The novel COVID-19, which has been officially declared as a pandemic by the World Health Organisation, has brought with it concern and uncertainty for everyone. Inevitably, it resulted in a disruption to the operations of business and most organizations are now struggling with unprecedented financial and economic realities. In turn, today’s market conditions give rise to new or different VAT challenges for organizations. Below, we share some VAT considerations associated with COVID-19.
Keeping up to date with VAT Developments
National authorities have announced several fiscal measures in an attempt to alleviate economies and businesses from the negative effects of COVID-19. It is thus necessary for businesses to keep abreast with the daily developments to be able to maximize the use of government support policies, as well as to implement any VAT changes in a timely manner.
Hospitality and Entertainment Industries
The hospitality and entertainment industries are undoubtedly two of the sectors most badly impacted by the COVID-19 threat. Travel ban, closure of non-essential establishments and social distancing measures led to booking cancellations, ‘no-shows’, refunds and cancelled events. In such circumstances, it may be confusing for businesses to identify their VAT position. Whilst it is crucial to analyse one’s business transactions on a case by case basis, it is to be noted that when, effectively, no provision of services has taken place, VAT should not have been levied. This means that businesses may be able to reclaim VAT already paid to the authorities on the advance payments or deposits that had been received from their customers. Where a cancellation charge is applicable, the VAT implications thereon would depend on the terms and conditions attached to the specific transaction. According to settled case-law, the cancellation fee would not be subject to VAT where it represents a compensation for the loss suffered and it has no direct connection with any supply of a service for a consideration.
In these market circumstances, many entrepreneurs have moved their business online. Their business model may now involve online intermediaries or marketplaces as well as international customers, giving rise to additional VAT complexities. Businesses are encouraged to analyse the changes to their operations vis-à-vis their possible VAT implications.
Non-Profit Making Organizations (NPOs)
The role of NPOs becomes even more significant during these critical times. Local VAT regulations stipulate that the supply of services made by NPOs to their members are exempt without credit and as such, VAT registration would not be required. Having said this, where NPOs provide other services against payment, or organize fund-raising activities, these would have to be considered in the context of the general VAT rules, unless the funds are specifically destined to be used for health, welfare or educational purposes.
On a national level, we have seen entrepreneurs and corporations donating money, goods and services in support of Malta’s fight against COVID-19. As the outbreak evolves, funding needs are likely to increase. Monetary donations are treated as outside the scope of VAT when these are freely given and the person donating the money has no right to receive a benefit in return. In this situation, the donation must be unconditional and not linked to any identifiable benefits, as opposed to sponsorship payments. With regards to donated services, in other words, where services are being provided for no consideration, VAT is generally not applicable. On the other hand, a donation of goods may require businesses to self-charge VAT where the goods in question do not qualify as business gifts.
During these critical times, it remains crucial for organizations to take into consideration the VAT consequences of their transactions and ultimately meet their VAT compliance obligations. In such a way, businesses are in a better position to navigate through these challenging times without exposing themselves to unnecessary VAT punitive measures.