Introduction of 12% reduced VAT rate

Deon Caruana
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On the 6th of October 2023, the Minister for Finance published Legal Notice 231 of 2023 which introduces a new VAT rate of 12% on certain services.


This regulation transposes paragraph 5 of Article 105a of the Council Directive 2006/112/EC as amended by Council Directive (EU) 2022/542 of 5 April 2022 and also amending Directives 2006/112/EC and (EU) 2020/285 with regards to these rates of VAT. In addition and from a local perspective, this new Legal Notice amended the Eighth Schedule to the VAT Act by introducing a new reduced VAT rate of 12% on certain services.


New Addition in the VAT Return

A revised VAT return template has been introduced, incorporating two additional fields - 31b and 37b. These fields are designated for transactions subject to the 12% VAT rate. This change not only affects businesses benefiting from the reduced rate but also others.  A sample of the updated VAT Return Form including the 12% VAT rate can be found here. Proactive adoption of the updated VAT return would ensure timely compliance.


The New Reduced VAT Rate

As from 1 January 2024, the new reduced VAT rate of 12% applies to the following supplies of services:

1. Custody and Management of Securities

Starting from January 1st, 2024, a reduced VAT rate of 12% applies to certain securities management services. Specifically, this rate applies to services involving the management of securities portfolios, commonly known as securities portfolio management services.

What Are Securities Portfolio Management Services?

Securities portfolio management services involve the continuous monitoring and management of a client's investment portfolio to make recommendations or decisions regarding investments. These services can be provided either on a discretionary basis, where the manager invests funds on behalf of the client, or on an advisory basis, where recommendations are provided to the client before any investments are made.

It is important to note that the reduced VAT rate of 12% applies only to securities portfolio management services and does not cover other types of investment advice or related services. Services such as advice on capital structure, corporate strategy, mergers and acquisitions, and other similar services are subject to the standard VAT rate of 18%.

Despite the introduction of the reduced VAT rate for securities management services, exemptions listed under Item 3 of Part 2 of the 5th Schedule to the VAT Act remain unaffected. This means that services such as receiving, executing, and transmitting orders to buy and sell securities, which are charged on a transaction-by-transaction basis, continue to be exempt from VAT, regardless of any management services included in the contractual arrangements.

Combined Fee Consideration - According to the Court of Justice of the European Union (CJEU), if a package of services which includes securities management, is charged based on a combined percentage fee of assets under management, such is treated as a single supply for VAT purposes. As such, the entire supply is subject to the reduced VAT rate of 12%.

2. Management of credit and credit guarantees by a person or body other than that which granted the credit

Additionally, item 12 of the Eighth Schedule to the VAT Act introduces a reduced VAT rate of 12% for services encompassing the management of credit and credit guarantees. Effective from January 1st, 2024, this amendment applies to services provided by entities distinct from the original credit grantors. It is important to emphasize that this alteration does not impact the existing exemptions outlined under item 3 of Part Two of the Fifth Schedule to the VAT Act.

However, when managed by a taxable entity other than the original creditor, it becomes subject to the reduced VAT rate of 12%. To clarify, "credit and credit guarantees" encompass those whose supply would otherwise qualify for exemption under item 3 of Part Two of the Fifth Schedule to the VAT Act.

3. Services consisting of care of the human body

Services relating to the care of the human body delivered by professionals exercising any regulated health care profession regulated under the Health Care Professions Act (Cap. 464) are subject to a reduced rate of 12% applicable to services. This encompasses services rendered within health studio businesses or similar establishments. However, exempt (without credit) supplies outlined in item 11 of Part Two of the Fifth Schedule to the VAT Act do not fall in the scope of the newly introduced 12% rate.

Understanding VAT Exemptions for Medical Care

Items 11(1) and (2) of Part Two of the Fifth Schedule provide for exemptions for medical care services provided by professionals regulated under the Health Care Professions Act or the Psychology Act, both directly and through approved hospitals or institutions by the Minister. However, it is essential to note the limitations of these exemptions as they might not cover all services provided by healthcare professionals. Only services qualifying as "medical care" per the guidelines for VAT treatment of Health Care Services, issued by the CfTC (Commission for the Treasury of Customs), are eligible for these exemptions.

Implications and Scope of the 12% Reduced Rate

For services falling outside the scope of medical care or not covered by existing exemptions, the reduced VAT rate of 12% applies, provided they involve the care of the human body by a person in the exercise of any profession regulated under the Health Care Professions Act. However, services not meeting both the exemptions criteria and the criteria for the 12% reduced rate, are subject to the standard VAT rate of 18%.

4. Short-term hiring of a pleasure boat to a person, according to an agreement, which does not exceed a cumulative period of five (5) weeks over a running twelve (12) month period

Item 8 of Part Two of the Third Schedule to the VAT Act, stipulates that the supply of the continuous possession or use of a pleasure boat for not more than ninety (90) days is considered to be a short-term hiring of a means of transport, the place of supply of which, would be the place where that pleasure boat is actually put at the disposal of the customer.

On the other hand, the place of supply of the hiring of a pleasure boat, other than short-term hiring, would be the place where the customer is established, has his permanent address or usually resides.

Furthermore, the place of supply of the hiring of a pleasure boat to a non-taxable person, other than short-term hiring, would be the place where the pleasure boat is put at the disposal of the customer, in so far as such supply is actually provided by the supplier (i.e. the lessor of the pleasure boat) from their place of business or a fixed establishment situated in that place.

In light of the above, the 12% reduced VAT rate applies to pleasure boat rentals if the cumulative term, when added to any previous hiring within the past twelve (12) months, does not exceed a period of five (5) weeks, which is further stipulated as equivalent to thirty-five (35) days, over a running 12-month period. In cases where the rental surpasses this period, the reduced rate applies only to the initial segment with the remaining term subject to the standard 18% VAT rate. Responsibility lies with the lessor in accurately apportioning the taxable value based on the duration of the respective periods of hire.

As an exclusion, the provision of seating or space on board a pleasure boat, when provided separately from other passengers, does not qualify for the reduced VAT rate and should be charged at the standard rate.

The Commission for the Treasury of Customs (CfTC) issues guidelines shedding light on scenarios involving pleasure boat hire within packages of services. If the hire of a pleasure boat constitutes the principal component of a single composite supply, the reduced VAT rate applies to the entire package. However, services provided additionally and at the customer's request do not form part of this composite supply and should be subject to VAT at the standard rate.

Goods typically offered during pleasure boat hire, provided to the customer upon the boat's availability, may be considered part of a single composite supply. Conversely, items specifically requested by the customer are not automatically included in this composite supply and may be subject to standard VAT rates.

How we can help

At Grant Thornton Malta, our VAT team is equipped and ready to help you identify the VAT treatment of your supplies and provide assistance with the newly published guideline. For more information, please reach out to our team of experts. Trust Grant Thornton to be your partner - we allow you to focus on what you do best, while our dedicated team does the rest. 

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