Revenue Tax Briefing Issue 31, April 1998
The Prompt Payment of Accounts Act 1997 came into effect on 2 January 1998 and applies to goods and services supplied on or after that date.
The Act provides that certain purchasers who obtain goods or services from a supplier must pay for those goods or services by a prescribed payment date. Where payment is not made by this date, the purchaser must pay to the supplier an interest penalty in addition to the amount due for the goods or services.
The annual rate of interest is 11.75%. This is calculated from the period beginning on the day after the prescribed payment date and ending on the date when the payment is made.
Purchasers liable for the interest penalty on late payment include Government Departments, public bodies and their subsidiaries and contractors on public sector contracts.
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.
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.
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.
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.
Interest paid under the Prompt Payment of Accounts Act 1997 is yearly interest. Accordingly, Section 246 Taxes Consolidation Act 1997 (deduction of tax at the standard rate) applies where penalty interest is paid by:
Where Section 246 applies, the person by or through whom the payment is made must deduct and remit to Revenue tax at the standard rate in force at the time the payment is made.
In practice, Revenue will not require tax to be deducted under Section 246 from payments of penalty interest under ₤100.
* “Company” in this context means any body corporate. A body corporate is a succession or collection of persons having in the estimation of the law an existence and rights and duties distinct from the individual persons who form it from time to time [Murdoch, Dictionary of Irish Law]. Examples of bodies corporate are companies registered under the Companies Acts, government departments and local authorities.