Contractors’ Questions: Is it legal to 10-day backdate an invoice so it’s payable immediately?

Contractor’s Question: I won’t name names, but is it ok for a company to issue invoices and backdate them 10 days, thereby making them immediately due for payment?

Expert’s Answer: I am not aware of any laws that prohibit a business from dating an invoice earlier than its actual issuance date.

The disadvantage of flexibiity?

Businesses often have the flexibility to set their own invoicing practices, so this may be what you’re up against.

However, the absence of laws prohibiting the invoicing practice you outline doesn’t mean that it might not be perceived as misleading or unfair by customers, especially if they are expected to make a payment very soon after receiving the invoice.

The main concern I’ve picked up on in relation to this invoicing practice is centred around how it impacts payment by Direct Debit and the Direct Debit Guarantee.

What is the Direct Debit Guarantee?

The Direct Debit Guarantee is designed to protect individuals and businesses where there are errors in the set-up or collection of their direct debits, e.g. incorrect amounts are taken or taken on an incorrect date.

The Guarantee only requires advance notice of a payment where the amount or date are variable. So, if the Direct Debit is for a fixed amount (e.g. a monthly subscription) and is taken on a regular date (e.g.,the 1st of every month), the company is not required to give notice before each payment -- other than before the first payment.

This first notice is typically given once, when the Direct Debit is initiated, outlining the schedule and amounts of the payments. As long as the payments remain consistent with this initial notice, no further notice is required to be given.

Variation is the key

But if the amount or the date of the payment varies (e.g. utility bills where the amount depends on usage), then the company is required to provide notice before each payment.

When a service starts partway through a month, the first Direct Debit payment is often ‘prorated’ to reflect only the portion of the service provided. This should be communicated to the customer at the outset, when the Direct Debit agreement is set up.

The full payment in the second month is considered the regular, agreed-upon amount. Since this amount would have been specified when the Direct Debit was first set up, it does not constitute a change that requires further notice to be given.

If notice is required, what is the correct period?

The Direct Debit Guarantee states that advance notice would normally be 10 working days before the payment is taken but it is possible for organisations to set advance notice periods much shorter than this. Three days is not uncommon.

Any reduced advanced notice period must be explicitly agreed upon with the customer when setting up the Direct Debit mandate. The agreed-upon notice period should be clearly stated in the Direct Debit Instruction (DDI) or the terms and conditions that the customer accepts.

So, whether the scenario we are presented with is acceptable, ultimately depends on the information provided at the set-up of the Direct Debit. This should have confirmed the advance notice period and whether the direct debit is for a fixed or variable amount.

The expert was chartered accountant Helen Christopher, founder of Beansprout Consultancy, an accounting and financial advisory to small companies.