How do I deal with customers that will not pay?

If a judgement is issued but the customer doesn’t pay or falls behind in payments, you need to get the judgement enforced. Here are key ways of doing this, each of which involves court fees, which can be added to your claim.

One enforcement option is to ask the court to get bailiffs or enforcement officers to collect the money. Bailiffs will ask the customer to pay up, and if payment’s not received they will go to the customer’s business or home to try to get the customer to pay them directly, or failing this, to see if there’s anything they can seize and sell-off to pay the debt.

Another option is to ask the court to make a charge against the customer’s land or property. This means that if they sell the land or property they must pay the charge (which is then paid to you) before they get their money. Obviously, the customer needs to actually have land or property, and you may have to wait a long time before they sell it!

If your customer is employed (as opposed to self-employed or a company) you can apply to the court  for an attachment of earnings order. This compels the customer’s employer to deduct money from their wages until the debt to you is cleared.

If your customer owes you over £750, you can issue a statutory demand. This means that the customer has 21 days to pay up. If the customer is a limited company and they fail to pay up, a petition can be issued for the winding-up (liquidation) of the company, which means that their assets must be sold to pay off you and other creditors, after which the company is dissolved. 

If you issue a statutory demand to an individual (as opposed to a company) who then fails to pay up within 21 days, you can issue a petition to make them bankrupt. If a court declares them bankrupt they will need to give up assets and sell property to pay you and other creditors. 

That depends on factors such as:

• What actions your customer takes.  E.g. if they pay up as soon as they get notification of court action, you won’t have to go any further, so this will cost you less than if they defend the claim
• Whether your claim is successful or not. If you win the case your customer will usually have to pay your court fees; if you lose you may end up paying all your costs, court fees and also the customer’s costs, which can be expensive for higher claims
• The amount you’re trying to recover. There’s a sliding scale of court fees according to the value of the claim, ranging from £35 for amounts up to £300, through £115 for amounts of £1,500 – £3,000, to 5% of the value for amounts of £10,000 – £100,000
• How much you do yourself as opposed to involving others, such as solicitors. Many firms will have sliding fee scales, e.g. to initiate court action to attempt to recover a sum of £500 they might charge £150; for a sum of £5,000 they might charge £250; for a sum of £15,000 they might charge 5% of the amount.

There are many solicitors and agencies who specialise in recovering debts. They can help you with specific parts of the legal process, or handle the entire thing for you. Of course, they will charge you for their services, so shop around to compare prices.

Solicitors will be able to quote for specific tasks such as writing and sending a final demand or letter before action, representing you at a hearing, preparing a statutory demand, etc. For other tasks that can’t be quantified so easily, they will normally charge an hourly rate.

Some firms will have sliding scales for fees depending on the amount of the debt. If your claim is successful you may be able to recover some of these costs. Some won’t charge a fee unless they are successful, but they’re likely to be expensive.

Some ways of enforcing court judgements can be tricky and potentially expensive if you get things wrong (see the next section). In these circumstances, always take legal advice.

Make sure that you find out what the legal fees are likely to be for your specific circumstances, and don’t forget that you’ll also need to pay court fees.

To find a local solicitor who specialises in debt recovery, go to the Law Society’s solicitor database.

A statutory demand is one way of trying to get a customer to pay up once a court judgement has been made against them (see the above section).

However, it can be tempting to jump straight in with a statutory order as the threat of liquidating a business or making the customer bankrupt can be persuasive in getting them to pay up. But courts can take a dim view of using a statutory demands as a debt collecting technique to short-cut the normal process for getting a judgement.

If you plan to issue a statutory demand, be sure that the customer won’t dispute the debt. If they manage to get the demand set aside, or get an injunction against a winding up petition, you’re likely to be made to pay their legal costs, which could run into thousands of pounds.

Remember that your ultimate aim is to get the customer to pay up. If they’re made to liquidate their business or are declared bankrupt, you may find that you’re just one of many creditors waiting for payment, and worse still, you may be at the bottom of the list and not get anything.

For information on statutory demands, go to the Make and Serve a Statutory Demand, or Challenge One section of GOV.UK.

If you’re VAT registered and you invoice a customer but they don’t pay up you can reclaim the VAT you charged and paid as bad debt relief providing that certain conditions are met including:

• the debt is more than six months old but less than four years and six months old

• you’ve written the debt out of your customer ledger and moved it into a specific bad debt account.

If so, and you have evidence that shows you’ve tried to get the customer to pay the invoice, you can recover the VAT by including the amount you’re claiming in Box 4 of your VAT return.

If you’ve claimed a refund but later the customer pays up, you have to repay the VAT element. Put the amount you’re repaying in Box 1 of your VAT return for the period in which you received the payment.

If you’re using the VAT cash accounting scheme or one of the retail schemes, bad debt relief isn’t applicable as you only pay VAT on amounts actually received from customers.