The EU SME VAT Exemption Scheme

This article outlines the special VAT regime for small enterprises (SME scheme) within the European Union, including the significant changes effective from 1 January 2025. (Source: EC — SME VAT exemption scheme)

What the SME VAT Exemption Scheme Is

The SME VAT exemption scheme is a special VAT regime designed to simplify VAT obligations for small enterprises. From 1 January 2025, it allows eligible small enterprises to sell goods and services without charging VAT to their customers (VAT exemption) and significantly alleviate their VAT compliance obligations (Source: EC — SME VAT exemption scheme).

However, small enterprises choosing VAT exemption will lose the right to deduct VAT on goods and services used to make these exempt supplies (Source: EC — SME VAT exemption scheme). The scheme is optional, meaning businesses can choose to remain under the standard VAT regime if it's more suitable for their specific situation (Source: EC — SME VAT exemption scheme).

Eligibility Criteria and Thresholds by Country

Definition of a Small Enterprise

In the context of the SME scheme, a "small enterprise" refers to any person considered a taxable person for VAT purposes, regardless of their legal form (e.g., self-employed, freelancer, start-up, incorporated company, natural person carrying out economic activity) (Source: EC — SME VAT exemption scheme).

Turnover Thresholds

There are two main turnover thresholds:

Union Annual Threshold: For small enterprises applying the cross-border SME scheme, the total annual turnover in all 27 Member States must not exceed EUR 100,000 (or the equivalent in national currency) in the current and previous calendar year (Source: EC — SME VAT exemption scheme).
National Annual Threshold: Member States have the possibility to set their own national annual threshold under which small enterprises can VAT exempt their supplies. This maximum national annual threshold is EUR 85,000 (or the equivalent in national currency) (Source: EC — SME VAT exemption scheme).

Sectoral Thresholds

Some Member States may set more than one national annual threshold, known as 'sectoral thresholds' (Source: EC — SME VAT exemption scheme). If a small enterprise could benefit from multiple sectoral thresholds, the tax authorities will inform them which single threshold to use based on their activities (Source: EC — SME VAT exemption scheme). For the cross-border scheme, the annual turnover must be broken down per threshold in the prior notification, and the tax authorities of the Member State granting the exemption will determine the applicable sectoral threshold (Source: EC — SME VAT exemption scheme).

Member State of Establishment (MSEST)

The Member State of Establishment (MSEST) is the Member State where the business's central administration carries out its functions. For a natural person, it's typically where they have their permanent address. There can only be one MSEST for the application of the SME scheme, and it does not include fixed establishments in other Member States (Source: EC — SME VAT exemption scheme).

Non-EU Enterprises

Non-EU small enterprises cannot apply the SME scheme. This includes small enterprises established in the United Kingdom, including Northern Ireland (Source: EC — SME VAT exemption scheme). Even if a non-EU small enterprise has a fixed establishment within the EU, it cannot access the scheme (Source: EC — SME VAT exemption scheme).

Implementation by Member States

The SME scheme is only applicable in Member States that have implemented it in their national legislation (Source: EC — SME VAT exemption scheme). However, a small enterprise established in a Member State that has not implemented the scheme can still access the cross-border SME scheme in other Member States (Source: EC — SME VAT exemption scheme).

Start-ups

Start-ups and any small enterprise beginning an economic activity can apply the SME scheme (domestic or cross-border) if they fulfill the requirements. In such cases, the annual turnover to report would be zero (Source: EC — SME VAT exemption scheme).

Eligible Goods and Services

All supplies of goods and services are eligible for VAT exemption, with some specific exceptions (Source: EC — SME VAT exemption scheme):

Occasional transactions, such as the supply before the first occupation of a building or parts of the building, or the supply of building land.
Exempt cross-border supplies of new means of transport made from one Member State to another.
Additional transactions that may be excluded by the Member State concerned.

How to Apply / Register

The SME scheme is optional. Small enterprises should assess if it's suitable for their business (Source: EC — SME VAT exemption scheme).

For Domestic SME Scheme

If you wish to apply the domestic SME scheme, or stop applying it, you should contact your Member State of Establishment (MSEST) to learn about the specific procedures (Source: EC — SME VAT exemption scheme).

