Small and medium-sized enterprises (SMEs) are vital to the European Union’s economy, representing 99% of all businesses and driving growth and job creation. However, these SMEs face higher tax compliance costs compared to larger enterprises, with research showing that compliance costs may include fixed expenses. Many SMEs outsource tax compliance activities, with 74% of microenterprises opting for external assistance to navigate tax obligations.
To alleviate the VAT compliance burden for SMEs, many EU member states have implemented the ‘SME scheme’, exempting businesses below a certain turnover threshold from VAT registration and collection obligations. However, exemption thresholds vary among member states, with changes set to take effect on January 1, 2025. The most significant change includes extending the SME scheme to businesses established in member states other than where VAT is due, with specific conditions and requirements for eligibility.
The new SME scheme will impact businesses interacting with SMEs, as national exemption thresholds are expected to rise due to the higher maximum threshold. For EU-established businesses engaging with small enterprises under the SME scheme, VAT charges may no longer apply to their purchases. However, businesses in cross-border sales of digital services and goods to EU customers may need to reassess their VAT compliance obligations due to the changes in the SME scheme.
The interaction between the new SME scheme and the One Stop Shop (OSS) is essential, as both schemes simplify VAT compliance for businesses but have different scopes. While the SME scheme aims to ease tax compliance for small enterprises and will now include cross-border sales, the OSS streamlines VAT declaration and payment for cross-border B2C transactions within the EU. Simultaneous application of both schemes is possible for eligible businesses, offering flexibility in VAT compliance.
A special type of the OSS is the Import One Stop Shop (IOSS), enabling businesses selling low-value imported goods to collect VAT at the time of sale. Businesses must have separate registration for the IOSS in their country of establishment. Non-EU businesses without a physical presence in the EU will not benefit from the SME scheme and will remain liable for VAT from the first sale. Clarity on eligibility for the SME scheme is crucial before its implementation in January 2025.
Overall, the new SME scheme aims to reduce VAT compliance costs for small businesses established within the EU, with potential implications for other businesses involved in transactions with SMEs. The impact of the changes on VAT compliance obligations and cross-border transactions underscores the need for businesses to stay informed about regulatory developments to ensure compliance and legal certainty.
