Everyday Common Key Words that Start-ups in Malta must know. And realise that any business is secretly also a tax collector!
Remember this basic formula:
GROSS AMOUNT minus VAT equals NET INCOME
Or in simple words:
What is left from the total amount of what I charge the client, less the VAT I am (as part of the system) collecting for the GOVT is my NET income.
NET Amount / Net Income
The Net amount is the amount you plan to charge person or client before adding any VAT on top. It the Net Income you will earn.
The VAT charged on top is NOT yours, that’s way it’s not income. You are basically collecting it for the GOVT. Remember Robin Hood’s Sheriff of Nottingham? Well that’s us business owners, sort of, including Start Ups in Malta. Collecting VAT and then passing it to our Government.
For Income TAX Purposes ONLY the NET amounts of all Sales and Expenses totals are included to arrive to your profit.
VAT doesn’t feature in your profitability. It may affect your CASHFLOW though if you’re not careful!
VAT . Value Added Tax.
“Value” for the powers that be, as VAT is the GOVT’s way of collecting tax, especially from consumers, and the general public indirectly.
Why indirectly? Because the GOVT is not taxing your personal “Income” as Income Tax does. You don’t have a choice when it comes to Income Tax, if you exceed certain tax free brackets, you’re going be taxed. “Immisslek il-but direttament”.
VAT on the other hand is only charged if you decide buy an object from a business. The business owner will do all the work for the GOVT by legally having to charge someone VAT on top of the amount he wishes to receive as his or her income.
So if Business sells a laptop to you, and needs €1,000 in order to cover costs and make a profit, on top of the €1,000 , the business has to charge you an extra €180 on top as 18% Output VAT . This results in the consumer having to pay €1,180 to the Business.
Indirectly the consumer has paid an extra €180 in “tax” to the Government. So indirectly the consumer was taxed!
€1,000 will go to the owner and the €180 will have to be paid to the VAT Department by the business when submitting their VAT Return.
Should the business owner charge the consumer and not issue a receipt, reason is certain that the owner wants to avoid paying VAT and pocket the “extra’ €180 for himself.
Not only is owner illegally stealing public funds (the €180 VAT you paid), but essentially the owner stole your money also!
Also on the same transaction the owner is also avoiding paying the “direct” Income TAX on the €1,000 NET. Goes without saying this is highly illegal!
INPUT VAT – is the VAT a business gets charged by another Business for making a purchase or making use of a service. The Input VAT is deducted against the Output Vat due to the Government.
Laptop purchased from manufacture as stock to re-sell.
NET Amount – €500
Output VAT at 18% – €90
GROSS Amount charged – €590
OUTPUT VAT – is the VAT the business has to charge on top of the NET. In this below case the Laptop bought from the manufacturer for €590 is then sold for double the price to a consumer at €1,180.
Laptop sold to consumer
NET Amount – €1,000
Output VAT at 18% – €180
GROSS Amount charged – €1,180
Therefore based on the above VAT due to the VAT Department is as follows:
Output VAT charged from Sales made to consumer: €180
Input VAT incurred from Suppliers /Manufacturer: (€90)
Difference between Output and Input: €90
Therefore amount Due to VAT department is €90.
This can also be in a “Minus” situation. This occurs if you incurred more expenses with input VAT, then sold more products with output VAT. If you have more input VAT then you have Output Vat you will receive a refund from the VAT department via Bank transfer.
GROSS – Is basically the NET + VAT. Therefore NET + VAT equals GROSS Amount.
The Gross amount is the total amount you shall charge your clients!
WHY VAT IS NOT AN EXPENSE FOR ANY ART 10 BUSINESS
So for anyone Registered under Art 10, VAT charged by suppliers i.e INPUT VAT is not an expense because it is claimed back. Same as the €90 in the example above.
OUTPUT VAT is collected by the Business from the client, so it’s not an expense either.
However for those persons who are EXEMPT under ART 11, this cannot be claimed back and so it is an expense. Therefore any new business owner must plan carefully to see whether to register under ART 11 or ART 10.
Especially, if most or a substantial amount of the business owner’s expenses have Input VAT and clients are other ART 10 businesses!
Here is where we can tell you exactly what your best option is!
For more info contact us