Tax interest is a daily charge applied by the Revenue Commissioners on any tax liabilities not paid by their legal deadline. It is treated as a statutory cost for late payment rather than a penalty and applies to all major business taxes in Ireland.
Tax interest is the additional charge imposed by the Revenue Commissioners when a company fails to pay its tax liabilities by the statutory deadline. In the Irish tax system, interest is not considered a penalty for wrongdoing, but rather a "cost of credit" for the period that the state was deprived of the funds. It applies automatically to almost all unpaid taxes, including Corporation Tax, VAT, and employer PAYE/PRSI.
When your company misses a payment date, tax interest begins to accrue on a daily basis from the day after the tax was originally due until the date it is finally paid in full. Because the interest rates set by Revenue are typically significantly higher than standard bank rates, tax interest can accumulate rapidly, creating a substantial financial burden for startups that are not diligent with their compliance calendar.
For founders, tax interest is a critical cash flow consideration. It is important to note that, unlike many other business expenses, tax interest paid to Revenue is not tax-deductible. This means the actual "real world" cost of the interest is even higher than the headline rate, as it must be paid out of the company's after-tax profits. Monitoring your financial year end and associated payment dates is the best way to avoid these unnecessary costs.
The rates for tax interest in Ireland are set by legislation and vary depending on the type of tax involved. For most "standard" taxes like VAT and employer payroll taxes (PAYE/PRSI), the interest rate is currently 0.0274% per day, which equates to approximately 10% per annum. For Corporation Tax and Capital Gains Tax, a slightly lower rate of 0.0219% per day (roughly 8% per annum) typically applies.
These rates are intentionally high to discourage businesses from using "unpaid tax" as a low-cost working capital loan. Revenue calculates the interest using a simple daily formula: the amount of tax late, multiplied by the number of days late, multiplied by the daily interest rate. Because it is calculated daily, even being just a few days late with a large VAT payment can result in a noticeable interest charge on your next statement of account.
Revenue has very limited power to waive tax interest. Because it is viewed as a statutory charge rather than a discretionary penalty, it is much harder to "negotiate away" than a late filing fine. Generally, interest will only be waived in exceptional circumstances, such as a significant error by Revenue themselves or an extreme case of personal hardship that made payment physically impossible.
If you disagree with an interest charge, you can request an internal review or appeal to the Tax Appeals Commission. however, you must be able to prove that the tax was actually paid on time or that the underlying tax assessment was incorrect. Simply claiming that you forgot the deadline or had poor cash flow statement results is rarely accepted as a valid reason for waiving interest.
It is vital to distinguish between tax interest and tax penalties. Interest is a time-based charge for the late payment of money. A penalty, on the other hand, is a punitive fine for a specific default, such as failing to file a return, making a careless error, or deliberate tax evasion. Penalties are often calculated as a percentage of the tax underpaid, ranging from 3% to 100% depending on the severity of the behavior.
In many cases where a payment is late, you will be hit with both. For example, if you file your Corporation Tax return late, you may face a late filing surcharge (a penalty) AND interest on the tax that remained unpaid after the deadline. This "double hit" is why maintaining a clean record with the Companies Registration Office and Revenue is so important for a company's financial health.
While having a small amount of tax interest on your record does not automatically result in a strike-off procedure, persistent unpaid interest can lead to Revenue enforcement. Revenue can apply for a "Tax Clearance Certificate" to be withheld, which prevents your company from winning government contracts or applying for certain grants.
Furthermore, during due diligence for equity financing, investors will look at your Revenue record. A history of recurring tax interest payments suggests poor internal management and a lack of financial control, which can negatively impact your company's valuation orEven lead to an investor walking away from the deal.
In situations where a company has significant tax arrears, Revenue may allow a Phased Payment Arrangement (PPA). This lets you pay off the base tax and the accrued tax interest over a period of months or even years. However, while you are paying off the debt, "carry-on interest" usually continues to accrue on the remaining balance.
Applying for a PPA is a formal process that requires you to prove you can meet your future tax obligations whilst paying down the old ones. Successfully managing a PPA can protect your corporate veil and keep the company trading, but the interest costs mean that the total amount paid back will be significantly more than the original tax bill.
Under Irish law, tax interest is specifically disallowed as an expense when calculating your company's taxable profit. This policy exists to ensure that there is no tax benefit to being late. If interest were deductible, the "net cost" to the company would be lower, effectively reducing the deterrent effect of the charge.
This makes tax interest one of the most expensive forms of "debt" a company can have. Because the interest must be paid from "taxed" income, a 10% interest charge effectively costs the business more than a 10% bank loan. Founders should prioritise the payment of tax liabilities over almost any other unsecured creditor to avoid this non-deductible drain on resources.
