Reasonable Debt Recovery Costs: What Businesses Need to Know About Recovering Unpaid Invoices

Unpaid invoices are not only a cash-flow problem. They also create an administration problem.

Many business owners spend too much time chasing payment, sending reminders, checking records, answering excuses, preparing letters and deciding whether formal recovery action is worth the cost.

That time has a value.

The question is whether the business can recover that value from the client who has failed to pay.

The answer depends on an important distinction.

For business-to-business debts, recovery costs are protected by statute. The Late Payment of Commercial Debts (Interest) Act 1998 gives a supplier a statutory route to claim compensation for late payment in qualifying commercial debts. This includes the basic fixed compensation sums and, where those fixed sums are not enough, the possibility of claiming further reasonable recovery costs.

For business-to-consumer debts, the position is more difficult for the business. The commercial late payment legislation does not automatically apply to consumers. In consumer cases, the statute that exists is mainly designed to protect consumers, not to give business owners an automatic right to add late payment charges or recovery fees.

This guidance explains the difference between business-to-business debt recovery costs and business-to-consumer debt recovery costs. It is designed to help small businesses understand when statutory recovery costs may apply, when consumer fairness rules become important, and why clear paperwork, payment terms and internal recovery protocols matter before any recovery charge is added.

Statutory late payment rights and

contractual B2B recovery charges

The starting point for business-to-business debt recovery costs is the Late Payment of Commercial Debts (Interest) Act 1998.

Where a qualifying commercial debt is paid late, the Act gives the supplier a statutory right to claim late payment interest and fixed compensation. Section 5A provides for fixed compensation of £40, £70 or £100, depending on the size of the unpaid debt.

Section 5A(2A) is also important because it allows the creditor to recover reasonable additional debt recovery costs where those costs exceed the fixed statutory compensation.

However, the statutory scheme is not necessarily the end of the matter. It does not prevent businesses from using properly drafted B2B contractual terms dealing with late payment, administration charges, recovery work, credit-control costs or other commercial consequences of non-payment.

The issue is whether the contractual charge is enforceable.

A late-payment or debt-recovery charge in a B2B contract is not automatically unenforceable merely because it is higher than the immediate loss caused by the late payment. The modern question reflected in Cavendish Square Holding BV v Makdessi and ParkingEye Ltd v Beavi is whether the charge is a secondary obligation triggered by breach of contract and, if so, whether it imposes a detriment on the defaulting customer which is out of all proportion to the creditor’s legitimate commercial interest in enforcing payment.

For example, a contract may state:

“If payment is late, the customer must pay a £150 administration and recovery charge.”

That clause is triggered by breach of the payment obligation.

A debtor may argue that it is an unenforceable penalty.

The creditor’s answer may be that the charge is not punishment. It protects a legitimate commercial interest in being paid on time, preserving cash flow, avoiding unnecessary credit-control work, covering staff time, chasing costs, business disruption and the increased risk created by non-payment.

The safer approach is to ensure that any contractual late-payment charge is modest, clearly drafted, commercially justified and linked to genuine recovery or administrative work.

A clause which supports a proper debt recovery process is easier to defend than an arbitrary or excessive charge imposed simply to punish late payment.

In this section:

1. Statutory late payment rights
How the Late Payment of Commercial Debts (Interest) Act 1998 gives suppliers a statutory route to claim interest and compensation on qualifying business debts.

2. Fixed statutory compensation under section 5A
How the fixed compensation sums of £40, £70 and £100 apply depending on the size of the unpaid commercial debt.

3. Additional reasonable recovery costs under section 5A(2A)
How a supplier may claim the difference where the fixed statutory compensation does not meet the reasonable costs of recovering the debt.

4. Contractual B2B recovery charges
How properly drafted B2B payment terms may support recovery of administration time, credit-control costs and commercial consequences of late payment.

5. Worked example: multiple unpaid B2B invoices
How statutory interest, fixed compensation and additional reasonable recovery costs may be calculated in practice.

6. Practical checks before claiming B2B recovery costs
What a creditor should check before adding statutory compensation, additional reasonable recovery costs or contractual late-payment charges.

Fixed statutory compensation under section 5A

Section 5A provides fixed statutory compensation where a qualifying commercial debt is paid late.

The fixed compensation is:

Debt less than £1,000
Fixed statutory compensation: £40

Debt of £1,000 or more, but less than £10,000
Fixed statutory compensation: £70

Debt of £10,000 or more
Fixed statutory compensation: £100

This fixed compensation is sometimes misunderstood. It is not the same as statutory interest. It is a separate statutory compensation sum for late payment.

