Late Payment in Commercial Transactions

Tax treatment of interest and compensation paid under S.I. No. 388 of 2002 European Communities (Late Payment in Commercial Transactions) Regulations 2002

General

This article sets out the tax treatment of interest and compensation paid under the new Regulations. The tax treatment of interest payments made under the Prompt Payment of Accounts Act, 1997 is outlined in an article in Issue 31 of Tax Briefing.

With effect from 7 August 2002 the Regulations give effect to Directive 2000/35/EC of the European Parliament and of the Council of 29 June 2000 on combating late payment in commercial transactions. They apply, with some exceptions, to commercial transactions in both the public and private sectors and amend the Prompt Payments of Accounts Act, 1997.

The new Regulations provide that interest shall be payable in respect of a late payment. In contrast to interest paid under the Prompt Payment of Accounts Act 1997, it will now be an implied term of every contract that interest is payable if debts are not paid on time. A payment is regarded as late when 30 days have elapsed unless an alternative payment period is specified in an agreed contract. The interest chargeable for late payment is the European Central Bank main refinancing rate plus seven percentage points unless otherwise agreed.

Also there is provision that compensation may be claimed for debt recovery costs. Like the “late payment interest”, compensation is an implied term of every “commercial transaction”, i.e., it forms part of the terms of the contract itself and is not in addition to the contract.

Tax treatment of interest paid under S.I. No. 388 of 2002

VAT

The payment received in respect of interest under S.I. No. 388 of 2002, European Communities (Late Payment in Commercial Transactions) Regulations 2002 is not regarded as consideration for VAT purposes. Accordingly, any such payment collected by a taxable person from a customer, due to the late payment of that customer’s account, does not represent consideration for a taxable supply and is not, therefore, liable to VAT.

Income Tax/Corporation Tax

The interest is regarded as a trade expense, which is tax deductible in computing the profits of the person making the payment (i.e., the purchaser).

The interest is taxable in the hands of the recipient (i.e., the supplier). Although strictly chargeable under Case III of Schedule D, it may be included as a trade receipt and accordingly assessed under Schedule D Case I.

Professional Services Withholding Tax (PSWT)

Unlike interest paid under the Prompt Payment of Accounts Act, 1997, interest paid under the new Regulations is an implied term of the contract. Accordingly, where interest is paid in accordance with Regulation 4 of the new Regulations on foot of payments, which are payments for professional services, within the meaning of Section 520 TCA 1997, PSWT should be deducted from the interest. When completing Forms F45 for issue to specified persons (i.e., suppliers), accountable persons should include interest amounts.

Relevant Contracts Tax

Where interest is paid in accordance with Regulation 4 of the new Regulations on foot of payments, which are payments to subcontractors in certain industries, within the meaning of Section 531 TCA 1997, RCT should be deducted from the interest. When completing Forms RCTDC for issue to sub-contractors, principal contractors should include interest amounts.

Withholding tax on interest payments by companies and to non-residents

Unlike interest paid under the Prompt Payments of Accounts Act, 1997 interest paid under the new Regulations is not yearly interest. Accordingly, Section 246 TCA 1997 does not apply where penalty interest is paid.

Tax treatment of compensation paid under S.I. No. 388 of 2002

The tax treatment of compensation paid under the new Regulations is the same as interest paid under the Regulations as outlined above, with the exception that the issue of the application of Section 246 TCA, 1997 does not arise.