A simple guide to understanding the Value Added Tax (VAT)

The Value Added Tax (VAT) is a tax added to the price of a product or a service. VAT is a tax collected by a merchant on behalf of the Government of a particular country. Hence value-added. 

The rate of VAT may vary from one country to another. In the European Union, the Value added tax is included already in the final price of the good or service. For example, if a carpet has a price tag of €120, part of the price includes VAT (e.g. 20%). The cost of the rug is €100, and the VAT is €20. 

The United States has a similar tax, known as the sales tax. The item’s price on a shelf doesn’t include tax; however, the merchant adds the sales tax at the counter. The final price ($120) that the customer pays would be higher than the shelf price ($100). This practice is illegal in the EU.

The minimum standard rate for VAT for EU countries may vary from 15% to 25%. Luxembourg currently has the lowest standard rate (17%), while Hungary has the highest (27%).

Suppose the exact carpet sells for €100 before adding VAT. In theory, it will sell for €117 in Luxembourg (17% VAT) and €127 (27% VAT) in Hungary, without considering other costs like transport, labour costs for retail employees, etc.

Malta

The VAT came into force on 1st January 1999 through Chapter 406 – Value Added Tax Act of the Laws of Malta. The tax is a used fiscal tool for the Government to influence the economy. For example, lower taxes can encourage people to spend more, and higher taxes can encourage people to spend less.

The VAT Act mentions economic activity, which refers to a taxable person. Anyone who performs an economic activity is a taxable person, i.e. someone that pays VAT. In this case, a taxable person can refer both to an individual or a limited liability company carrying out an economic activity. 

The list of taxable persons is exhaustive – some categories include manufacturers, authorized representatives, importers, distributors or a person. The list does not include employees employed by a taxable person.

For example, a beverage company is a taxable person as it is a company; it collects and pays VAT. Employees working out their job with the company aren’t taxable persons in the VAT Act.

The same applies to a self-employed architect. The architect is generating economic activity and is considered a taxable person. If the architect engages an employee, the employee isn’t a taxable person.

The term economic operator is used instead of “a taxable person that carries economic activity” to keep things as simple as possible.

VAT rates

Malta has four rates of VAT:

• 18% – Standard rate
• 0% (e.g. food for human consumption, pharmaceutical products, scheduled bus service, domestic inter-island sea passenger transport, international passenger transport, exports, intra-community supplies of goods, etc.)
• 5% (e.g. electricity supply, confectionery and other edible items, medical accessories, printed matter, certain items for the exclusive use of the disabled, minor repairing of bicycles, shoes and leather goods, clothing and household linen (including mending and alteration), domestic care services such as home help and care of the young, elderly, sick or disabled, admission to museums, art exhibitions, concerts and theatres)
• 7% (e.g. accommodation in a hotel or guest house, accommodation in any premises, use of sporting facilities)

The standard VAT rate

The article will be discussing the standard VAT rate (18%). This article will not address the other VAT rates (0%, 5%, 7%). 

The customer always pays the total VAT amount to a supplier. The economic operator acts as a tax collector on behalf of the Government.

Economic operators who buy goods and services from other economic operators like raw materials pay VAT. However, they can claim the difference between the amount paid to their suppliers and the amount collected from customers.

For example, a merchant sells interior design items. It collects €10,000 worth of VAT from the things it sells to customers, and the merchant pays €5,000 VAT to its supplier. The merchant nets the difference and pays the VAT Department €5,000 (Received: €10,000 less Paid: €5,000)

The customers would have paid €10,000 to the merchant, and the supplier would have collected €5,000 from the merchant. The supplier would pass €5,000 it ordered from the merchant to the VAT department, and the merchant will pay the difference (€5,000).

The general rule and the exception

The example above illustrates a scenario where both economic operators (the merchant and the wholesaler) are eligible to pay the difference to the Government. The VAT refers to this procedure under article 10.

Article 10 – the general rule

Article 10 of the VAT Act states that the customer pays the merchant’s total VAT rate (18%). The merchant passes on the difference between what it collects and the amounts paid to its supplier. Article 10 is the general rule. However, there are exceptions.

Article 11 – the exception to the general rule

Article 11 is an exemption to article 10 – the general rule. The supplier must be eligible to provide goods and services in this category. An economic operator must apply to benefit from the exemption.

Article 11 requires the merchant to register with the VAT department. Perfectly legal. However, the merchant doesn’t collect and should not collect VAT from customers. The merchant cannot set off any VAT it paid to its supplier. 

Any VAT the merchant pays its supplier for goods or services it purchased cannot offset against any VAT collected from its customers. Economic operators do not charge VAT, and they do not recover VAT. For example, if a merchant paid €10,000 worth of VAT to its suppliers, it cannot be claimed.

Legal: Should an economic operator register Article 10 or Article 11?