For many small unpaid invoices, the fixed compensation will be £40 per qualifying invoice. Where there are several unpaid invoices, each invoice should be checked separately, because the fixed compensation may apply to each qualifying debt.

Additional reasonable recovery costs under section 5A(2A)

Section 5A(2A) provides further protection for suppliers.

It provides that if the supplier’s reasonable costs of recovering the debt are not met by the fixed statutory compensation, the supplier is also entitled to a further sum equivalent to the difference between the fixed compensation and those reasonable recovery costs.

In simple terms:

Additional reasonable recovery costs = reasonable recovery costs minus fixed statutory compensation already claimed

This matters because the fixed compensation may not always cover the real cost of dealing with an unpaid commercial debt.

A business may need to spend time and money reviewing invoices, checking payment terms, calculating statutory interest, preparing a recovery file, drafting correspondence, issuing a Letter Before Action, and preparing the matter for possible court action.

However, the additional costs must still be reasonable.

A creditor should not treat section 5A(2A) as a blank cheque. The costs should be proportionate, capable of explanation, and linked to actual or anticipated recovery work.

Worked example: multiple unpaid B2B invoices

A supplier provides services to a business customer.

Six invoices remain unpaid.

Unpaid invoice example:

Invoice 1 - Amount: £283.00

Invoice 2 - Amount: £180.00

Invoice 3 - Amount: £581.00

Invoice 4 - Amount: £208.00

Invoice 5 - Amount: £173.50

Invoice 6 - Amount: £106.00

Total unpaid invoices: £1,531.50

Each invoice is below £1,000. On that basis, the fixed statutory compensation is calculated at £40 per invoice.

Fixed compensation calculation:

Invoice 1: £40
Invoice 2: £40
Invoice 3: £40
Invoice 4: £40
Invoice 5: £40
Invoice 6: £40

Total fixed statutory compensation: £240

The unpaid principal balance is £1,531.50.

If statutory interest to the calculation date is £56.77, the position before any additional recovery costs would be:

Unpaid principal invoices: £1,531.50
Statutory interest: £56.77
Fixed statutory compensation: £240.00

Subtotal before additional recovery costs: £1,828.27

If the reasonable recovery work is assessed at £400, but the fixed statutory compensation is only £240, the creditor may reserve or claim the difference under section 5A(2A).

Additional recovery-cost calculation:

Reasonable recovery work assessed or anticipated: £400
Less fixed statutory compensation already claimed: £240

Additional reasonable recovery costs: £160

The debtor-facing position may therefore be presented as:

Unpaid principal invoices: £1,531.50
Statutory interest: £56.77
Fixed statutory compensation: £240.00
Additional reasonable recovery costs: £160.00

Total before court issue fee: £1,988.27

This type of calculation should be explained clearly.

The debtor should be able to see the unpaid invoices, the statutory interest calculation, the fixed compensation calculation, and why any additional reasonable recovery costs are being claimed.

What may count as reasonable recovery work?

Reasonable recovery costs may include work such as:

reviewing the invoice bundle;
checking whether the debt appears to qualify as a commercial debt;
assessing payment terms and invoice dates;
calculating statutory interest;
calculating fixed statutory compensation;
preparing the recovery file;
preparing a Letter Before Action;
reviewing debtor correspondence;
considering whether a genuine dispute has been raised;
preparing the matter for a County Court claim, where appropriate.

The key point is that the costs should be connected to the recovery of the debt.

They should not be arbitrary, inflated or used simply to punish the debtor for paying late.

Practical checks before claiming B2B recovery costs

For B2B unpaid invoices, the statutory late payment regime should usually be the starting point.

The business should first check whether the debt qualifies under the Late Payment of Commercial Debts (Interest) Act 1998.

If it does, the creditor may consider statutory interest, fixed compensation under section 5A, and additional reasonable recovery costs under section 5A(2A).

Contractual terms can strengthen the creditor’s position, but they should support a genuine commercial recovery process. They should not operate as a punishment for breach.

Before claiming or warning additional recovery costs, the business should be able to explain:

what work has been done;
why the work was necessary;
what the fixed statutory compensation covers;
why the fixed compensation is not enough;
how the additional sum has been calculated;
why the total recovery-cost position is reasonable.

This protects the creditor’s position and makes the recovery demand easier to justify if the debtor challenges the calculation.

