EU issues new guidance on VAT for small businesses

13 November, 2024

European Commission, on 11 November 2024, released the Guide to the SME scheme and explanatory notes for the updated Small Enterprise Scheme (SME scheme), which will take effect on 1 January 2025.

This guide aims to provide a better understanding of the EU legislation relating to the new rules concerning the special scheme for small enterprises applicable from 1 January 2025 as well as to clarify the practical application of these rules. It is mainly addressed to small enterprises interested in the application of the special scheme for small enterprises, which will find through the guide the key elements of the functioning of the special scheme.

Background

The special scheme for small enterprises aims to reduce the compliance costs borne by small enterprises, which are proportionally higher than those borne by large businesses due to their more limited resources to cope with the complexity and fragmentation of the VAT system in the EU.

Before the amendment of the VAT Directive regarding the SME scheme (which will apply as from 1 January 2025), small enterprises could only benefit from exemption under the SME scheme if they were established in the Member State where the VAT was due.

As a result, small enterprises making transactions in Member States where they were not established had to register and to fulfil the VAT obligations (submit periodical VAT returns, issue full invoices, account for VAT etc.) in each Member State where VAT was due. This had a negative effect on competitiveness in the internal market for companies not established in the Member State where VAT was due compared to those established there, which made it necessary to amend the rules governing the special scheme.

Thus, from 1 January 2025, the SME scheme will also allow taxable persons established in a Member State to exempt from VAT supplies of goods and services made in Member States where they are not established and to benefit from simplified VAT obligations provided that their annual turnover in those Member States does not exceed the national threshold and their Union annual turnover does not exceed EUR 100,000.

Thus, both taxable persons established in the Member State where the VAT is due and those established in another Member State will be eligible for the SME scheme in the Member State where the VAT is due. Taxable persons cannot deduct the input VAT on their purchases of goods and services used for transactions covered by the SME scheme.

Two levels of application can thus be distinguished:

At the domestic level: application of the special scheme by small enterprises only in their Member State of establishment;
Cross-border: application of the special scheme by small enterprises in one or more Member States other than their Member State of establishment, whether the SME scheme is applied at the domestic level or not.

The SME scheme is optional and can be applied in one or more Member States. The following scenarios can be identified:

The application of the SME scheme only in the Member State of the establishment (domestic SME scheme);
The application of the SME scheme only in one or more Member States other than the Member State of the establishment (cross-border SME scheme);
The application of the SME scheme in the Member State of establishment and in other Member State(s) of its choice in which VAT is due (cross-border SME scheme).

National annual threshold

This refers to the annual turnover threshold fixed by a Member State below which a taxable person may be eligible to apply the SME scheme in that Member State and be granted a VAT exemption. A national annual turnover threshold cannot exceed EUR 85,000 (or the equivalent in national currency).

Sectoral thresholds

Sectoral thresholds refer to where a Member State applies more than one national annual threshold. None of these sectoral thresholds can be higher than EUR 85, 000 (or the equivalent in national currency).

Member State annual turnover

This means the total annual value of supplies of goods and services, exclusive of VAT, made by a taxable person within that Member State during a calendar year, whether taxed or exempt.

Union annual threshold

This refers to the Union annual turnover threshold of EUR 100,000.

Who can apply for the exemption of the SME scheme?

Only taxable persons considered small enterprises can apply fir the exemption of the SME scheme.

For the purpose of the domestic SME scheme, a taxable person is considered to be a small enterprise when it meets the following conditions:

It is established in a Member State;
Its annual turnover in the Member State where the small enterprise is established does not exceed the national threshold set by that Member State.

For the purposes of the cross-border SME scheme, a taxable person is considered to be a small enterprise if it meets the following conditions:

It is established in a Member State;
Its annual turnover in the EU (27 Member States) does not exceed EUR 100,000;
Its annual turnover in the Member State granting the exemption does not exceed the national threshold set by that Member State.