Practical complexities arising from input tax adjustments under the VAT Act

Abstract

Purpose: The main purpose of this study is to assess the practical issues arising from the application of the Capital Goods Scheme, and to analyse the implications arising from the lack of formal guidance. This research attempts to identify ways to overcome the issues arising from the implementation of the Scheme, and recommend improvements to the current system of input VAT recovery relating to capital goods.

Design: The objectives of this study have been satisfied through semi-structured interviews with local tax practitioners and high-ranking officials from the Office of the Commissioner for Revenue and the Malta Institute of Taxation. A set of scenarios relating to input VAT adjustments have also been discussed shedding light on the lack of formal guidance.

Findings: This study establishes that there are a number of issues in the application of the Capital Goods Scheme. There is a lack of clear definitions and inconsistent interpretation and application of the main provisions of the Scheme. In the absence of guidelines, tax practitioners must resort to obtaining confirmations from the tax authorities, which creates an unnecessary time lag. There is also a lack of awareness of the Scheme from a client perspective, and a lack of enforcement of the Scheme by the tax authorities. All respondents were unanimous that there is a need for guidelines to be issued or a complete overhaul of the present Scheme.

Conclusions: The Office of the Commissioner for Revenue should consider issuing a set of guidelines and amending the present legal notice to cater for the present business environment. By improving the legislative framework, the burden on tax authorities would be reduced giving rise to greater efficiency.

Value: This study is of value to both the Office of the Commissioner for Revenue and tax practitioners when dealing with VAT adjustments on capital goods. Given the significant value of capital goods may represent, avoiding errors in interpretation and application is of importance to businesses operating in Malta.