Business-to-consumer debt recovery

costs and the Consumer Rights Act 2015

Business-to-consumer debt recovery costs require a different approach from B2B debt recovery costs.

Many small businesses and self-employed professionals only consider recovery charges when the unpaid invoice has already started consuming time and money. By then, the business may already be dealing with reminders, complaints, excuses, disputed work and uncertainty about whether formal recovery action is worth it.

The difficulty is that this is often too late.

For consumer debts, the business is usually in a stronger position if the customer paperwork, payment terms and internal recovery protocol were in place before the goods were supplied or the service was carried out.

A business may be able to rely on a verbal agreement, but verbal agreements often create evidence problems. If the price, scope of work, payment date and recovery-charge wording were not clearly recorded, the dispute can quickly become a word-against-word argument.

This is especially common where a consumer says the service was faulty, incomplete or not carried out with reasonable care and skill. Section 49 of the Consumer Rights Act 2015 may become relevant in service disputes because it requires a trader to perform the service with reasonable care and skill.

Section 50 may also matter where the consumer relied on something said or written by the trader about the service, price, timescale or what was included.

Where goods are supplied, the Consumer Rights Act 2015 also contains consumer protections about the goods supplied, including issues such as quality, fitness and description.

For this reason, a B2C unpaid invoice is not always only about non-payment. It may also involve the quality of the goods or services, what was promised, what was accepted, and whether the business can prove the debt.

The key difference between B2B and B2C recovery costs

For B2B debts, the Late Payment of Commercial Debts (Interest) Act 1998 may give the supplier a statutory route to claim interest, fixed compensation and additional reasonable recovery costs.

For consumer debts however, that statutory route is not available in the same way.

Section 2 of the Late Payment of Commercial Debts (Interest) Act 1998 applies the Act to contracts for the supply of goods or services where the purchaser and supplier are each acting in the course of a business, other than an excepted contract.

That means a normal business-to-consumer debt is outside the commercial late payment regime because the consumer is not acting in the course of a business.

A business therefore cannot rely on the Late Payment of Commercial Debts (Interest) Act 1998 to add statutory commercial compensation to a consumer invoice.

For B2C debts, the business usually has to rely on:

clear contractual terms;
evidence that the consumer accepted those terms;
fair and transparent wording;
proportionate charges;
proper records of the goods or services supplied;
a careful internal recovery process.

The starting point is not statutory commercial compensation.

The starting point is contract, evidence, fairness and proportionality.

Why B2C recovery charges need clear contract terms

A business may want to include a term such as:

“If payment is late, the customer must pay an administration and recovery charge.”

In a consumer contract, that type of wording needs care.

The charge should be clear before the consumer agrees to the service or purchase. It should not appear for the first time after the invoice becomes overdue.

The term should explain:

when the charge may apply;
what the charge is for;
whether reminders will be sent first;
whether the charge reflects administration or recovery work;
whether the consumer can still dispute the invoice where there is a genuine issue.

A hidden, vague or excessive charge is much easier for a consumer to challenge.

Section 62: the main unfairness test

Section 62 of the Consumer Rights Act 2015 is the main unfairness test.

A consumer may argue that a late-payment, administration or recovery charge is unfair because it causes a significant imbalance in the parties’ rights and obligations, contrary to good faith, to the consumer’s detriment.

If the business term is unfair, it is not binding on the consumer.

For example, a consumer may argue:

“The recovery charge is unfair under section 62 because it is disproportionate, was not properly explained, and creates a significant imbalance against me.”

For the business, the practical answer is preparation.

The business should be able to explain why the charge exists, what work it covers, why the amount is proportionate, and how the consumer was told about it before entering into the contract.

Section 63 and Schedule 2 paragraph 6: disproportionate compensation

Section 63 of the Consumer Rights Act 2015 brings in Schedule 2.

Schedule 2 contains an indicative and non-exhaustive list of terms that may be regarded as unfair.

For late-payment and recovery charges, the important provision is Schedule 2, paragraph 6.

This refers to a term which requires a consumer who fails to fulfil their obligation to pay a disproportionately high sum in compensation.

This is the key risk for consumer recovery charges.

If a consumer pays late, the business may have suffered time, delay and administration cost. But if the recovery charge is too high, automatic, unexplained or unrelated to real work, the consumer may argue that it is a disproportionately high sum in compensation.

A safer B2C recovery charge is:

modest;
clearly written;
explained before the contract is made;
linked to genuine administration or recovery work;
not used as punishment;
applied only after reasonable reminders;
reviewed if the consumer raises a genuine dispute.

