Administrative Tribunal orders refund of VAT following a revision of business model

The Administrative Review Tribunal on 30 March, 2015 ruled that the VAT Department must overturn its decision not to give a VAT refund, after the owner of a property changed its business model. 

This was decided by Magistrate Gabriella Vella in XXX Limited -v- Director General (VAT).

The applicant company filed its appeal before the Tribunal following a decision by the VAT Department to allow claims for a refund on expenses it incurred on five villas it had built, as allowed by the VAT Act (chapter 406 of the Laws of Malta).

The company had built five villas, originally with the intention to sell two of them which would finance the remaining three, which were to be rented. The company applied for a VAT number and described its activity as renting property.

In 2008 and 2009, the company claimed 60% of the VAT incurred for three of the villas which were to be rented. It just happened that the company achieved alternative financing which allowed it not to sell the two villas and therefore would be able to rent all five.

The company then notified the VAT Department that it was amending its returns from 2008 to 2010 because of this decision and therefore, felt it was entitled to claim a VAT refund on the two villas which originally were to be sold.

At first the VAT Department put its decision on hold because the Court of Appeal was dealing with a similar case and it wanted to be guided by the judgment.

On 5 January, 2012 the VAT Department issued its ruling on this Court of Appeal judgement Aprilia Hotel -v- Commissioner of VAT, decided on 27 October, 2011, which held that it was “established that no input VAT should be claimed in connection with immovable property that was not intended initially to be used to carry out taxable supplies in the scope of VAT (e.g. renting). In view of the foregoing the department considers that on the basis of the Court of Appeal decision input VAT incurred in connection with an operation which falls outside the scope of VAT cannot be claimed at a later stage on the premise of “a change of intention”.

The company replied stating that irrespective of what the Maltese court decided there were numerous European Court of Justice decisions which allowed a deduction of input of VAT and the VAT refund should be issued. 

The VAT Department was intransigent, quoting Article 22(2) and (3) of the VAT Act, which states that input VAT had to be paid to that person during that time the goods were paid for. 

The Tribunal held that the starting point of this case was based on the principle of tax neutrality, which has two aspects. The first being that VAT should be neutral in the sense that, generally speaking, an operator should be relieved entirely of the burden of VAT in the course of its economic activities (the right to deduct) and secondly that economic operators making similar supplies should be subject to the same VAT treatment.

In fact the European Court of Justice (ECJ) allows the right to ask for a reduction in input VAT as an adjustment to its declarations. This was held in Gmina Miedzyzdroje -v- Minister Finansow by the ECJ, which quoted from EU director 2006/112, and is reflected in Malta’s subsidiary legislation 406.12. The Court held: “The period laid down in Article 187 of Directive 2006/112 for adjustment of deductions enables inaccuracies to be avoided in the calculation of deductions and unjustified advantages or disadvantages for a taxable person where, in particular, changes occur in the factors initially taken into consideration in order to determine the amount of deductions after the declaration has been made. The likelihood of such changes is particularly significant in the case of capital goods, which are often used over a number of years, during which the purposes to which they are put may alter.” 

The Tribunal then turned its attention to the Maltese judgement Aprilia Hotel -v- Commissioner of VAT, on which the VAT Department rested its decision. The tribunal held that it was of the opinion that this judgement was incorrect as it was not in conformity with ECJ rulings. Furthermore, the facts were not identical to that of this case. The Tribunal held that the law allowed changes in the calculations of input tax and this is found in Article 4(b) of the Regulations, however, it does not give much details on how this may be done. Therefore, the Tribunal applied the principle of tax neutrality, which would apply in this particular case. 

Therefore, the Tribunal upheld the company’s request by ordering the VAT Department to deduct the input VAT incurred for all the five villas.

Malcolm Mifsud, Partner, Mifsud & Mifsud Advocates

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