Malta’s VAT gap surpasses half a billion in 2023, latest EU report reveals

Malta’s VAT compliance gap continued to widen in 2023, reaching an estimated €508 million, according to the latest VAT Gap report for 2024 published by the European Commission.

This marks the highest figure recorded for the country and represents a significant increase from the €415 million registered in 2022.

The VAT gap, which measures the difference between the expected VAT revenue and the amount actually collected, has been a persistent challenge for Malta.

The latest data shows that the gap has more than doubled since 2016, when it stood at €238 million. Notably, past estimates have been revised upwards, with the 2020 VAT gap initially reported at €270 million now adjusted to €311 million.

A growing challenge

Malta’s VAT gap has been on an upward trajectory in recent years.

The data for the past eight years paints a concerning picture:

• 2016: €238 million
• 2017: €240 million
• 2018: €281 million
• 2019: €354 million (revised from €287 million)
• 2020: €311 million (revised from €270 million)
• 2021: €342 million
• 2022: €415 million
• 2023: €508 million

This continued rise suggests that while VAT revenue collection has improved, so too has the amount of uncollected VAT, highlighting systemic issues in enforcement and compliance.

Malta’s economic recovery and VAT trends

The report notes that VAT revenue in the country grew by 18.9 per cent in 2022, driven by strong economic recovery post-pandemic, robust household consumption, and increased business investments.

Prior to the pandemic, Malta’s economy was expanding at an average rate of seven per cent annually, but it suffered an 8.1 per cent contraction in 2020, one of the steepest declines in the EU due to its heavy reliance on tourism. However, a strong recovery followed, with GDP growing by 12.4 per cent in 2021 and 8.1 per cent in 2022. Household consumption rebounded sharply, increasing by 11 per cent in real terms in 2022, bolstered by wage growth and Government measures to freeze energy prices.

Despite these positive indicators, VAT compliance remains a challenge. The VAT compliance gap, which had improved in 2021 to 25.5 per cent of the VAT Total Tax Liability (VTTL), remained largely unchanged in 2022 at 25.9 per cent. However, preliminary estimates indicate that it deteriorated further in 2023.

Sectoral trends and compliance risks

A key factor influencing VAT compliance is the structure of consumption. The services sector, which is harder to tax effectively than goods, saw strong growth in 2022. Spending on restaurants and hotels surged by 83.3 per cent, while spending on recreational goods and services grew by 48.8 per cent. Given the higher risk of VAT non-compliance in the hospitality and services sector, this shift in spending patterns could have contributed to the widening VAT gap.

Malta’s industrial sector also grew by 8.4 per cent in 2022, driven by increased demand for microchips and electronics. Meanwhile, e-commerce saw steady growth, with online sales increasing to 13 per cent of total business turnover in 2022, up from 11.8 per cent in 2017. The rise of digital transactions could improve VAT compliance over time, as electronic payments are easier to track than cash-based transactions.

Government measures and compliance challenges

To address VAT compliance challenges, the Maltese Government has implemented various measures, including stabilising energy prices and providing financial assistance to businesses. These efforts helped reduce bankruptcy declarations by 25 per cent in 2022 after a sharp 33.3 per cent increase in 2021. However, the persistently high VAT gap suggests that further measures are needed to tackle non-compliance, fraud, and administrative inefficiencies.

Clampdowns on tax-dodgers yielding results

Finance Minister Clyde Caruana revealed in September 2024 that the Government has collected €500 million more in taxes last year, when compared to the previous year, as increased enforcement on tax collection yielded results.

He said that in 2025, the Government will collect an estimated €200 million more than it did in 2024, without even taking into account additional tax revenues from economic growth.

Dr Caruana attributed this increased income to the Malta Tax and Customs Administration’s (MTCA) efforts to increase tax compliance among businesses.

The European Commission has been pushing for reforms such as real-time VAT reporting and enhanced e-invoicing for cross-border businesses. It has also recommended shifting VAT collection responsibilities to digital platforms, such as Airbnb and Bolt, to counter underreporting by service providers. If adopted, these measures could help improve VAT compliance and reduce Malta’s widening gap.

With the VAT gap now surpassing half a billion euros, addressing non-compliance must remain a key priority for policymakers. Strengthening enforcement, leveraging digital tax collection methods, and ensuring businesses adhere to VAT obligations will be crucial in reversing the trend.