Interest on delayed VAT refunds is being paid to potentially non-compliant taxpayers, because the Malta Tax and Customs Administration’s (MTCA) information system continues to accrue interest automatically without distinguishing between the delays from taxpayer’s end, and those arising from the taxman.
A review by the National Audit Office on sampled transactions found interest being paid out on delayed VAT refunds, even though the delays were attributable to the respective taxpayers, as a result of late submission of income tax returns.
In one case, interest amounting to €74,887 was paid for a four-year period on a VAT refund payable to a taxpayer whose income tax returns for 2019 and 2020 were submitted two years’ late. At least half of that amount was paid out incorrectly.
In 2024, net VAT collected was €1.46 billion, with refunds of €519 million, of which interest paid totalled €3.8 million.
VAT refunds are paid out by the MTCA to economic operators to recover any resultant excess input-VAT in the course of their activities.
Interest is payable on refunds outstanding for more than five months from either the return’s due date or its submission to the Commissioner, whichever falls later.
But in its audit, the NAO found that the VAT information system exhibited functional limitations that were hindering the timely processing of refunds.
These constraints prevented the automatic offsetting of credit and debit balances across different tax periods, requiring manual intervention.
For example, manual reconciliations particularly those relating to vehicle imports processed through Transport Malta, were causing significant delays, in some cases over 12 years, when the tax period for provisional assessments is that of six years. This deficiency resulted in €204,000 interest on refunds in just the sample cases tested by the NAO.
The MTCA said it will procure a new integrated tax and customs administration system.
“Until a new automated system is implemented, it is recommended that MTCA establishes temporary measures to enable at least manual cross-period offsetting of credit and debit balances, and to monitor refunds pending beyond statutory or internal deadlines,” the NAO said.
The NAO also found VAT refund delays extending to beyond 10 years, due to concurrent credit control exercises on prior VAT periods, with no direct linkage to the specific refund actually under review.
Such delays in the issuing of VAT refunds led to substantial interest due totalling €166,385.
The MTCA said that as from 2025, VAT credit claims are automatically risk-assessed through a software that flags high-risk cases for further review.
These cases are examined by the Triage Committee, with only a small number of VAT refunds being withheld each month, specifically those identified as the highest risk.
