VAT in Family Businesses: The Risks No One Talks About

VAT in Family Businesses: The Risks No One Talks About

Family businesses are the backbone of the economy. They represent a significant share of GDP and employment across Europe and in Malta, their influence is even more pronounced. Built on trust, continuity, and personal relationships, they often stand for more than commercial value.

They stand for legacy.

But as these businesses grow, evolve, and transition, so do their risks. Succession planning. Restructuring. External investments. These are the milestones that attract attention, from lawyers, auditors, and advisors. Legal frameworks are reviewed. Governance structures are revised. Financial statements are scrutinised.

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But VAT?

It’s often left in the background. Treated as routine. A compliance obligation. A quarterly exercise. And that’s where the exposure begins.

Because VAT isn’t just a filing requirement. It’s a mirror to the business model itself. And when it’s overlooked, especially in family-run operations, it becomes one of the most underestimated sources of risk, inefficiency, and lost value.

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Running on Habit, Not Design

According to the Malta Chamber’s 2024 Family Business Survey, 86% of family business leaders say their day is consumed by operational matters. Just 14% dedicate time to strategy.

And that’s where risk lives: not in the things being done, but in the things not being examined.

We’ve seen this play out across multiple VAT dimensions:

• ‍Asset transfers between intra-group entities treated informally, without realising that they could qualify as a transfer of a going concern (TOGC), and therefore fall outside the scope of VAT. But only if the legal and factual conditions are met.

• Recharges of employees across group entities where no VAT is charged because “it’s all in the family.” Yet if there’s no employment contract with the receiving entity and the substance reflects a supply of staff, VAT could very well be due.

• Director benefits like motor vehicles bought through the business, with the assumption that input VAT is recoverable, when in fact, input VAT on personal motor vehicles is blocked under the Malta VAT Act, unless it would constitute a commercial vehicle used for business purposes.

• Shared costs and group overheads invoiced to the wrong company, yet VAT is claimed by the one that actually incurred the expense or benefited from the supply. That’s not a technicality. If the invoice is addressed to the wrong entity, input VAT may be denied, even if the transaction was internal.

These aren’t isolated incidents. They’re systemic patterns. And in family businesses, they’re often underpinned by trust and informality. That’s not negligence, it’s proximity. But it carries consequences.

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The Culture Behind the Compliance

The 2024 survey revealed that:

• ‍65% of family businesses still don’t have a succession plan.‍
• 66% have no family employment policy.
• And decisions in many cases are still perception-led, not process-driven.

In this environment, VAT is rarely seen for what it is: a structural mirror of your business logic.

Who is supplying what?

Who is the recipient?

Who is invoiced, and who should be?

These are not compliance questions. They’re questions about how your business is built.

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When “We’ve Always Done It This Way” Is No Longer Enough

The VAT issues that tend to surface in family businesses are rarely about fraud or evasion.

They’re about assumption. Habit. A sense that because something’s always been done a certain way, it must be right.

But VAT doesn’t operate on legacy. It operates on fact and form.

• Are we applying VAT where we should be, especially between our own companies?
• Are we claiming back VAT only when we’re actually allowed to?
• Do our invoices and company set-up reflect what’s really happening in the business?

When these questions are left unasked, even the most successful businesses can become exposed.

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VAT as a Strategic Mirror

VAT isn’t just a tax. It’s a reflection of your operations.

It reveals the substance of your structure, the quality of your documentation, and the coherence of your group model. And in family businesses, where formality often follows trust, it’s easy for that structure to evolve without revisiting the VAT implications.

Over the years, we’ve come across situations like:

• Employees working across companies, but no VAT charged between entities.
• Businesses passed on to the next generation, yet VAT was charged when it shouldn't have been.
• Invoices addressed to one company, even though another one actually used the service.
• Director expenses paid through the business, with unclear VAT treatment.

None of these happened with bad intentions.

But all of them had consequences, consequences that could have been avoided if someone had asked the right question at the right time.

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So What Should Family Businesses Be Asking?

Not every business needs a VAT overhaul. But every family business should, at minimum, reflect on:

• Are we treating intra-group recharges correctly from a VAT perspective?
• Have we reviewed whether our asset transfers qualify as falling outside the scope of VAT?
• Are we risking input VAT recovery by misaligning invoicing and actual economic activity?
• Are our director expenses and employee benefits treated correctly under the VAT Act?
• Does our governance structure support proper VAT decision-making?

If you're unsure on any of these, it's not about being wrong. It’s about being unaware, and that’s the most costly risk of all.

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VAT shouldn’t be an afterthought. It should be part of the architecture. And if no one has challenged how it’s working for your business, maybe now is the right time.

If you're unsure or would like to discuss how VAT applies within your current structure, reach out. We’ll set up a meeting, have a call, and take it from there. No pressure, just a conversation worth having.