Late payment interest

What it means

Late payment interest is the charge for paying after the due date. On taxes the office assesses it at the statutory rate on the amount owed for each day of delay.

In commercial dealings it arises by law even without a contract clause. A contractual rate is possible but must be proportionate: an excessive one will be reduced or refused by a court.

For taxes, late payment interest is not to be confused with a penalty. Interest is charged for paying tax late, a penalty for filing late, not filing or giving wrong figures. Whoever both files and pays late usually gets both, and each is assessed by a separate decision.

How it works in practice

In collections it runs from the first day after the due date and appears in the reminder. It is claimed with the principal in an application for a payment order.

In the books interest received is income and interest paid an expense. Interest paid in commercial relations is deductible; penalty interest charged by the tax office is not.

When a customer pays an invoice late, we do not issue the interest as another invoice with VAT. Late payment interest is not consideration for a supply and so not a taxable supply; it is stated in a demand or a reminder without tax and recognised as income in the books.

What to watch out for

Late payment interest and a contractual penalty are different things and can run side by side. The contract must say clearly which applies when, or only one of them survives a dispute.

Tax paid with the wrong variable symbol or to a different account. The payment leaves on time, but on the taxpayer’s personal account it is not allocated to the right tax, and late payment interest keeps running until the matter is corrected by an application to the tax office.