Payment Terms clause: meaning, risks, and what to negotiate

Net 30 (payment due 30 days after invoice date) is the most common default in UK B2B contracts. Net 15 is common for freelancers, agencies, and smaller suppliers. Net 60 or Net 90 often appear in contracts where the customer has significantly more bargaining power, but these longer terms create meaningful cash flow strain for suppliers. Under the Late Payment of Commercial Debts (Interest) Act 1998, if the contract does not specify a payment period, payment is due within 30 days of either invoice receipt or delivery of goods/services, whichever is later.

Yes. Under English law, if your contract specifies a late payment interest rate, that rate applies. If the contract is silent, the Late Payment of Commercial Debts (Interest) Act 1998 implies interest at 8% above the Bank of England base rate. You can also claim fixed administrative recovery costs: £40 for debts up to £1,000, £70 for debts up to £10,000, and £100 for debts above £10,000. Including express interest and fee provisions in your contract is recommended because it makes the position clearer and can be more commercially persuasive than relying on statutory defaults.

Set-off (sometimes called offset) allows a customer to deduct money they claim you owe them from money they owe you. For example, if you invoice £10,000 but the customer claims you caused £2,000 of damage, a broad set-off clause would let them pay only £8,000. This is dangerous because the customer can self-help without going through any dispute process. Narrow set-off rights limited to 'undisputed amounts' or 'amounts finally determined by a court' are much safer. The safest position is to exclude set-off entirely, meaning the customer must pay invoices in full and pursue any claims separately.

Yes, but only if your contract expressly gives you that right. Without an express suspension clause, stopping performance could be treated as breach of contract. A well-drafted suspension clause typically: (a) applies only after payment is overdue by a defined period (e.g., 15–30 days), (b) requires written notice before suspension takes effect, (c) states that suspension does not constitute termination or breach, and (d) allows you to charge a reconnection fee. Suspension is a powerful tool because it creates immediate commercial pressure without ending the relationship, which may be disproportionate for a single late payment.

'Payment due on receipt' means the customer must pay immediately upon receiving the invoice — there is no credit period. This is common for freelancers, one-off services, and low-trust engagements. 'Net X days' (e.g., Net 15, Net 30) gives the customer X days after the invoice date to pay. Net terms are effectively interest-free credit you are extending to the customer. Longer Net terms should be priced accordingly — if a customer demands Net 60, your pricing should reflect the cost of waiting two months for payment and the increased risk of non-payment.

Milestone payments are common in larger projects, where payment is tied to completion of defined phases rather than time. For example: 30% on contract signing, 40% on delivery of first prototype, 30% on final acceptance. The critical risk is that 'acceptance' or 'completion' criteria can be subjective, giving the customer power to delay payment by claiming milestones haven't been met. To protect yourself: (a) define each milestone objectively and specifically, (b) include a deemed acceptance provision if the customer does not respond within a set period, (c) avoid large final payments that give the customer leverage, and (d) ensure you can invoice for completed milestones even if the project is later terminated.

A deemed acceptance clause says that if the customer does not reject deliverables or raise invoice queries within a specified period (e.g., 10 business days), they are deemed to have accepted them, and payment becomes due. This is critical protection against strategic silence — customers who delay payment by simply not responding. Without deemed acceptance, you may have to chase the customer to confirm acceptance before you can invoice or before payment becomes due. The acceptance period should be reasonable (typically 5–15 business days depending on the complexity of the deliverables), and the clause should specify what form rejection must take (e.g., written notice with reasonable detail).

For custom work, bespoke services, or any engagement where you have upfront costs, a deposit or upfront payment is standard and recommended. Common structures include: (a) 50% upfront, 50% on completion, (b) 33% upfront, 33% on milestone, 34% on completion, or (c) monthly billing for ongoing work. Upfront payments reduce your risk exposure and improve cash flow. Customers may resist large upfront payments, so be prepared to negotiate the percentage or offer a smaller initial deposit followed by milestone payments. For standard products or services with no customisation, upfront payment in full is reasonable.

If you are VAT-registered, your invoices must show your VAT number and the VAT amount. Payment terms should specify whether quoted prices are exclusive or inclusive of VAT — 'Exclusive of VAT' means VAT is added on top, 'Inclusive of VAT' means the quoted price already includes VAT. For B2B contracts, prices are typically exclusive of VAT, with VAT added at the prevailing rate. Payment due dates and late payment interest apply to the total invoice amount including VAT. If the customer is required to withhold tax (e.g., under CIS in construction), the payment clause should address how withholding is handled and documented.

If a customer enters insolvency (administration, liquidation, or a company voluntary arrangement), your ability to recover unpaid invoices depends on your contractual rights and insolvency law. Retention of title clauses (where you retain ownership of goods until paid) are the strongest protection for physical products. For services, your position is weaker — you become an unsecured creditor for unpaid invoices. Some contracts include provisions accelerating payment on insolvency, making all outstanding amounts immediately due, but these clauses can be challenged by insolvency practitioners. The best protection is: (a) requiring deposits or stage payments, (b) limiting payment terms, (c) monitoring customer creditworthiness, and (d) exercising suspension rights promptly on payment default.