How to raise late payment fees as invoices in Xero

Summary

• Xero has no late payment fee feature. The open product request for this feature dates back to 2014.
• Raise the fee as a separate invoice rather than editing the original. That keeps the overdue invoice intact as the record of the actual sale.
• A separate invoice is also easier to waive if the customer pays quickly.
• The manual method for applying a late fee is five steps. Calculate what you’re owed, raise a new invoice to the same contact, add interest and compensation as separate no-VAT lines, reference the original invoice number, send.
• Treasure (by Trove) does the first 4 of these steps for free. Treasure is Trove’s free plan and plugs into Xero so you can apply late fees with one click.

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 can muddie your records.

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 Interest accrues every day, so the figure you raise today is out of date tomorrow.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.

If you’d rather the charge showed up on a statement than as a one-off invoice, showing late payment interest on a customer statement covers that route instead.

Calculate and raise the fee for free with Treasure

Treasure by Trove does the calculation above for you, for free. Either connect your Xero account or key in the details for the specific invoice and it will work out the statutory interest and the compensation fee. If you do connect your Xero account Treasure will also raise the invoice for you, keeping interest accurate as time passes.

Treasure is free but still includes the manual step of applying late fees when needed. For a fully automated solution, including sending the invoices, try the 30-day free trial for any of Trove’s paid plans.