Penalties for late payment, interest rates, lump-sum compensation… It is sometimes difficult to make sense of the maze of financial penalties applied in the event of non-payment. When it comes to public contracts, failure to pay an invoice to a supplier is penalised by interest at the higher rate, as set out in the French Public Procurement Code. Definition, rates and calculation methods: we explain everything you need to know about interest on arrears in this comprehensive guide.
What is interest on arrears?
Interest on arrears is defined by articles L2192-12 et seq. of the French Public Procurement Code as the penalty for late payment. This additional interest is payable by a public body to its supplier or service provider if its debt is not paid on time.
There is no difficulty in characterising late payment: in fact, in the context of the performance of a public procurement contract, payment terms are contractual or predetermined depending on the client. They range from 30 days to 60 days, depending on the type of public body. If an invoice is not paid within this period, whether for the balance or on account, the unpaid supplier or service provider is entitled to a surcharge in the form of interest on arrears.
The purpose of this surcharge is to compensate the creditor (in this case, the contract holder) for the loss caused by the late payment. As such, interest on arrears does not have to be claimed in order to be payable. It is payable ipso jure and the rate is set by decree. In addition, the payment of interest on arrears is automatically accompanied by a fixed indemnity for collection costs of €40.
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Interest on arrears, public and private contracts: what are the differences?
The applicability of interest on arrears as such is limited to public contracts, i.e. contracts between a public body and its service provider or supplier. In the case of private contracts, the term “interest on arrears” is used instead of “late payment penalties”.
The starting point for calculating interest is also different, since the payment period for invoices may be set by the principal in its General Terms and Conditions. However, it may not exceed 60 days.
Finally, the rate of interest on arrears and penalties for late payment is different, although it is calculated on the same basis as the base rate set by the European Central Bank. It corresponds to the base rate plus 8 points in the case of a public contract, and plus 10 points in the case of a private commercial contract. However, in the latter case, it is possible to reduce it contractually, without being able to go below 3 times the legal interest rate.
Every six months, the public authorities set the legal interest rate by decree. This legal interest rate is used as a reference for calculating default interest and late payment penalties.
There is, however, one point in common: the application of the fixed indemnity of €40 for collection costs is compulsory regardless of the type of customer, public or private.
When is interest on arrears due?
Late payment is deemed to have occurred when the statutory or contractual payment period is exceeded. The right to interest on arrears therefore starts to run as of the day following the expiry of this period, ipso jure. There is therefore no need for the creditor to formalise that interest is due by sending a registered letter.
The statutory payment periods vary according to the type of public-sector customer:
- Standard 30-day period for ministries, government departments, local authorities, etc.
- 50 days for public and military health establishments.
- 60 days for public companies.
The calculation period for entitlement to default interest ends the day after the debt is paid.
What are the rates of interest on arrears?
The rate of interest on arrears is based on the key rate or refinancing rate set by the European Central Bank every six months, plus a certain percentage. To define the rate, a distinction must be made depending on whether the unpaid contract was concluded before or after 16 March 2013, when Decree no. 2013-269 of 29 March 2013 amended the penalties for late payment by public bodies.
Previously based on the ECB refinancing rate plus 7 points, interest on arrears will now be based on the ECB rate plus 8 points for all contracts entered into on or after 16 March 2013 and for receivables due on or after 1 May 2013.
While the ECB refinancing rate has been 0.00% since 2016, it has risen significantly since July 2022 in line with inflation.
What is the trend in the rate of interest on arrears?
Here is a table showing changes in the rate of interest on arrears since the decree of March 2013:
|
Date |
Legal interest rate – ECB rate |
Interest on arrears |
|
09/08/2022 |
1,250 % |
9,250 % |
|
07/21/2022 |
0,500 % |
8,500 % |
|
03/10/2016 |
0,000 % |
8,000 % |
|
09/04/2014 |
0,050 % |
8,050 % |
|
06/05/2014 |
0,150 % |
8,150 % |
|
11/07/2013 |
0,250 % |
8,250 % |
|
05/02/2013 |
0,500 % |
8,500 % |
How is interest on arrears calculated?
The calculation of interest on arrears, for a claim unpaid within the regulatory time limit, is based on the following formula :
Amount due (incl. VAT) x (number of days overdue / 365) x applicable interest rate.
To this must be added the automatic 40 euro flat-rate collection fee, which is added to the principal amount of the debt.
The applicable rate to be taken into account when determining the amount of interest to be added is the rate in force on the day interest begins to accrue. By way of example, let’s consider a contract concluded in 2020 between a service provider and a public health institution.
An invoice for 15,000 euros is issued on March 15, 2021, with a payment term of 50 days, i.e. a maximum settlement date of May 4, 2021. For a hypothetical payment delay of 100 days, default interest will start to accrue on May 5, 2021, at the ECB rate + 8 points, i.e. 8.000%.
Their final amount will be :
15,000 x (100 / 365) x 8.000% = 328.77 euros
The total amount to be paid by the healthcare establishment to its debtor will therefore be 15,000 + 328.77 + 40 = 15,368.77 euros.
How can I avoid interest on arrears?
If you’re a public institution or company, the only way to avoid having to pay interest on arrears is to pay your invoices on time. With the help of accounting software, you can anticipate your payments by scheduling them in advance.
As a service provider or supplier, you can benefit from support both in accounting for customer receipts and in preventing the risk of non-payment.
Which solution to choose?
With CashOnTime Allocation, the automatic allocation and settlement of payments avoids errors and the disputes that can arise from them. Is your invoice payment overdue? The CashOnTime Collection solution enables you to monitor your outstanding amounts and payment deadlines, while assessing the risk of non-payment. Thanks to real-time alerts, you can serenely follow up with your customers, avoiding them having to pay default interest and penalties.
Determining the rate, calculating late payment penalties… Although interest on arrears is compulsory, it can be tedious to implement. The CashOnTime platform makes the task easier for you, and guarantees a healthy, long-term relationship with your debtors, whether public or private.
Don’t hesitate to contact our experts to anticipate any financial risk and optimize your customer relations!
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