Section 68: transparency

Section 68 requires consumer terms to be transparent.

For debt recovery charges, this means the wording should be plain, clear and understandable.

A vague statement such as “additional charges may apply” may not be enough if the business later wants to add a fixed recovery fee.

The business should make clear what charge may apply, when it may apply, and what it is intended to cover.

The practical question is:

Did the consumer know before contracting that a late-payment or recovery charge could be added?

If the answer is unclear, the business may struggle to rely on the charge.

Section 69: ambiguity is interpreted in favour of the consumer

Section 69 applies where the wording of a consumer term can have more than one meaning.

If the term is ambiguous, the meaning most favourable to the consumer will usually prevail.

This matters where businesses use unclear wording about “fees”, “charges”, “costs” or “administration”.

If the business wants to rely on a recovery charge, the wording should be specific.

It should identify the charge, the trigger, the purpose of the charge and the recovery steps that may be taken.

Section 71: the court may consider fairness

Section 71 is also important.

If a dispute reaches court, the court may consider whether a consumer term is fair where it has enough information to do so.

This means a business should not assume that a recovery charge will be accepted simply because it appears on an invoice or because the consumer has not used technical legal wording.

The fairness of the term may still be considered.

That is why B2C recovery charges should be built carefully from the beginning.

Practical example: late payment by a consumer

A small service business completes work for a consumer.

The invoice is £350.

The consumer does not pay on time.

The business wants to add a £150 administration and recovery charge.

This may create a problem.

The consumer may argue that £150 is disproportionate compared with the invoice and the actual administration work required. The consumer may also argue that the charge was not clearly explained before the contract was made.

The business will be in a stronger position if it can show:

the price was agreed;
the payment date was clear;
the service or goods were properly supplied;
the recovery charge was included in written terms;
the consumer received the terms before agreeing;
the charge was clear and prominent;
reminders were sent before the charge was added;
the amount reflects real administration or recovery work;
any complaint or dispute was considered before recovery action.

The issue is not only whether the consumer paid late.

The issue is whether the business can prove that the charge is contractually agreed, fair, transparent and proportionate.

Internal paperwork and recovery protocols for B2C debts

For consumer debts, paperwork is protection.

A business should have a simple customer process before disputes arise.

This may include:

written quotation or estimate;
clear description of the goods or services;
clear price or pricing method;
clear payment date;
written payment terms;
cancellation wording, where relevant;
fair late-payment wording;
fair administration or recovery-charge wording;
evidence that the consumer accepted the terms;
invoice with consistent payment wording;
first reminder;
final reminder;
Letter Before Action;
record of any complaint or dispute.

This does not only help with recovery charges. It helps prove the unpaid invoice itself.

If the consumer later says the work was faulty, the price was not agreed, or the charge was never explained, the business should be able to answer with clear records.

Safer wording for B2C recovery charges

A consumer recovery term should not be aggressive or excessive.

A safer approach is to use wording that is clear, fair and linked to actual administration.

For example:

“If an invoice is not paid by the due date, we may charge a reasonable administration cost for additional recovery work caused by late payment. Any charge will be proportionate, will reflect the work reasonably required, and will not affect your right to dispute the invoice where you have a genuine reason for doing so.”

This is safer than a harsh automatic penalty because it links the charge to reasonable work and preserves the consumer’s right to raise a genuine dispute.

The wording should still be adapted to the business, the service, the customer journey and the evidence available.

Practical checks before adding B2C recovery costs

Before adding a recovery charge to a consumer invoice, the business should check:

Is the customer a consumer?
Was the charge written into the contract?
Was the term given before the contract was made?
Was the wording clear and transparent?
Is the charge modest and proportionate?
Is the charge linked to real recovery work?
Has the consumer raised a genuine dispute?
Has the business considered any complaint?
Is there evidence that the goods or services were properly supplied?
Could the charge be challenged as disproportionately high under Schedule 2 paragraph 6?
Would the business be comfortable explaining the charge to a court?

Practical point for B2C unpaid invoices

For B2C unpaid invoices, the key protection is not the commercial late payment statute.

The key protection is preparation.

A business should use clear written terms, fair payment wording, transparent charges and a careful recovery process.

The aim is not to punish the consumer for late payment.

The aim is to create a fair, evidence-based recovery process that helps the business recover unpaid invoices while staying within consumer protection rules.

Helpful links

Commercial Debt Recovery

BLA Commercial Debt Recovery Policy