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VAT scheme for Small Businesses

VAT scheme for Small Businesses

On 18 February 2020, finance ministers have agreed to new simplification rules which will open the VAT exemption to small businesses established in other member states and help reduce VAT compliance costs. The new regime should reduce red tape and administrative burdens for SMEs and create a level playing field for businesses regardless of where they are established in the EU. The new VAT scheme for SMEs will apply as of 1 January 2025.

How will the new VAT scheme work?

New VAT rules for small businesses

Current rules on the exemption of supplies under a certain threshold:

  • Member States are allowed to exempt supplies by small enterprises with an annual turnover not exceeding a given threshold, different in each Member State.
  • Small enterprises not established in a certain Member State have, however, no access to such an exemption.

New rules on the exemption of supplies under a certain threshold:

  • Member States will be allowed to continue exempting small businesses with an annual turnover not exceeding a given threshold, which cannot be higher than € 85,000 (maximum exemption threshold).
  • The new rules will open the exemption to small enterprises established in other Member States than the one in which the VAT is due. The exemption will apply if the turnover in Member State where the SME is not established is below the national threshold and if the annual turnover in the EU is below € 100,000: a safeguard threshold preventing companies with large turnover to benefit from the SME exemption in other Member States. For this purpose, SMEs will be able to use the single registration window in their own Member State.

Current rules on simplification of registration and reporting:

  • Member States may release exempt small enterprises from certain or all VAT obligations relating to identification, invoicing, accounting or returns.

New rules of simplification of registration and reporting:

  • The new rules will provide exempt SMEs with simplifications in terms of registration and reporting. The new VAT rules will reduce the overall VAT compliance costs that SMEs face by up to 18% per year.

For more details – read the infographic on VAT for small businesses

Background information

The new VAT scheme follows-up on the 'cornerstones' for a new definitive single EU VAT area proposed in October 2017, and the VAT Action Plan towards a single EU VAT area presented in April 2016.