The short answer is that it depends. The VAT Act talks about entry and exit thresholds. There are three thresholds, and their values change from time to time. The last time the lists were updated was on 24th December 2018. Click here to see if the rates have changed.

The VAT Act talks about entry and exit thresholds.

	Entry Threshold	Exit Thresholds
Economic activities consisting principally in the supply of goods	€35,000	€28,000
Economic activities consisting principally in the supply of services with a relatively low value-added	€24,000	€19,000
Other Economic Activities that provide a pure service	€20,000	€17,000

One can observe that the entry threshold figures are higher than the exit thresholds and change from one category to another.

Above the entry threshold

Suppose an economic operator supplies goods that generate or expect to create more than the entry threshold (e.g. the merchant projects to sell more than €35,000 worth of goods). In that case, the merchant will automatically register under article 10.

Below the exit threshold

On the other hand, if an economic operator supplies goods that generate or expect to create more than the exit threshold (e.g. the merchant projects to sell fewer than €28,000 worth of goods). In that case, the merchant will automatically register under article 11.

Between the entry and exit thresholds

There is a choice if an economic operator supplies goods that generate or expect to create a value between the entry (€35,000) and exit (€28,000) thresholds.

The merchant can choose whether to register under article 10 or 11. If the merchant opts to register under article 10, they can’t switch to article 11 for at least thirty-six months.

Other considerations

This section only applies when there’s a choice between the entry and exit thresholds, i.e. deciding between articles 10 and 11. The option can be tricky. (See the paragraph above – “Between the entry and exit thresholds”). The list below can give you some tips to consider:

• Filing the paperwork with the VAT department is much straightforward under article 11 than under article 10. Economic operators do not charge VAT, and they do not recover VAT. Even though it’s always advisable to speak to a financial advisor like an accountant, one can easily file a return if one knows what it’s doing.
• Calculating the net VAT under article 10 may be more complicated and may require the use of a financial advisor. For example, the merchant’s may have suppliers registered under article 11 (exempt). Suppose its supplier is exempt, and it didn’t charge the merchant any VAT. In that case, it could not net the difference from the VAT it collected from its customers.
• Article 11 caters for small businesses like sole traders and other smaller trades. In contrast, article 10 caters for large companies that may process hundreds of invoices every year and may have their in-house accountants.
• Article 10 can be advantageous when the business incurs high costs such as buying laptops, furniture, etc. The supplier only pays the difference between the VAT incurred for purchasing these items and the VAT collected from customers. Such adjustment can have a positive effect on the merchant cash flow. Suppose the VAT paid to the merchant’s suppliers exceeds the amount collected from its customers. In that case, the merchant is eligible for a tax credit redeemable in the following tax period. Unfortunately, this does not apply to economic operators under article 11. The implications can be a negative effect on the cash flow.
• Eligible merchants under article 11 can sell products cheaper. For example, two businesses buy the same product for €50 each from the same supplier. The merchant registered under article 11 can sell the item for €100. However, the merchant registered under article 10 must sell the same thing for €118 (€100 plus 18% VAT) to maintain the same profit margin of €50. Consumers would prefer to save €18, making the merchant registered under article 11 cheaper and attractive even though the product is identical to the seller under article 10.

Important facts

• The VAT number under article 11 is eight digits long, i.e. 1234-5678, and does not have the MT prefix.
• The VAT number for businesses registered under article 10 is digits long, i.e. MT1234-5678 (includes MT prefix).
• Most economic operators are obliged to issue a fiscal receipt regardless of their registration. The rule does not apply to medical services (e.g. doctors, psychologists, etc.), religious services and educational services (e.g. teachers providing private lessons). The category is exempt from issuing fiscal receipts.
• It is illegal for a business registered under article 11 to collect VAT, as it will collect revenue belonging to the Government. In other words, theft.

Caution

A few bad players may offer customers the “opportunity” to buy a good or service without charging them VAT. At the same time, a consumer is legally entitled not to pay for VAT should a business be registered under article 11.

Suppose a business doesn’t issue a fiscal receipt. It will be liable for avoiding other taxes besides VAT, such as income tax. It will be declaring lower revenues, lower profits and lower tax revenue for the Government. So the consumer won’t be saving anything but helping the business evade taxes.

A customer willing to aid a business to avoid taxes is an accomplice and may be subject to prosecution.

Stuff that is good to know

• VAT is paid once and only once in the European Union. Suppose a customer buys goods from Italy amounting to €122 (Cost: €100 plus VAT: 22%). The customer doesn’t pay any more VAT once the item arrives at its final destination, i.e. from one EU country to another.
• Any item bought from outside the European Union is subject to VAT. The non-EU seller may collect the VAT on behalf of the final destination of the country, or else the customer must pay the tax upon the arrival of the item in the customer’s country.

More information

Contact the VAT department by email at  or call 153 for more information about the VAT department.