EU: VAT guidance on new rules for small businesses

The European Commission on November 11, 2024, published the explanatory notes and guide for the updated small enterprise scheme (SME scheme) effective January 1, 2025.

Background

The SME package will update, effective January 1, 2025, the SME scheme as follows:

• The maximum national annual threshold set by member states under which small enterprises can exempt value added tax (VAT) from their sales of goods and services under the SME scheme (VAT taxable in that member state) is €85,000 (or the equivalent in national currency). Member states have the possibility to set more than one national annual threshold. These are called “sectoral thresholds.” In case a small enterprise can benefit from more than one sectoral threshold, the tax authorities will, based on its activities, inform the small enterprise about the threshold to use since only one threshold can be applied per taxable person.
• Small enterprises established in another member state than where VAT is due can exempt VAT from their supplies, in the same way that small enterprises established in that member state already can for domestic transactions. This means that the local thresholds apply in the same way. However, only small enterprises with a total annual turnover in the 27 member states not exceeding €100,000 are eligible to apply the cross-border SME scheme. A new VAT ID with an “EX” suffix included (the “EX number") has been created for taxable persons leveraging the cross-border SME scheme.

The SME scheme is only available to EU-established businesses. Non-EU businesses must comply with their EU VAT obligations from the first sale they are liable to collect VAT for.

Eligibility

The SME scheme applies to all supplies of goods performed by a taxable person meeting the local threshold(s), including domestic supplies, intra-EU supplies (B2C and B2B), and exports.

The SME scheme does not apply to the following transactions:

• Supplies carried out on an occasional basis, but still VAT taxable (mainly certain real estate transactions in some member states)
• Supplies of new means of transport made from one member state to another one
• Other transactions that Member States choose to exclude from the application of the SME scheme (member state dependent)

In addition, the SME scheme does not apply to purchases. Therefore, taxable persons performing the following purchases will still be required to register for VAT for these purchases:

• Intra-Community acquisitions of goods subject to VAT
• Imports of goods
• Purchases of services for which the small enterprise is liable to pay VAT (reverse charge)
• Supplies of services within the territory of another member state for which VAT is payable solely by the recipient (although there may be no VAT to pay)

The explanatory notes explain that both standard and SME scheme may operate together. For instance, if a SME taxable person purchases services from a nonresident, the SME taxable person will be required to VAT register also under the standard regime to self-assess VAT under the reverse charge mechanism. However, because the SME taxable person’s sales are exempt under the SME scheme, the self-assessed VAT in the regular VAT return will not be recoverable.

SME scheme and OSS/IOSS

When the SME scheme was amended, questions were raised as to how the SME scheme will work with other special mechanism in the EU VAT Directive, including the One-Stop-Shop (OSS) and the Import-One-Stop-Shop (IOSS). The OSS allows sellers of intra-EU goods and certain services to final consumers to comply with their EU-wide obligations through a single EU registration. The IOSS applies the same simplification for sales of low value goods imported into the EU that are destined to final consumers.

The explanatory notes clarify that the SME scheme and OSS regime can coexist. For instance, a seller could leverage the SME scheme in their member state of establishment (MS1) and a member state of consumption (MS2), while leveraging the OSS for another member state of consumption (MS3). The explanatory notes include various iterations that are possible depending on the various revenues and thresholds.

The explanatory notes further clarify that the SME scheme and IOSS are mutually exclusive.

Purchases made from SME taxable persons

The explanatory notes clarify that the VAT exemption of the SME scheme prevails over the VAT treatment under the standard VAT regime. This means that purchases made from a SME will always be exempt from VAT. In this respect, the explanatory notes expressly provide examples of intra-Community supplies of goods and/or services made by a SME in MS1 to a taxable person in MS2. According to the explanatory notes, the business customer should not account for VAT for this purchase. It is the business customer’s responsibility to check the VAT exempt status of the small enterprise through the application SME-on-the-Web (available from January 2025).

While the explanatory notes do not include an example of a domestic supply covered by the domestic reverse charge mechanism (e.g., immovable property related services by a non-established person in certain member states), it is likely that in these transactions the purchaser would also not have to self-assess VAT if the SME status is verified.

Supplies to SMEs—lack of clarity

The explanatory notes and guide focus on the VAT treatment of SME supplies but do not provide full clarity on how suppliers of SMEs should deal with SME customers in cross-border transactions and domestic transactions requiring a business customer to self-assess VAT under the reverse charge mechanism.

While the guidance is clear that for purchases the standard VAT regime should apply and the customer should thus register for VAT, it is less clear how sellers should interact with small businesses that do not comply with this requirement.

With respect to cross border sales of goods within the EU, the EU VAT rules are clear that only such sales made to VAT registered customers can be zero-rated.

For cross-border sales of services, the EU VAT Directive does not impose the same strict requirements to zero-rate a transaction as the focus is on the status of “taxable person” rather than a formalistic approach. However, in practice, it is recommended that sellers collect their customers’ VAT identification numbers to ensure that the customer is not a private individual. It cannot be excluded that member states will use the remarks in the explanatory notes that the customer making use of the SME scheme should register for the regular VAT regime to self-assess VAT on the purchase of cross-border services to argue that VAT can never be reverse charged if the customer cannot provide a valid (regular) VAT identification number. 

KPMG observation

The explanatory notes and guide provide helpful information for those businesses subject to the SME scheme. As businesses often contract with SME suppliers and/or customers, they may need to carefully review the impact of the SME scheme expansion has on their internal processes and systems.
 

For more information, contact a KPMG tax professional:

Werner Gelderblom | gelderblom.werner@kpmg.com

Lennert Janssen | janssen.lennert@kpmg.com

Philippe Stephanny | philippestephanny@kpmg.com

Chinedu Nwachukwu | chinedunwachukwu@kpmg.com