COVID 19 – a VAT perspective

Zampa Debattista
Posted on 3rd April 2020

Definitely trending … Coronavirus or Covid 19 … businesses thriving or not, many expanding, a few stable or contracting, but now all facing a crisis with no precedents. In order to support and sustain businesses Government announced a serious of aid packages primarily aimed at safeguarding employment and employees. Up to now, the only measure relating to VAT was the deferment of payment of VAT.  This measure apart, in what way can businesses be impacted by the economic effects arising as a result of Covid 19 regarding VAT? Are businesses aware of such situations and most important are they in a position to handle and take remedial action? In this article we will be examining some particular situations that we envisage that business may have to face.

Measures by Government

In a communication dated 20th March 2020, the Commissioner for Revenue notified that the payment of VAT which falls due in March and April 2020 shall be deferred and has to be settled in two equal instalments with the two quarterly returns immediately following the quarter in which the dues would have been deferred. It is to be emphasized that the measure concerns the payment of the VAT and not the filing of the VAT return which is to be submitted by the due date. The scheme is principally aimed at companies or self-employed persons that may suffer a significant drop in revenue arising as a result of the economic constrains due to the Covid 19 pandemic, so much so that companies or self-employed persons which are not adversely hit by the crises are encouraged not to avail themselves of the scheme and continue paying the VAT on time. Companies and self-employed persons that qualify for the scheme must make an on-line application on the Malta Enterprise website, by not later than 15th of April 2020.

We understand that this may not be the only Covid 19 measure relating to VAT as Government has hinted that other measures may be introduced depending on how the economic situation develops.

EU Commission message to Member States

The EU Commission has solicited Member States to take measures aimed at helping businesses at this moment of crises, such as deferment of payment of the VAT which is possible under Article 206 of Council Directive 2006/112/EC (the “VAT Directive”). It would be difficult to foresee any immediate amendments to the VAT Directive to take on board other measures needed to counter the crises and sustain businesses. This particularly so since any amendments to the VAT Directive have to undergo a lengthy legislative process and can only become law if unanimously agreed by the Member States. However, it is noted that some Member States have taken temporary measures to reduce or zero the VAT rate on personal protective equipment to alleviate the burden on national health services fighting the Covid 19.

Most urgent VAT constraint for businesses

Cash flow and payments not received

Without a doubt, the main constraint for businesses at the moment and for the duration of the Covid 19 crises, is the cash flow position. In respect of VAT, liquidity is fundamental given that the VAT liability of vatable supplies generally rests with the supplier, bar a few exceptions where the liability may shift to the customer. Now, for VAT purposes the majority of businesses account for VAT on an accruals basis, meaning that irrespective of whether they had pocketed the VAT from their customers, they are still required to pay it to the Tax Authority by the date established at law. On the other hand, businesses and persons eligible to account for VAT on a cash basis, such as retailers and professional services providers, account for the VAT when they actually receive the payment and hence do not bear any consequences when they do not receive a payment for a supply. In the current situation, it is most likely that even reliable customers will be unable to make timely payments to their suppliers, possibly aggravating extensively the cash flow of the suppliers who are liable to pay it, the so-called domino effect. Whilst, the announced measures that allow for a deferment of the payment to the Commissioner for Revenue may temporarily help, ultimately the person liable to pay it shall have to make the payment. In such circumstances, what would be the position of the supplier? Can such uncollected VAT paid to the Commissioner be reclaimed? If yes, what are the conditions?

Claim for Bad Debt Relief

Any person registered under Article 10 may claim relief from VAT on bad debts incurred, subject to meeting the conditions and restrictions posed in Item 10 of the Tenth Schedule to the VAT Act. Guidelines for Bad Debt relief Claims can be downloaded by accessing the following:

Guidelines for Bad Debt Relief claims

Currently such guidelines have limited application due to their existing restrictions, such as the requirement of a final Court judgement to assert that the bad debt can never be recouped.  Possibly it could be time to have the scope of these guidelines widened, at least have them aligned them with the bad debt relief guidelines for income tax purposes.

Payment for a supply made but goods/services not supplied

Let us now examine a scenario where a supplier (on accruals basis) received a payment/deposit for a supply and fails to provide or will be unable to provide the good/service in respect of the payment received with relative VAT payment to the Commissioner already made by the supplier.

The supplier may reimburse the payment and have it reflected in a credit note issued to the customer, accounting for it in his VAT records.

