How to add late payment fees to invoices in Xero

Xero has no built-in feature for late fees

This is a long-standing issue dating back to 2014. You can encourage them to build it by upvoting this product thread suggesting they add this functionality:

Until they build it, here are some free workarounds you can use instead.

Separate invoice or add to existing invoice?

First up - it’s usually easiest to raise the late payment fee as a separate invoice to the same customer, rather than changing the original (now overdue) invoice.

There are three reasons.

1. It keeps the original invoice intact as the record of the actual sale.
2. You can always waive the new late fee invoice if the customer pays quickly.
3. Statutory interest and the compensation fee do not incur VAT. Mixing them into an invoice that does carry VAT muddies your records and risks charging VAT on amounts that shouldn’t have it.

How to add late fees manually in Xero

1. Work out what you’re owed using a late payment fee calculator: the statutory interest to date plus the fixed compensation fee.
2. Create a new sales invoice in Xero addressed to the same contact.
3. Add the interest and the compensation fee as separate line items, each set to a no-VAT tax rate so nothing has VAT applied.
4. Reference the original invoice number in the description so it’s clear what the charge relates to.
5. Send it to the customer. Our guide on what to do after you calculate a late payment fee covers options for communication the late fee.

The catch is step one. Interest accrues every day, so the figure you raise today is out of date tomorrow. Keeping the charge accurate means recalculating and editing the invoice repeatedly until the customer pays.

Generate late fees for Xero invoices free with Trove

Trove will automate this for you when the late payment fee plan launches in early July. This plan will be free for all Xero users. Join the waitlist to get early access.