Tax treatment of interest paid under the Prompt Payment of Accounts Act 1997

VAT

Interest is calculated on the VAT inclusive amount of the payment for goods or services. VAT is not charged on the interest as the interest is not regarded as consideration for the supply of goods or services.

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 1.

Tax Clearance Certificates

The Act does not require payment of an amount due to a supplier who has failed to comply with a request to provide a tax clearance certificate. It extends the time limits for payments where there are delays in furnishing tax clearance certificates.

Professional Services Withholding Tax (PSWT)

Where interest is paid on foot of payments which are payments for professional services, within the meaning of Section 520 Taxes Consolidation Act 1997, PSWT should not be deducted from the interest. When completing Forms F45 for issue to specified persons (i.e. suppliers), accountable persons should exclude interest amounts.