However, in case no reimbursement is made, reference has to be made at the VAT rules regulating the point in time where the tax becomes chargeable.  In the context of a domestic transaction, tax becomes chargeable on the earlier of the date when the payment is received or the date when the services are rendered/ goods are delivered.  In this case, the payment has preceded the date where the services are rendered/goods are delivered and consequently, generally, the transaction should be subject to VAT on the amount actually received from the customer. However, given that no supply takes place, irrespective of the payment made, in line with the take of the ECJ in such situations, the supply should fall outside the scope of VAT.  As a result, the supplier may in terms of Article 69 of the Malta VAT Act, apply for a remedy in that the Commissioner shall repay the VAT, where it results, on the production of evidence, that the tax paid by a person was not due. It is understood that where a good is not delivered or a service is not rendered that supply would be outside scope of VAT and arguably the tax paid thereon would definitely not be due. However, it is noted that the regulations prescribing the manner and time within which such a claim can be made are not published and as a result it is not clear how such a claim can be made.

In the context of an Intra-Community supply, given that the tax point is linked to the delivery of goods irrespective of payment, there would be no amendments to be made in this respect since the payment in advance of such supplies never triggers a VAT obligation. Likewise, the non-dispatch and transport of the goods do not give rise to an intra-Community acquisition by the customer in the Member State of arrival.

The European Court of Justice on cancellations – CJEU

As mentioned above, the situations we are currently experiencing are dissimilar to any other previous ones and therefore, the reliance of court decisions in respect of cancellations of the sort is to a certain extent limited.  Having said that we have gone through a couple of cases on cancellation to highlight the though process of the CJEU in respect of cancellations.

At first glance it may appear that once the service was not rendered, then it shall be deemed to fall outside scope of VAT as one of the conditions necessary for a supply to be in the scope of VAT, namely the supply of the service is not met.

In case C-277/05 Societe Thermale, the CJEU ruled that sums paid in advance by customers relating to a supply of hotel services that are subject to VAT, are to be interpreted as constituting a deposit and where the customer exercises the cancellation option available to him and that sum is retained by the hotelier, that sum is to be considered as a compensation for any losses suffered by the hotelier as a result of the client’s default. In other words, there is no direct connection with the supply of any service for consideration and consequently the deposit retained by the hotelier shall not be subject to VAT.

In case, C-250/14 Air France-KLM the CJEU analysed the VAT treatment of unused and/or expired flight tickets for domestic air travel taking place within French territory (in France domestic air travel is taxable). The CJEU was asked whether the issue by an airline company of flight tickets would be subject to VAT in the event that those tickets have not been used by passengers, remaining unutilised with no possibility of a refund to the purchaser. The CJEU ruled that since there was a direct link between the service supplied and the consideration received, the sums paid constituting the actual consideration for an identifiable service supplied in the context of a legal relationship, a supply of service such as that at issue in the proceedings would be subject to VAT particularly since the flight service was effectively performed. This because the sum paid by a passenger to an airline company in the context of the legal relationship  constituted by the transport contract, is directly linked with an identifiable service for which it constitutes the remuneration, and second, that the service was in fact performed, it being the passenger who by absconding did not enjoy the service so performed.

As mentioned above, the principles of interpretation established as a result of the above two cases may not be necessarily applicable for cancellations in these two sectors brought about by the Covid 19 pandemic as the context is entirely different. We understand, that pursuant to cancellations sums paid in advance would be refunded or retained with the possibility to use the service later. However, this would depend on the terms and conditions set out in the agreements between the service provider and the customer. As a result, an assessment on a case by case basis would be highly recommended.

Unredeemed Vouchers

As a result of Covid-19 it could be the case that certain dated vouchers which were sold to consumers may not be redeemed until this pandemic is over, and consequently could expire.

What is the VAT treatment of unredeemed vouchers?

Effectively, in order to address the VAT consequence of unredeemed vouchers, it is pertinent to identify whether a voucher is single purpose voucher or a multi-purpose voucher.  While we do not envisage any issues with the VAT treatment of unredeemed single purpose vouchers, since the tax point is triggered upon issuance, there could potentially be differing interpretations on unredeemed multi-purpose vouchers.  Generally, given that multi-purpose vouchers are taxable at redemption and the redemption does not happen before the voucher expires, then, in principle, the unredeemed voucher will go untaxed.

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DisclaimerPlease note that this article is intended for information purposes only and whilst utmost care has been taken to ensure a correct application and interpretation of VAT rules, Zampa Debattista shall bear no responsibility legal or otherwise, for misuse.

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