For Cross-Border SME Scheme (from 1 January 2025)

From 1 January 2025, the process for cross-border application is simplified (Source: EC — SME VAT exemption scheme):

Single Registration: Small enterprises will only need to register once for the SME scheme in their MSEST (Source: EC — SME VAT exemption scheme).
Single Identification Number: The MSEST will grant a single identification 'EX number' that will be used in all Member States where the small enterprise benefits from the VAT exemption (Source: EC — SME VAT exemption scheme).
Prior Notification: Small enterprises must submit a prior notification (Source: EC — SME VAT exemption scheme).
MSEST as Contact Point: Even if the MSEST has not implemented the SME scheme, it will act as the contact point with other Member States (Member States of exemption) for prior notifications and quarterly reports (Source: EC — SME VAT exemption scheme).

Obligations When Exempt

When operating under the SME VAT exemption scheme, small enterprises have specific obligations:

Loss of VAT Deduction Right: They lose the right to deduct VAT on goods and services used for their exempt supplies (Source: EC — SME VAT exemption scheme).
Simplified Invoices: The scheme allows for simplified invoices (Source: EC — SME VAT exemption scheme).
Single Quarterly Report (for Cross-Border): For those applying the cross-border scheme, periodical VAT returns are replaced by one single quarterly report to inform about the turnover in all relevant Member States (Source: EC — SME VAT exemption scheme).
Compliance with National Rules: For the domestic SME scheme, businesses must consult their MSEST for procedures to access or leave the scheme (Source: EC — SME VAT exemption scheme).

Cross-Border Implications

From 1 January 2025, a significant change is the introduction of the cross-border SME scheme (Source: EC — SME VAT exemption scheme). This allows small enterprises established in one Member State to VAT exempt their supplies in other Member States where VAT is due, mirroring the treatment of domestic transactions (Source: EC — SME VAT exemption scheme). This aims to create a level playing field for all small enterprises, regardless of their base (Source: EC — SME VAT exemption scheme).

Key aspects of the cross-border scheme include:

Union Annual Turnover Threshold: Eligibility requires a total annual turnover across all 27 Member States not exceeding EUR 100,000 (Source: EC — SME VAT exemption scheme).
Simplified Compliance: This involves single registration in the MSEST, a single 'EX number' for use across Member States, and a single quarterly report instead of multiple VAT returns (Source: EC — SME VAT exemption scheme).
MSEST Role: The MSEST acts as the central point for registration and reporting, even if it has not implemented the SME scheme itself (Source: EC — SME VAT exemption scheme).

Recent Changes (2025 EU-Wide SME Scheme)

The most significant changes to the SME VAT rules come into effect on 1 January 2025 (Source: EC — SME VAT exemption scheme). These changes aim to modernize and simplify the VAT system for small enterprises across the EU:

Introduction of Cross-Border Application: For the first time, small enterprises can apply VAT exemption for supplies made in Member States other than their Member State of establishment (Source: EC — SME VAT exemption scheme).
New Maximum National Annual Threshold: The maximum national annual threshold that Member States can set for VAT exemption is now EUR 85,000 (or equivalent in national currency) (Source: EC — SME VAT exemption scheme).
Union Annual Threshold: A new EU-wide turnover threshold of EUR 100,000 is introduced for eligibility for the cross-border scheme (Source: EC — SME VAT exemption scheme).
Simplified Compliance Measures: These include a single registration in the MSEST, the issuance of a single 'EX number', and the replacement of periodical VAT returns with a single quarterly report for cross-border activities (Source: EC — SME VAT exemption scheme). Simplified invoices are also part of the new regime (Source: EC — SME VAT exemption scheme).

The rules to apply from 1 January 2025 depend on a business's current situation and future intentions:

Continuing Domestic Scheme: If a business already applies the domestic SME scheme and wishes to continue, domestic rules will apply (Source: EC — SME VAT exemption scheme).
Starting Domestic Scheme: If a business does not currently apply the SME scheme but wishes to start applying it only domestically, domestic rules will apply (Source: EC — SME VAT exemption scheme).
Applying Cross-Border Scheme: If a business wishes to apply the SME scheme in other Member States (whether or not also in their MSEST), cross-border rules will apply (Source: EC — SME VAT exemption scheme). This includes scenarios where a business stops applying the domestic scheme but starts applying the cross-border scheme (Source: EC — SME VAT exemption scheme).