The EU has ruled out refunding any "extra" money collected by the government through VAT paid on car registrations since Malta joined in 2004.

This was declared by EU Budget Commissioner Dalia Grybauskaite in response to a legal argument put forward by Labour MEP John Attard Montalto as part of the campaign being waged by Labour to force the government to refund VAT paid by thousands of new car owners upon registration of their vehicles.

In a parliamentary question, Dr Attard Montalto argued that since the Maltese government hands over to Brussels a portion of the VAT collected on the island, the EU should refund the government the "illegal" part collected as VAT on the registration of new cars since Malta joined the EU five years ago.

Dr Attard Montalto argued that the money had been collected "illegally" by the Maltese government and, thus, the EU should send it back to Malta so that it would be given back to Maltese consumers.

The EU Executive replied that the amount Dr Attard Montalto deemed as having been "illegally collected" was insignificant when compared to the VAT that Malta was bound to hand over every year to the EU budget. The commissioner said that although, in principle, VAT collected by a member state formed part of the harmonised VAT base used to determine member states' contribution to the EU budget, this did not apply in Malta's case.

EU financial rules provide that when the VAT base is greater than 50 per cent of a member states' Gross National Income, as is the case for Malta, their harmonised VAT base is no longer used to calculate their contribution. Instead, a uniform rate is applied to an amount corresponding to 50 per cent of the member state's GNI for that year. According to the Commission, as Malta falls in this category, the island has been "capped" since accession by percentages well above 50 per cent of its GNI.

"In that situation, where the Maltese harmonised VAT base has not been used to determine its contribution, the VAT actually collected on the registration of new cars has had no impact on the Maltese VAT contribution," the commissioner said.

At the same time, the Commission reiterated that it was up to the Maltese courts to decide whether Malta collected any taxes illegally, as Labour was claiming, and that the Commission did not enter into the issue.

"This reply is strictly related to the financial relations between Malta and the EU; it has strictly no bearing on the relations between the government of Malta and its taxpayers," the commissioner said.

Last Thursday, Labour filed a court case against the government on behalf of 18,000 people claiming that the government had collected VAT on the registration of new cars "illegally" and that refunds should therefore be paid. The government is claiming that it acted correctly and did not break any EU rules.