Statutory prescription and procedural fairness in VAT enforcement

On 28 February, 2025, the Administrative Review Tribunal (the “Tribunal”) delivered its decision in XXX v Kummissarju tat-Taxxa u Dwana (Rikors No. 5/2018 SG), which concerned a demand issued by the Commissioner for Tax and Customs (the “Commissioner”) against the Appellant for unpaid Value Added Tax (“VAT”), together with administrative penalties and interest – chargeable in terms of the provisions of the Value Added Tax Act (Chapter 406 of the Laws of Malta) (the “VAT Act”).

Key issues before the Administrative Review Tribunal

The demand was issued on 23 May, 2018, for approximately €37,000, and covered 17 consecutive VAT periods commencing in June 2010 and ending in June 2016.

The Appellant taxpayer challenged the demand on the following grounds;

• that the Commissioner violated “principles of natural justice” when preparing and issuing the demand;
• that the amount claimed by the Commissioner was not based on a formal assessment; and
• that portions of the sums claimed by the Commissioner had become unenforceable and prescribed by law.

Alleged breaches of the principles of natural justice

The taxpayer contended that the Commissioner acted in violation of two principles of “natural justice”, and accordingly in breach of administrative law. Namely;

• the audi alteram partem principle – in that the Commissioner breached Appellant’s right to a fair hearing by failing to provide adequate notice of the demand, or an opportunity to reasonably contest such demand;
• the nemo iudex in causa sua principle – in that the Commissioner acted as both judge and interested party in its own cause, by determining the taxpayer’s liability without external adjudication.

The Tribunal dismissed both arguments.

Ultimately, it was held that the demand was not based on a unilateral estimation by the Commissioner but rather on amounts of VAT declared by the Appellant taxpayer, who self-assessed the amounts of VAT due in Appellant’s own VAT returns. As such, the Commissioner had not challenged the amounts of VAT declared by the Appellant via the demand, and thus, there was no corresponding requirement to notify the taxpayer in advance of the sums claimed or to extend an opportunity to contest the said demand.

The Commissioner was found to have merely exercised his statutory obligation to collect amounts of VAT which were collected and declared by the Appellant, but which ultimately remained unpaid. Accordingly, the Tribunal held that no breach of the principles of natural justice had occurred.

Allocation of payments in terms of the VAT Act

The Appellant also attempted to challenge the amounts claimed by the Commissioner by explaining to the Tribunal that he had always paid amounts of VAT so declared. Notwithstanding this, the Commissioner highlighted in his reply that the amounts of tax due as declared by the Appellant were not actually paid within the time limits stipulated in the VAT Act. This triggered the imposition of administrative penalties against the Appellant, together with the charging of interest at the statutory rate on the balance of such amounts so declared.

In this respect, the Tribunal thoroughly examined the “appropriation of payment” mechanism enshrined in Article 67(3) and (4) of the VAT Act. Accordingly, where any payments made by taxpayers to the Commissioner, the amounts of such payments should first be allocated against any interest which would have fallen due for late payment of VAT, or against any administrative penalties incurred as a result of late payment. In the case where both interest and administrative penalties are due, payment is first allocated against interest due thereon. Therefore, any unpaid balance of underlying VAT for a tax period would only be settled once interest and administrative penalties were first settled by the taxpayer in full.

As a result, this allocation method resulted in a situation of continued liability for unpaid VAT, even when the Appellant had made payments which he believed should have satisfied his obligations in terms of the VAT Act.

The Appellant criticised the demand further, by stating that the demand provided him with no information as to how the sums were calculated by the Commissioner – such that he could not determine whether the Commissioner had appropriately calculated the amounts of interest / penalties due, and whether payments by the Appellant had been correctly allocated.

The Tribunal, in the interest of certainty, calculated the sums itself and found that the allocation method used by the Commissioner was both lawful and consistent with the rules in force during the relevant periods. Despite this, the Tribunal accepted that improved communication from the VAT Department could have mitigated the confusion experienced by the Appellant, however, it also stressed;

1. that it was incumbent on the Appellant to understand the payment allocation mechanism set out in Article 67 of the VAT Act, and;
2. that the Appellant could have but ultimately failed to request information from the Commissioner as regards the current tax position.

In this respect, the Tribunal rejected Appellant’s claim.

Prescription of amounts of tax, penalties and interest

The Tribunal proceeded to consider Appellant’s argument that parts of the Commissioner’s demand were time-barred, despite the Commissioner’s claim that this plea was not raised in the original appeal application. On this latter point, the Tribunal relied on the long-established principle that the plea of prescription may be validly raised at any stage of civil proceedings.

In this respect, Article 58(2) of the VAT Act establishes a six-year limitation period for the recovery of unpaid VAT and administrative penalties and, as a result, the Tribunal accordingly held that that any claims by the Commissioner for unpaid VAT and administrative penalties arising from tax periods which occurred six years before the demand was made, were prescribed by law and could not be recovered.

The Tribunal then considered whether the interest element of the demand was subject to a separate prescription period. While the Commissioner contended that the six-year prescriptive period should also apply to any interest due on unpaid VAT, the Tribunal agreed with the Appellant that Article 58(2) of the VAT Act does not specify a limitation period for the recovery of any interest. Furthermore, it cited the legal maxim “ubi lex voluit, dixit – ubi noluit, tacuit”, together with previous decisions delivered by the same Tribunal for support, when finding that the general law for the prescription of claims of interest – in this case Article 2156(g) of the Civil Code – should apply, and thus the applicable prescriptive period was one of five years, not six.

The Tribunal determined that any interest relating to periods before 23 May 2013 was also prescribed by law and non-recoverable by the Commissioner.

Outcome and practical consequences

The Tribunal found in favour of the Appellant in part, ordering the Commissioner to recalculate the demand by excluding all tax and penalty amounts for periods preceding 23 May 2012, and all interest amounts accruing before 23 May 2013. The remainder of the taxpayer’s claims, particularly those alleging procedural unfairness and wrongful allocation, were unequivocally dismissed.

In this respect, the Tribunal’s decision clarifies that taxpayers are to remain proactive in tracking the status of their tax returns, and to request information from the authorities clarifying / confirming their tax compliance status.

On the other hand, the Malta Tax and Customs Administration, for its part, must exercise diligence, fairness and proportionality in the enforcement of its claims, particularly in ensuring that demands for payment (including in respect of other taxes) are grounded in enforceable obligations, and not claims which are ultimately prescribed by law.

Disclaimer: Ganado Advocates is responsible for contributing to this law report but was not in any way involved as legal advisor for the parties in the judgement being covered in this law report. This article was first published in ‘The Malta Independent’ on 09/07/2025.