Date: Thursday 27th February 2020
Author: Brandon Gatt
The deduction system inherent in the EU VAT Law has been designed to relieve businesses from the burden of the VAT payable or paid in the course of their economic activities. It also promotes tax neutrality. The common system of VAT ensures that all economic activities are taxed in wholly neutral way. This is based on the principle of ‘Tax Neutrality’ provided for the in the EU Treaties and is interpreted in a number of CJEU Case Laws.
A right of deduction means a person’s rights to claim from the tax authorities the VAT paid on acquired goods and services. To be more specific, in accordance with Article 168 of the Council Directive 2006/112/EC (“VAT Directive”), in so far as the goods or services are used for the purposes of taxed transactions of a taxable person, the taxable person shall be entitled in the Member State in which he carries out such transaction to deduct input VAT.
As you might be aware, in Malta we have three (3) types of VAT registrations namely, Article 10, Article 11 and Article 12. The only Article which entitles a taxable person to deduct input VAT is Article 10, also know as the standard registration. In fact, Article 23 of the Malta VAT Act, provides that every person registered under Article 10 of the VATA, who furnishes a tax return for a tax period shall have the right to deduct from output tax for that period input VAT.
Before exercising the right of deduction, one has to understand the activity of the Company, specifically how this should be treated for VAT purposes. First and foremost, an assessment has to be carried out to determine whether the transactions fall within the scope of EU VAT. If in the affirmative, one has to establish whether that supply is treated as:
- Taxable supply.
- Exempt with credit supply.
- Exempt without credit supply.
Not all taxable persons, have a right to claim input VAT. For instance, an insurance company generally, cannot claim input VAT. The reason behind this is that according to the Item 2 of Part Two of the Fifth Schedule of the VATA, supplies by persons licensed under the Insurance Business Act or the Insurance Intermediaries Act, of insurance and reinsurance transactions, including related services are treated as exempt without credit. Given that such supplies are treated as exempt without credit, that person will not charge any output VAT on the sales, however, it will not be able to claim any input VAT. Therefore, the input on the expenses in this case is a sunk cost. However, there might be cases where if an insurance company provides insurance services to customers established outside the European Union (“EU”), the insurance company would be able to claim any VAT incurred in connection with such supplies.
Also, there might be cases where a particular company can provide ‘mixed-supplies’. A mixed supply occurs when a taxable person provides both taxable and exempt without credit supplies. This is very common in the letting of immovable property. A particular taxable person can rent out immovable property and charge VAT on such rent, whilst it can be the case where the same taxable person can rent out immovable property which is treated as exempt without credit for VAT purposes and therefore no VAT is chargeable. In this case the taxable person has to claim the input VAT which cannot be attributed directly on a partial attribution basis.
In view of the above, the Malta VAT Act stipulates that where a taxable person registered under Article 10 makes both taxable and exempt without credit supplies, he shall claim the input VAT incurred which is attributable to both his taxable and exempt without credit supplies in the proportion of his taxable to total supplied (including exempt without credit supplies).
As seen above, before claiming any input VAT is essential to assess the situation of a given scenario and analyse it accordingly. Additionally, one should delve into more details about the right of deduction, as there are further aspects that have to be read in conjunction with the related provisions of the right of deduction, such as the ‘Blocked Items’ provided for in the Tenth Schedule of the VATA and other considerations such as evidence and the submission of the VAT return itself.