EU backs right to interest on late payment of debt: Draft document calls for action in two years

THE European Commission has given its backing to the imposition of interest on late payment of debt.

A draft document calls on European Union member states to recognise that interest on late payment should be automatic and asks governments to fix a legal rate of interest at a similar level to commercial market rates for short- term bank loans.

The document will come as an embarrassment to the Government, which has recently come down against legislation for late payment. Ministers believe that it is up to industry to set its own standards on late payment.

The draft document also says companies should have a right to compensation for the legal and administrative costs of recovering money owed. It recommends that where a contract between debtor and creditor does not allow for this, and where law courts are not involved, compensation should be 5 per cent of the invoice's face value.

The draft covers a range of other recommendations including control of payment periods, complaints procedures and disclosure of payment policy in annual company accounts. It says that if the recommendations are not heeded within two years, the Commission will consider steps to make them binding.

The document warns of increases in the number and seriousness of delays in paying. Payment periods - the time between delivery of goods or services and payment - reached an average of 66 days in the EU in 1993. More than a quarter of businesses have to wait more than 90 days to be paid and 8 per cent more than 120 days.

The document says: 'Some businesses are currently resorting to late payment systematically as a normal feature of cash flow management. This is a decline in business ethics and not without posing a danger to the businesses.'

It adds that businesses perceived differences in payment periods in member states as an obstacle to the functioning of the internal market.

British companies pay their bills later than anywhere else in Europe, often deliberately, according to a survey by Intrum Justitia, the debt collection group. Payments in Britain are on average 23 days late compared with an average of 14 days for Europe as a whole.

The Confederation of British Industry is against statutory rights to interest. It says small firms would suffer because larger companies would impose longer payment periods in contracts, and because the small firm would be forced to pay interest on its own overdue debt.

The Labour Party and Liberal Democrats say a statutory right to interest is the only way to stop debtors taking advantage of free credit.