Starting January 1, 2025, the European Union is introducing a new VAT scheme for small businesses. This scheme is designed to simplify tax compliance for small enterprises and encourage growth. Here’s what it means and how it works:

1. What is the VAT Scheme for Small Businesses?

The new VAT scheme allows small businesses to not charge VAT on their sales of goods and services. This reduces paperwork and makes compliance easier.

Key Points:

• Businesses won’t collect VAT from customers.
• They cannot claim VAT refunds for their own expenses.
• It’s optional—small businesses can choose whether to use this scheme or stick to regular VAT rules.

2. Who Can Use This Scheme?

Eligibility Criteria:

1. Your business must be established in the EU.
2. Your total annual turnover across the EU must not exceed €100,000.
3. You must also stay below national turnover thresholds in each country you want to apply this scheme. These thresholds can vary but cannot exceed €85,000.

3. How Does It Work?

Domestic Application:

If you only sell goods/services in your home country:

• You can apply the VAT exemption domestically.

Cross-Border Application:

If you sell goods or services to customers in other EU countries:

1. You must submit a single notification to your home country tax authority.
2. If approved, you receive an “EX” identification number.
3. You can use this number to avoid VAT registration in other EU countries where you sell, as long as you meet the turnover thresholds there.

4. What Are the Pros?

• Less Paperwork: Simplified invoicing, reporting, and registration.
• Cost Savings: You don’t need to track or pay VAT, saving time and money.
• Easier Cross-Border Sales: Small businesses selling in other EU countries can benefit without needing multiple VAT registrations.

5. What are the cons?

If you send goods from one warehouse to another EU country or purchase goods in other EU country, this scheme may not be advantageous for you, and here is why. Having an EX number under the new SME VAT scheme does not exempt you from paying reverse charge VAT on goods purchased from suppliers in another EU country.

Here’s why:

1 Reverse Charge Mechanism:

• If you buy goods or services from another EU country, the reverse charge VAT still applies. This means:
  • You must account for VAT in your country as if you were the supplier.
  • You will not charge VAT to your customers (because of the SME scheme), but you also cannot deduct the input VAT on your purchases.

2 SME VAT Scheme Limitations:

• The SME VAT scheme only applies to your sales (outgoing supplies of goods and services) and provides a VAT exemption on those transactions.
• It does not exempt you from paying VAT on:
  • Intra-EU acquisitions of goods.
  • Reverse charge transactions (purchases from other EU countries where the supplier does not charge VAT).

3 Practical Impact:

• You will still need to declare and pay VAT on goods bought from EU suppliers via the reverse charge mechanism.
• Since you are exempt from VAT under the SME scheme, you will not be able to reclaim this input VAT.

Example:

• You purchase €1,000 worth of goods from an EU supplier.
• The supplier issues an invoice without VAT (because it’s an intra-EU supply).
• Under the reverse charge rules:
  • You must declare and pay VAT on the purchase in your country.
  • You cannot deduct this VAT because you are exempt from VAT under the SME scheme.

Having an EX number under the SME VAT scheme does not exempt you from paying reverse charge VAT on goods purchased from another EU country. You must still declare and pay the VAT, but you cannot reclaim it as input VAT.

6. What Happens If You Exceed the Threshold?

If your total annual turnover exceeds €100,000 across the EU:

• You will no longer qualify for the cross-border VAT exemption.
• You must comply with regular VAT rules and may need to register for VAT in other EU countries.

7 What Should You Do Next?

• Check Your Eligibility: Look at your annual turnover.
• Plan Ahead: Decide if the scheme will benefit your business.
• Contact our tax team if you need advice on this.