-built claims come from.

The system deals with it by writing the rate onto the debt at the moment it becomes late, as a stored number rather than a lookup. That makes the calculation stable — re-running the report next year produces the same figure — and it means a rate table that gains a new row every six months never rewrites history.

Simple, daily, and not compound

Statutory interest is simple interest. It does not compound, it does not capitalise at the year end, and there is no facility for adding it to the principal and charging interest on the total. Every attempt to make the number bigger this way makes the claim weaker.

It accrues daily, so the natural stored form is a daily amount: principal multiplied by the pinned rate, divided by 365. Everything downstream — the balance today, the balance at settlement, the balance in a letter dated next Tuesday — is that daily amount multiplied by a number of days. Storing a running total instead means recomputing every open debt every night for no benefit.

What the rate record holds

  • Reference date. 31 December or 30 June, and which one applied.
  • Base rate. The figure in force on that date, stored not looked up.
  • Statutory rate. Base plus eight, computed once.
  • Daily amount. Principal times rate over 365, to the penny.
  • Contractual override. Set where the contract provides its own remedy.
  • Currency. Because a debt in another currency is a different question.

When the contract has its own remedy

If the contract sets out its own remedy for late payment, and that remedy is a substantial one rather than a token, it displaces the statutory right. A contract specifying four per cent over base is a real remedy and the calculation follows it. A contract specifying interest at half a per cent a year is not a remedy, it is an attempt to switch the statutory one off, and it does not succeed.

Deciding which side of that line a particular clause falls on is a judgement, not a calculation, so the system does not make it. Where a contractual remedy exists it records the clause, flags the invoice for a human, and calculates both figures so that whoever makes the call can see what is at stake before making it.

The next post adds the two components that sit alongside the interest, one of which is usually worth more than it.

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