By means of Council Directive (EU) 2020/285, the current special VAT scheme for SMEs will be modified, effective January 1 2025.
The main change to be introduced in 2025 is the possibility of applying the VAT exemption, under certain circumstances, to cross-border transactions, something that is not provided for in the current SME scheme, which is a purely domestic regime.
The new scheme introduces an optional two-level VAT system for SMEs. One level refers to SMEs conducting only domestic transactions, while the other includes provisions for SMEs involved in cross-border activities. EU member states can, therefore, exempt SMEs from charging VAT on goods and services supplied within their territories. Additionally, and this is the great novelty about the new SME scheme, if a member state applies this exemption domestically, it is required to extend it to SMEs from other member states operating within its jurisdiction, provided these SMEs meet certain requirements.
As a result of the above, SMEs covered by the scheme will not be able to deduct the input VAT on the acquisition of goods or services used in their VAT-exempt activities.
The definition of an SME is based on turnovers and thresholds, both locally and at an EU level.
For applying the domestic level of the special scheme, the national turnover (in its member state of establishment) of the SME cannot exceed €85,000. Member states have the flexibility to establish different thresholds, as long as they are duly justified, for different business sectors, provided these thresholds do not exceed €85,000. If an SME operates across sectors, it must choose a single threshold for all activities in the given member state.
On the other hand, for applying the cross-border level, the EU turnover (in all 27 member states) of the SME cannot exceed €100,000. If the SME exceeds this turnover, the cross-border level of the special scheme cannot be applied, and the SME would be limited to VAT exemptions only within its member state of establishment (if it remains below the national threshold).
Compliance with the special scheme: simplifications and complications
For SMEs operating exclusively within their member state of establishment, the scheme permits several compliance simplifications. For example, member states can exempt these SMEs from VAT identification (if they require a VAT identification, the process cannot take more than 15 working days) and, if VAT returns are necessary, require only one annual return. Simplified invoicing is also permitted.
However, the cross-border scheme may have some more complicated compliance obligations. SMEs applying this cross-border level are eligible to apply the exemption in member states other than their member state of establishment. This last member state serves as the primary contact between the SME and other member states´ tax authorities, allowing the SME to submit a single registration and obtain an “EX” number, which is needed for the application of the scheme. This process should take no more than 35 working days.
Under the cross-border scheme, SMEs are only required to submit one quarterly report covering supplies in any of the 27 member states (including those where the SME will not apply the special scheme) to the tax authority in their member state of establishment. The scheme restricts other member states from imposing VAT obligations on supplies covered by the scheme but not covered by any other activity that falls outside the special scheme, such as intra-EU acquisitions.
To qualify for the cross-border scheme:
SMEs must have a place of business in an EU member state (a fixed establishment will not suffice);
Their turnover in all 27 member states must not exceed €100,000; and
They must stay within the domestic thresholds of member states where they seek to apply the scheme.
It is important to mention that to apply the cross-border level of the new scheme, it is not necessary to first go through the domestic regime. In this way, an SME may apply the scheme solely in its member state of establishment. It can decide to apply the special scheme exclusively in other member states, while following the general VAT regime in its member state of establishment, or it can decide to apply both levels of the special scheme, exempting all its transactions, domestic or not.
Final thoughts on the EU’s modified VAT scheme
The new VAT scheme is complex to put into practice and could be a significant barrier to the right to deduct the VAT borne by SMEs. It is therefore advisable to assess in detail whether its application is worthwhile.
To conclude, in relation to the special scheme, the Court of Justice of the European Union recently gave warning (C-171/23, October 4 2024) that creating new companies from scratch to remain below the thresholds to avoid paying VAT can constitute an abusive practice. SMEs must therefore avoid this temptation.
