European Commission clarifies VAT rules for small business scheme

28 November, 2024

The European Commission has released its Explanatory Notes detailing the upcoming changes to the EU VAT system concerning the special scheme for small enterprises.

These changes stem from amendments made by the Amending Directive to the VAT Directive (2020/285) and the Commission Implementing Regulation 2021/2007. These new regulations will take effect for businesses starting on 1 January 2025.

The special scheme for small enterprises (‘SME scheme’) allows small enterprises to sell goods and services to their customers without charging VAT (VAT exemption) and to get some simplifications regarding their compliance and invoicing obligations.

This scheme is optional, so small enterprises can decide to apply it – provided that they fulfil the conditions – or to stick to the standard VAT rules and charge VAT to their customers.

The objective of the Explanatory Notes is to explain the functioning of the SME scheme based on the new rules and to provide a better understanding of legislation adopted at EU level and in particular Council Directive (EU) 2020/285 amending Council Directive 2006/112/EC (VAT Directive) and Regulation (EU) No 904/2010 on Administrative Cooperation.

The cross-border SME scheme applies to situations where a small enterprise utilises the SME scheme in the following scenarios:

exclusively in Member State(s) other than its Member State of establishment (MSEST);
in other Member State(s) and its MSEST.

General

The SME scheme is a VAT special regime that allows small enterprises to not charge VAT on their supplies of goods and services and thus alleviates the associated VAT compliance obligations. The counterpart of the VAT exemption is the loss of the right to deduct input VAT incurred on the purchases of goods and services linked to the VAT exempt supplies.
The SME scheme is optional and exists in almost all Member States.
Until 31 December 2024, the SME scheme is only accessible to small enterprises established in the Member State where VAT is due (domestic application of the SME scheme). The shift of taxation of supplies of goods and services from the place of origin to the place of destination created some inequalities between small enterprises established and non-established in a same Member State. To put all small enterprises on an equal footing, the rules of the SME scheme have been reviewed and some new common rules have been created.
As from 1 January 2025, the SME scheme is therefore also accessible to small enterprises not established in the Member State where VAT is due (cross-border application of the SME scheme). The domestic application of the SME scheme remains applicable. The SME scheme is only open to small enterprises established within the European Union.
The SME scheme and the Union One-Stop-Shop scheme (OSS) are compatible and can cohabit.

The domestic SME scheme

To apply the domestic SME scheme, the small enterprise must have an annual turnover not exceeding the national annual threshold or applicable sectoral threshold set by the Member State of establishment (MSEST). This threshold cannot be higher than EUR 85, 000.
In case a small enterprise applies the domestic SME scheme only, it must contact its Member State of establishment to get information on its VAT compliance obligations (registration, VAT return, etc) if any, as each Member State is allowed to set its own rules and to release small enterprises from one or more of these VAT obligations.
Should an SME want to apply the SME scheme in both its Member State of establishment and in one or more Member State(s), it will have to apply the rules set for the cross-border SME scheme.

The cross-border SME scheme

To be eligible to apply the cross-border SME scheme, the total annual turnover of the SME in the 27 Member States must not exceed the Union annual threshold set at EUR 100 000, or the equivalent in national currency.
The annual turnover of the SME in each of the Member States where it wants to apply the cross-border SME scheme must not exceed the national annual threshold or applicable sectoral threshold applicable in each of them.
The SME must only file one single prior notification in its MSEST to request access to the cross-border SME scheme. The MSEST acts as the contact point between the small enterprise and the other Member State(s).
The VAT obligations of the small enterprise are simplified: one single quarterly report to report the turnover of the SME in the 27 Member States to be submitted in MSEST. The SME is allowed to issue simplified invoices.
An SME can leave the cross-border SME scheme in one or more Member State(s) voluntarily.
An SME is excluded from the cross-border SME scheme in all Member States when its Union annual turnover exceeds EUR 100,000. Although its Union annual turnover of EUR 100,000 is not exceeded, an SME is excluded in one or more Member State(s) of exemption if and when its annual turnover in one or more MSEXEs exceeds the national annual threshold set by these MSEXEs (or the transitional period expires).
The exclusion of the cross-border SME scheme should not prevent the small enterprise from applying the domestic SME scheme, provided that it meets the conditions in its MSEST.
The cohabitation of the SME and OSS schemes is possible. A small enterprise can apply the SME scheme in some Member States (MSEST included) and the OSS scheme in other Member States (but OSS cannot be applied in MSEST). If the small enterprise is excluded from the cross-border SME scheme in one or more Member State(s), it can therefore apply the One Stop Shop for this/these Member States.