Small and medium-sized enterprises (SMEs) are a critical component of the European Union (EU), accounting for 99% of all businesses and playing a significant role in economic growth and job creation. However, SMEs face disproportionately higher tax compliance costs compared to larger enterprises, with compliance costs ranging from 1% to 2% of turnover. Research by the European Commission indicates that SMEs bear a heavier relative burden, despite larger enterprises having greater absolute costs due to economies of scale. The decision to outsource tax compliance activities also impacts tax compliance costs, with approximately 74% of microenterprises opting for external assistance.
To alleviate the VAT compliance burden for SMEs, many EU member states have implemented the ‘SME scheme’, which exempts businesses below a certain threshold from VAT obligations. The exemption thresholds vary among countries, with participation being voluntary. Starting January 1, 2025, the SME scheme will undergo changes, including extending the exemption to businesses established in other member states with certain conditions and a maximum threshold of €85,000. This will allow small businesses to benefit from the exemption, provided their revenue falls below the national threshold and their annual revenue across the EU does not exceed €100,000.
The most significant change in the new SME scheme is extending the exemption to businesses established in other EU member states. To qualify, businesses must meet specific conditions, and they can use the cross-border exemption independently of the domestic exemption. Businesses must inform their member state of establishment and obtain a unique identification number with a suffix ‘EX’ before reporting the total value of supplies made in each member state. Future rules related to the domestic exemption will remain largely unchanged, with member states setting an annual turnover threshold and providing a simplified VAT return option for exempt businesses.
The proposed changes to the SME scheme may impact businesses interacting with small enterprises, with an expected rise in national thresholds leading to more businesses opting for VAT-exempt sales under the scheme. EU-established businesses choosing the SME regime may face challenges related to VAT identification numbers, potentially requiring foreign service providers to charge VAT on cross-border sales to such businesses. Interaction between the new SME scheme and the One Stop Shop (OSS) will allow small businesses to benefit from both schemes where applicable, with the OSS simplifying VAT compliance for cross-border B2C sales exclusively within the EU.
The Import One Stop Shop (IOSS) under the OSS enables businesses to charge VAT at the time of sale for low-value imported goods, avoiding VAT at the EU border. EU businesses using the IOSS must have separate registration in their country of establishment, and the IOSS and SME scheme are considered mutually exclusive. The new SME scheme aims to reduce overall VAT compliance costs for small businesses and may have implications for other businesses involved in transactions with SMEs. It is crucial to clarify the eligibility criteria for non-EU businesses and ensure legal certainty before the scheme’s implementation in January 2025.
