Considering Article 22(4)(d) of the Malta VAT Act
Following the transition period which ended on 31 December 2020, the United Kingdom (UK),with the exception of Northern Ireland, departed from the European Union (EU), resulting in the UK being considered to be a country outside the EU for VAT purposes.
In the light of this, as from 1 January 2021 certain changes have resulted that impact Maltese established businesses undertaking transactions with UK based customers and suppliers, including (amongst others) changes to VAT reporting obligations, procedures on how to recover UK VAT and possibly changes to the method of reporting and settling UK VAT that was previously paid using the Mini One Stop Shop.
Despite the many hurdles which Brexit may have brought from a VAT perspective for persons operating with the UK, it has also resulted in some opportunities, one of which is the application of the provisions of Article 22(4)(d) of the Maltese Value Added Tax Act.
In summary, this article states that when certain exempt without credit services (set out in the table below) are supplied to customers that are established outside the Community (or when those services are directly linked with goods to be exported outside the Community), any input tax that is directly attributable to such supplies may be fully recovered by the taxable person providing these supplies. A country outside the Community is generally interpreted as one which is outside the European Economic Community (bar certain specific exceptions).
Specifically, this provision applies to the following exhaustive list of services:
Certain insurance related services |
Supplies by persons licensed under the Insurance Business Act / Insurance Distribution Act, of insurance and reinsurance services, including related transactions, in respect of which they are so licensed |
Granting/negotiation of credit |
The granting and negotiation of credit and the management of credit by the person granting it |
Certain transactions relating to credit guarantees |
The negotiation of or any dealings in credit guarantees or any other security for money and the management of credit guarantees by the person who is granting the credit |
Transactions surrounding payments and transfers as well as other financial services |
Transactions, including negotiation, concerning deposit and current accounts, payments, transfers, debts, cheques and other negotiable instruments, but excluding debt collecting and factoring |
Transactions relating to currency |
Transactions, including negotiation, concerning currency, bank notes and coins normally used as legal tender |
Certain transactions surrounding shares / securities |
Transactions, including negotiation, excluding management and safekeeping, in shares, interest in companies or associations, debentures and other securities, excluding documents establishing title to goods |
A supplier providing any of the above-listed services to UK customers (or in connection with the export of goods to the UK) may, as from 1 January 2021 be in a position to begin recovering part/all of the input tax incurred on expenses which are attributable to such supplies.
However, given that the provision of the above-listed services are generally regulated by competent authorities in the territory where such services are provided, additional considerations would need to be given to potential licensing requirements in the UK which may ultimately limit the ability to provide such services from a Maltese establishment.
Furthermore, in the event that a Maltese established taxable person were to set-up a fixed establishment (such as a branch) in the UK, one would need to determine the applicability of the provisions of Article 22(4)(d) of the Maltese VAT Act when assessing the extent (if any) of the taxable person’s right to recover input tax incurred in relation to supplies provided through the UK branch.
Indeed, in the recent Morgan Stanley case (C-165/17), the Court of Justice of the European Union ruled on the methodology to be used to determine the extent of a taxable person’s right to recover input tax in the context where the taxable person has its principal establishment in a territory of the EU and other fixed establishments also located within the EU.
However, it is not clear from this judgement whether the interpretation adopted should also be applied in the context of an EU established taxable person having a fixed establishment located in a non-EU territory (such as the UK).
Next steps
As indicated above, Brexit has altered certain VAT procedures for Maltese established persons doing business with UK customers and suppliers. Such suppliers should consider reviewing their internal VAT policies and procedures to ensure that they are compliant with VAT law and assess whether they are in a position to begin to recover input tax on supplies provided in terms of Article 22(4)(d) of the Maltese VAT Act.
