On the 5th of May 2009, the Economic and Financial Affairs Council (ECOFIN), broadly shared the Commission’s analysis of the spring economic forecasts indicating a substantial downward revision of prospects for economic growth this year and the next. In this meeting the ECOFIN adopted the legal texts regarding the use of reduced VAT rates in certain sectors. These texts were agreed upon earlier on this year (10th March 2009), as part of the economic recovery plan approved by the European Council in December 2008.

Article 97(1) of Directive 2006/112/EC requires MS to apply a standard VAT rate of 15%, in view of preventing divergences which would lead to structural imbalances in the Community and distortions of competition in some sectors of activity. However Article 98, allows MS the option to apply either one or two reduced rates which shall apply to goods and services listed in Annex III of the said Directive. This reduced rate shall not be less than 5% (Article 99).

By virtue of this Directive, MS are allowed the optional use of reduced VAT rates for certain labour-intensive local services, including restaurant services for which there is no risk of unfair competition between service providers in different MS. So far reduced rates on labour-intensive local services have only been allowed on a temporary basis but this Directive permits such reduced rates to be applied on a permanent basis. The supplies mentioned in the Directive are the following:

• Labour-intensive local services:

  • Minor repairs of bicycles, shoes and leather goods, clothing and household linen (including mending and alteration);

  • Window cleaning and cleaning in private households;

  • Domestic care services such as home help and care of the young, elderly, sick or disabled;

  • Hairdressing;

  • The renovation and repair of private dwellings, excluding materials which account for a significant part of the value of the service supplied

• Restaurant and catering services

• Books, on all physical means of support

The VAT rate in Malta is 18% of the taxable value of the supply (Article 19(1) VAT Act) with the lowest rate which cannot be lower than 5% of the taxable value of the supply (Article 19(2) VAT Act). The Fifth Schedule to the VAT Act provides a list of supplies which are exempt from VAT.

On the 5th of May 2009, the ECOFIN gave Malta the go ahead to maintain a zero VAT rate for the supply of food and pharmaceuticals. Food and pharmaceuticals are listed in Part 1 of the Fifth Schedule in Items 9 and 10 respectively. This implies that the supply of food for human consumption, excluding food supplied in the course of catering, as well as the supply of pharmaceutical goods will continue to be exempt with credit. This means that suppliers will not charge VAT to its customers, whilst any VAT which is incurred on supplies in the furtherance of their respective economic activity can be recuperated. This means that such economic activities maintain a healthy level of competition in their respective sectors, allowing more disposable income which can be used in other areas such as further investment with the possibility of employment positions being created.

Therefore food and pharmaceuticals in Malta do not merely enjoy a reduced VAT rate but are completely exempt from the VAT altogether.

This Directive will enter into force on the first day of the month following that of its publication in the Official Journal.