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Right of VAT Refund

4 Sep 2023 12:35 | Michael Debono (Administrator)

The right to deduct or claim VAT on expenses incurred in conducting an economic activity (input VAT) is one of the most important considerations for VAT registered persons. At first glance, the process may look straight- forward: receive the invoices, record them in the VAT return and proceed to claim VAT back. However, quite a few conditions need to be satisfied for such a claim to be in line with the various provisions of the Maltese VAT Act.

For starters, not everyone is entitled to claim back input VAT – only those who satisfy certain conditions, mainly taxable persons who qualify, and actually register, for Maltese VAT under Article 10 of the Maltese VAT Act and who perform certain activities which carry a right to refund.

Consequently, the first issue is to determine which economic activities will be carried out and whether they entail a right of refund. In case of mixed supplies, wherein only some of the activities carry such right, one might need to enter the realm of partial attribution rules which regulate how to calculate the portion of the VAT incurred on general expenses that can be claimed back.

From experience, there are quite a few misconceptions associated with this mechanism, such as that it can be applied to all the expenses incurred. This is not the case since for specific expenses solely attributable to a specific supply or group of supplies with the same right of refund, one either claims VAT in full or does not claim any of it depending on the nature of activities to which it is related.

The computation of the partial attribution mechanism is another important aspect which obliges an Article 10 VAT registered person to use the previous year’s ratio as a provisional ratio for the current year.

Once the current year is over and the definitive ratio is known, it is possible to perform any adjustments triggered by a difference between the provisional and definitive ratio in the appropriate boxes (40 or 41) of the first VAT return ending in the following calendar year. At times this might prove to be problematic, especially if it is being applied for the first time and if no proper records and workings are kept.

Blocked deductions are also another important consideration which prohibits the claiming of VAT on certain expenses, even if they are genuine business expenses. At this point, it is important to highlight the difference between VAT and corporate tax considerations with respect to what can be claimed back or deducted for tax or VAT purposes. Sometimes these are mixed, giving rise to an incorrect VAT treatment which, if discovered, may lead to interest and penalties.

Another key factor is the timing of the VAT claim. While in practice this is usually based on the invoice date, it is not always the case especially in cases of deposits, requests for payments from professionals or warrant holders and invoices from suppliers who are authorised to account for VAT using the cash accounting system.

Additional obligations apply in cases of input VAT claimed on capital goods (fixed assets) which satisfy certain conditions wherein the original amount of input VAT claimed back may need to be adjusted in the subsequent years, if certain conditions are satisfied.

Finally, due care needs to be given to collecting the appropriate evidence and format backing such VAT claims.

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