VAT Return Adjustments
It often happens that whilst drafting VAT Returns we are provided with invoices which should have been included in previous VAT Returns. Likewise, it is not the first time that during reconciliation and audit exercises we notice that certain invoices were not declared correctly in the respective VAT Returns. In this article we shall be discussing how to rectify such situations and the respective implications.
Incorrect VAT Returns
Article 28 of the VATA provides for two manners in which a VAT Return may be corrected:
- Non Punitive Method – Adjustment in subsequent VAT Returns
- Punitive Method – Filing of Correction Form (VAT Form 001/2016)
Non Punitive Method – Adjustment in subsequent VAT Returns
Item 4 of the Eleventh Schedule to the VATA lays down the two main criteria (commonly known as the 5% and 6 months rule) which need to be satisfied in order for a past VAT Return to be corrected by means of an adjustment in a subsequent VAT Return:
4. (1) Where a person registered under article 10, in a return for a tax period furnished to the Commissioner:
- overstates or understates the output tax and the overstatement or understatement does not exceed five per cent of the output tax declared in the said return, and/or
- overstates or understates the credit for input tax and the overstatement or understatement does not exceed five per cent of the credit for input tax declared in the said return,
he may correct the mistake by making the necessary entries in the value added tax account and in the tax return for the tax period during which the overstatement or understatement is discovered.
(2) No correction may be made in accordance with this item for any tax period which commences later than six months from the expiration of the tax period to which the mistake refers.
Hence with respect to the 5% rule, one needs to determine:
- In which VAT Return the mistake was made (the original VAT return)
- Whether the mistake concerns output or input VAT
- Whether the amount of output/input VAT incorrectly declared/omitted exceeds 5% of the total amount of output/input VAT declared in the original VAT Return
With respect to the 6 months rule one needs to determine that no more than 6 months passed from the last day of the original VAT Return and the first day of the VAT Return in which the adjustment will be made. Hence, assuming quarterly VAT Returns, the mistake in the original VAT Return can only be corrected in the subsequent 2 VAT Returns.
On the basis that both criteria are satisfied the mistake can be corrected by means of an adjustment in the subsequent VAT Returns without the need to file a correction form and without incurring any penalties or interest in connection with the adjustments made.
Item 4 also provides that:
(3) When a correction is made in terms of this item the value added tax account shall contain a clear reference to the tax period to which the mistake refers and to all the documents relating to relative transactions.
(4) A mistake in a tax return may not be corrected by means of a correction in a subsequent tax return except to the extent allowed and in the manner provided in this item.
Hence in case of corrections effected in subsequent VAT Returns which do not meet the 5% and 6 months rules, these will trigger penalties and interest in connection with the under declaration of output VAT/over declaration of input VAT in the effected VAT Returns (keeping in mind that the wording of the VATA does not contemplate for the off-setting of under/over declarations between different VAT periods except as per above).
In the eventuality that the mistake is not made up of a single invoice but of a number of invoices one can correct those invoices which in total do not exceed the 5% threshold via the Non Punitive method (assuming the 6 months rule is satisfied as well) with the remaining invoices corrected via the Punitive method (correction form).
Punitive Method – Filing of Correction Form (VAT Form 001/2016)
Until last year any adjustments to past VAT Returns which did not meet the 5% and 6 months rules were made using a formal letter sent to the VAT Department indicating the corrections which need to be effected to the respective boxes of past VAT Returns filed. However, with effect from 1 May 2016 (Via LN 128 of 2016 amending S.L. 406 .09 Value Added Tax (Forms) Regulations) a new Correction Form (VAT Form 001/2016) was introduced as the only manner in which to effect such corrections (which do not qualify for the Non Punitive method).
VAT Form 001/2016 if available from the VAT Department offices and can be downloaded from the VAT Department website (http://vat.gov.mt/en/Downloads/VAT-Forms/Pages/VAT-downloads.aspx) and is divided into three parts:
Part 1 – Details of Registered Person and VAT return to be corrected (VAT Identification Number, Name, Address, VAT Period Start and End date)
Part 2 – Replica of VAT Returns boxes except for total boxes (to fill in only those boxes which need to be amended; first filling in how the box actually reads in the original VAT Return filed – yellow columns – and in the adjacent box inserting the correct amount how it should read after the correction)
Part 3 – Reason for requesting correction and Personal Details of Signatory (Name, Signature, Designation, I.D./Passport Number, Email address, Telephone Number, Date)
Theoretically speaking the fact that a correction form is filed indicates that the original form was not full and complete. Hence in terms of Article 27.4 such VAT return is deemed filed when the correction form is actually filed, potentially leading to penalties in respect of late filing of VAT returns as per Article 38 VATA (higher of &eur;20 or 1% of net output VAT due for every month of part thereof VAT Return is filed late, capped at &eur;50 or &eur;250). Moreover, in the eventuality that the correction indicates that in the original VAT Return filed there was an under declaration of output tax/over declaration of input tax a one off penalty of 10% will be due on the amount of VAT in question in terms of article 37 VATA. Likewise interest at the rate of 0.54% for every month of part thereof the VAT is paid late will also be due.
With respect to whether any additional documentation needs to be enclosed with the VAT Form 001/2016 such a requirement does not exist per se. However keeping in mind that the VAT Department would need to ascertain that such corrections do not give rise to abuse (e.g. double claiming of the same input VAT) it would make sense to provide the VAT Department with the respective workings explaining the corrections in order to avoid any delay’s created by the VAT Department’s requests for further explanations/documentation.
The six years within which the VAT Department may issue an assessment in connection with the correction start running from the date on which a correction form is received and duly acknowledged by the Commissioner for Revenue. Likewise the retention of records obligation of 6 years will start running from the same date of receipt of acknowledgment (in case of capital goods the said period is extended by the reference period of five and twenty years in case of movable and immovable capital goods respectively).
To date VAT Form 001/2016 can only be filed manually, however the intention is to have the process available electronically.