EXPLANATORY MEMORANDUM

Pursuant to Article 395(1) of Council Directive 2006/112/EC of 28 November 2006 on the common system of valued added tax (‘the VAT Directive’), the Council, acting unanimously on a proposal from the Commission, may authorise any Member State to apply special measures for derogation from the provisions of that Directive in order to simplify the procedure for collecting VAT or to prevent certain forms of tax evasion or avoidance.

By letter registered with the Commission on 20 October 2020, Malta requested an authorisation to increase the threshold of an existing measure derogating from Article 287 of the VAT Directive, in order to exempt from VAT taxable persons whose annual turnover is no higher than EUR 30 000, until 31 December 2024. The Commission requested further information related to the request which was provided by letter registered with the Commission on 9 November 2020.

In accordance with Article 395(2) of the VAT Directive, the Commission informed the other Member States by letter dated 17 December 2020 of the request made by Malta. The Commission notified Malta by letter dated 18 December 2020 that it had all the information necessary to consider the request.

1.CONTEXT OF THE PROPOSAL

•Reasons for and objectives of the proposal

Chapter 1 of Title XII of the VAT Directive allows for the possibility for Member States to apply special schemes for small enterprises, including the possibility of exempting taxable persons below a certain annual turnover. This exemption implies that a taxable person does not have to charge VAT on his supplies and, consequently, he or she cannot deduct the VAT on his inputs.

Under Article 287 of the VAT Directive, particular Member States which acceded after 1 January 1978 may exempt taxable persons whose annual turnover is no higher than the equivalent in national currency of the amounts at the conversion rate on the day of their accession as specified in that provision. Malta started applying the EUR on 1 January 2008.

Under point 13 of Article 287 of the VAT Directive, Malta may exempt from VAT three categories of taxable persons: taxable persons whose annual turnover is no higher than EUR 37 000 if the economic activity consists principally in the supply of goods; EUR 24 300 if the economic activity consists principally in the supply of services with a low value added (high inputs); and EUR 14 600 in other cases, namely supplies of services with a high value added (low inputs).

Since its accession, Malta has made use of this provision to assist small businesses and to encourage new businesses to start operating. This has proved to be a useful simplification measure as it removes many of the VAT obligations for businesses operating below certain annual turnovers, which reduced the operating costs of these businesses. At the same time, the effect on revenue was insignificant. The Maltese government is committed to continue to apply measures to simplify the obligations of small operators, in line with the European Union’s objectives for small businesses, as laid out in the Commission Communication “Think small first” - a “Small Business Act” for Europe”.

For this purpose, with Implementing Decision (EU) 2018/279 of 20 February 2018 Malta was authorised to increase the threshold for the category with the lowest turnover, that is EUR 14 600, to EUR 20 000. By Council Implementing Decision (EU) 2020/1662 of 3 November 2020 Malta was authorised to prolong the application of this measure until 31 December 2024.

The adoption and subsequent transposition of this special measure to domestic law on 1 July 2018 led to over 1262 small enterprises benefitting from the increased threshold for annual turnover under such relative category of the simplification scheme for SMEs.

By raising the threshold to EUR 30 000 for taxable persons whose economic activity consists principally in the supply of services with a low value added (high inputs) or supplies of services with a high value added (low inputs), it is considered that the measure will reduce significantly the administrative burden on businesses eligible for the scheme, and in particular on micro-enterprises, by releasing them from the VAT obligations under the normal VAT arrangements, such as keeping VAT records or submitting VAT returns.

The special measure has reduced significantly the administrative burden and costs for the substantial amount of Maltese small enterprises indicated above. Moreover, the application of the special measure has enabled Malta to allocate more resources to the fight against VAT fraud and the enhancement of enforcement of the current VAT system.

The derogation measure, simplifying the obligations of small operators, is in line with the objectives set out by the European Union for small businesses.

It is therefore appropriate to authorise Malta to apply the derogating measure until 31 December 2024.

•Consistency with existing policy provisions in the policy area