Tax-deductible expenses for the self-employed in Malta

The test every expense must pass

Article 14(1) of the Act allows a deduction for outgoings and expenses incurred during the year to the extent to which such outgoings and expenses were wholly and exclusively incurred in the production of the income. Three things follow from those words:

• It must be for the work. A cost you would have had anyway, as a private person, does not pass.
• Mixed costs count only in part. To the extent to which is what lets you deduct the business share of something you also use privately, and nothing more.
• It belongs to the year it was incurred. The deduction falls in the year the cost was incurred. Costs incurred in the eighteen months before you start trading are treated as incurred on your first day of trading (art. 14(3)).

The costs the Act names

After the general test, article 14(1) lists costs it includes. For a freelancer or sole trader the relevant ones are:

• Rent for premises occupied to earn the income (art. 14(1)(b)).
• Repairs of premises, plant or machinery used to earn the income, and the renewal or repair of tools and equipment (art. 14(1)(c)).
• Borrowing costs incurred wholly and exclusively for the business (art. 14(1)(a)), subject to limits the rules set.
• Bad debts proved to the Commissioner to have become bad during the year (art. 14(1)(d)). If you later recover one, the recovery is income again.
• Advertising and promotion, including market research, samples, and fairs and exhibitions (art. 14(1)(l)).
• Wear and tear on plant and machinery used to earn the income (art. 14(1)(f)), covered below.
• Losses from earlier years, carried forward (art. 14(1)(g)).

The list opens with the word including, so it is not the whole of what you can deduct. Everyday running costs, such as software you use for the work, a business phone line, professional fees and materials, are judged on the same wholly-and-exclusively test.

What the Act rules out

Article 26 lists what may not be deducted. The items that matter to a self-employed person:

• Domestic or private expenses.
• Any cost to the extent it was not wholly and exclusively incurred in producing the income.
• Capital spending, except where article 14 allows it, which is how equipment is written off through wear and tear instead.
• The cost of improvements.
• Anything you can recover under insurance or an indemnity.
• Rent for premises, or part of premises, not paid to produce the income.
• Voluntary payments, and any payment that would be a criminal offence.

Equipment: written off over years, not at once

A laptop, a camera or a desk is not deducted in the year you buy it. Its cost is written off in equal yearly amounts, the straight-line method, over at least the minimum number of years the wear and tear rules (S.L. 123.01) set for its kind:

• The year you buy it counts as a full year, whatever the month (r. 7(a)).
• There is no wear and tear in the year you sell it or stop using it (r. 7(b)); a balancing adjustment under article 24 of the Act settles the difference instead.
• Private use reduces it. Where an asset is also used privately, the deduction is cut to the business share (r. 11).
• No records, no deduction. Wear and tear is allowed only where proper records of the cost were kept (r. 5).
• There is no small-asset shortcut. Nothing in the rules lets you deduct the whole cost of a cheap item in the year you buy it.

Cars

A car used for the business is written off over at least five years, on the business share of its use. For most cars there is also a ceiling: under rule 3 of the Income Tax (Deductions) Rules, S.L. 123.07, where a car cost more than €14,000, wear and tear is worked out as if it had cost €14,000. Lease payments on a car are limited in the same proportion. The ceiling does not apply to vehicles of a type not commonly used privately, vehicles used mainly for hire or for carrying the public, or driving-school cars.

Working from home, and entertaining

Neither has a rule of its own in the Act or the rules made under it.

• Working from home. A home cost is deductible only to the extent it passes the article 14(1) test, and private use is excluded by article 26. How the business share is worked out is a matter of practice, not law, so agree the method with your accountant and keep the working.
• Entertaining clients. No provision mentions it either way. It stands or falls on the same general test, so treat any claim you read that it is fully or half deductible with care, and ask your accountant.

VAT on what you buy

On Article 10 you reclaim the VAT on costs used for your taxable supplies on your VAT return, so the cost to you is the amount before VAT. On Article 11 you cannot reclaim it, so the price you pay includes it. A service you buy from a business in another EU country can also carry VAT you self-charge under Article 12; the VAT registration guide explains when.

The evidence to keep

Article 14(5) refuses a deduction for a purchase where the supplier is required to issue a tax invoice, unless you hold that invoice or the document the VAT Act requires. Equipment needs proper records of its cost. In practice: keep every invoice and receipt in its original form, note what each cost was for, and record when you bought and sold anything you write off over years.

Settlano logs each expense with a photo of its receipt, reads the amount, supplier and date on your phone, spreads capital items over their proper life, and hands your accountant an expense register at the end of the year. The income and expense tracker guide shows how.

Common questions