Practically, input VAT is the VAT incurred on the acquisitions made by a taxable person.
As a general rule, the deduction system incorporated in European VAT legislation has been designed to relieve businesses from the burden of the VAT payable or paid in the course of their economic activities.
Therefore, in principle, businesses carrying on an economic activity would have a right to deduct input VAT. However, there are instances, where although a business is carrying on an economic activity, if those supplies are treated as exempt (without credit), that business will not have a right to deduct input VAT.
In order to determine whether input VAT is deducted or not, a business has to carry out an analysis on the activities carried out by it. Basically, if a business will apply the methodical approach (which we referred to in Article Series 1), will have a wholistic view on his VAT obligations in Malta or possibly in other EU Member States.
If, a business will determine that his supplies will be considered as taxable or would fall within the remit of the qualifying supplies (i.e., supplies which give rise to deduction), then that person would be able to recover input VAT.
If, on the other hand, a business would determine that his supplies are treated as exempt without credit, unfortunately, the input VAT incurred on his acquisitions will be considered as a sunk cost, as such VAT will not be recoverable in the hands of the taxable person.
In Malta, we have three types of registrations: Article 10, Article 11 and Article 12. The only registration article which allows a person to recover the input VAT is Article 10, which is the standard registration in Malta.
We will not go through the processes in detail, however, a taxable person has to prepare and submit a Malta VAT Return and in case the output VAT (which is the VAT charged on the supplies made by the Company) exceeds the input VAT, the difference will be VAT refundable in the hands of that business.
The answer is no. Why?
Even tough a taxable person could have a full right of deduction, not all input VAT is deductible, as there are certain items which are considered as ‘blocked items. For example, if a business in Malta incurred input VAT with respect to the acquisition of works of art, that input VAT is considered as blocked and therefore, that business would not be able to recover that input VAT, even if the works of art are used as decorations in the office.
Also, one must consider that when a taxable person provides mixed supplies i.e., supplies which are taxable and supplies which are treated as exempt without credit, the taxable person would have a limited right to deduct input VAT.
What if a Company established in Malta, incurs VAT in other EU Member States, can this be recovered?
Yes – not through the Malta VAT Return but through the submission of a separate refund application, which we refer to it as the 8th Directive Application (which is regulated by Council Directive 2008/9/EC.