VAT invoices becoming critical for income tax deduction of expenses

VAT invoices and income tax deductions

To be allowed as an income tax deduction, expenses have to be supported by proper VAT documents required to be issued in terms of the VAT Act.

Anthony Pace

Partner, Head of Tax

KPMG in Malta

papers stacked on table

Proposed changes through the Budget Measures Bill of 2016

The Budget Measures Bill of 2016 proposes the introduction of a new condition for expenses to be allowed as deductible from the chargeable income of taxpayers – the expenses must be supported by the relevant invoice or document issued in terms of Article 50 or 51 of the Value Added Tax Act. Although not yet enacted, it is reasonable to assume that such provision will be enacted in the coming months through the next Budget Measures Act with effect from year of assessment 2017 i.e. covering financial years ending in 2016.

Further Insight

The new provision is proposed to amend the main article regulating income tax deductions - Article 14 of the Income Tax Act. Although Article 14 is generally described as the positive-tests article for deductions to be allowed, the proposed amendment adds a negative requirement; it will disallow deductions unless the taxpayer is in possession of such VAT documents and he produces such documents if required to do so by the Commissioner.
With the removal of the EUR7,000 VAT registration exemption threshold last
year, the default is that suppliers must be VAT registered and must issue VAT
documents unless they are engaged in exempt without credit supplies. The salient VAT documents required to be issued by suppliers in terms of the VAT Act can be summarized as follows:

  • Full tax invoices when the customer provides his VAT identification number to the supplier. Such invoices must contain all the content required at law including the VAT rate, the VAT amount payable, the full names, addresses and VAT numbers of both the supplier and the customer and reference to the applicable special scheme if one of such schemes is adopted (such as the travel agents` margin scheme).
  • Simplified tax invoices when the customer provides his identification number to the supplier and the value of the relevant invoice does not exceed EUR100. Simplified tax invoices need not have the name and address of the customer, yet the inclusion of the VAT identification number of the customer remains pertinent.
  • Fiscal receipts when the customer does not provide his identification number to the supplier. Such fiscal receipts can be issued in the following forms:Through fiscal cash registers when the suppliers are retailers or sellers of food;Through point of sale systems approved by the Commissioner for VAT. Such receipts should have an EXO number printed on the receipt;  Through approved fiscal taxi meters; orOn the pre-printed grey forms that suppliers can obtain from the VAT Department. Such method of receipting is generally used by suppliers of services (e.g. repairers, suppliers of services connected with immovable property, professional service providers etc.). 
  • Fiscal receipts when the supplier is registered as a small undertaking, also known as an Article 11 registration. Generally such receipts need to be issued on the pre-printed grey forms that suppliers can obtain from the VAT Department.

No VAT documents are required to be issued by persons engaged in exempt
without credit supplies, such as transfers of immovable property and supplies of insurance, medical, educational and banking services.

KPMG Observations

Subject to the enactment of the said provision, it has now become crucial for taxpayers to have the right VAT documents, not solely for the purposes of claiming VAT credits where relevant, but also to ensure that they take the maximum income tax deductions which they would be entitled to. When taking into account that the VAT Department and the Inland Revenue Department are constantly taking steps to merge and share data, taxpayers cannot afford to ignore such new requirement because, amongst other potential consequences, a VAT inspection could easily have income tax consequences and vice versa.

With the removal of the VAT registration threshold in 2015, not being VAT registered is no longer a plausible excuse of Maltese suppliers engaged in taxable or exempt with credit supplies. In this context, the starting point for taxpayers is to familiarise themselves with the type of VAT documents that they need to receive from their suppliers and the minimum content required to be included on such documents. Controls and checks can thereafter be put in place to secure proper documents are in hand.

Although the amendment is not yet in force, current or early adoption is highly recommended as, based on the Bill, the new test will affect all income tax computations covering year of assessment 2017. It would be advisable that taxpayers who might not be fully compliant with the proposed amendment for their year of assessment 2017 seek to identify the potential issues and take remedial action, where possible. We would be pleased to help you prepare to meet the new test that could safeguard your income tax deductions. Our team of experienced tax professionals specialised in VAT and income tax can also check the health of your business from a tax perspective and help you get up to speed with the necessary record retention and compliance requirements. 
If you would like to know more about this development and how it might affect
your business, or indeed to discuss any other tax matter, please get in touch with us.

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