small business word on wooden blocks
Small and medium-sized enterprises (SMEs) account for 99% of all businesses in the European Union (EU) and play a key role in driving economic growth and job creation. However, despite their importance, small businesses suffer from disproportionately higher tax compliance costs compared to larger companies. Compliance costs across the EU are typically in the range of 1% to 2% of turnover, but research conducted by the European Commission shows that large companies face greater absolute costs to meet their compliance obligations. However, it has become clear that small and medium-sized enterprises bear a relatively greater burden. This discrepancy suggests that compliance costs may include fixed costs and that large firms leverage economies of scale to manage tax compliance more efficiently. Interestingly, the decision to handle tax compliance activities in-house or outsource appears to impact a company's tax compliance costs. Approximately 74% of small businesses choose to outsource their tax compliance activities, indicating that they rely heavily on external assistance to avoid tax liability.
To ease the burden of VAT compliance on small and medium-sized enterprises, many EU member states have introduced special rules known as 'SME schemes'. The scheme exempts companies established in member states with annual sales below a certain threshold from the obligation to register and collect VAT. However, these exemption thresholds vary widely between member states, ranging from a minimum of 10,000 euros in Greece to 85,000 euros in Italy. Participation in the Small Business Scheme is voluntary and if a company chooses to take advantage of it, it must refrain from charging his VAT on any sales, as the scheme cannot be applied selectively to certain transactions. not.
From January 1, 2025, the small and medium enterprise system will be significantly revised. EU member states will retain the power to set exemption thresholds for small and medium-sized enterprises, but the maximum threshold will be set at 85,000 euros. In addition, small and medium-sized enterprises established in EU member states other than the country in which they are liable to pay VAT are also exempted, provided that their revenues in the non-incorporated member state are below the national threshold and their annual EU-wide revenues are: subject to. 100,000 euros.
New small business system
The most important change consists in extending the small business regime to companies established in Member States other than those in which VAT is payable. This cross-border exemption has two cumulative conditions. Firstly, the annual turnover of the EU must not exceed his 100,000 euros, and secondly, the value of supplies produced in a particular member state must not exceed that national standard. A company will not qualify for the exemption if its annual turnover is below the state threshold but exceeds the EU annual turnover. The cross-border exemption can be used independently of the national exemption and companies are not required to use this exemption in every Member State in which they make supplies. Therefore, although a small and medium-sized enterprise does not charge his VAT in his home country, he may collect VAT if he sells to consumers in other Member States.
To take advantage of the cross-border exemption, a company must first notify its establishment in a member state and obtain a personal number with the suffix “EX” in that member state. This notification requirement is intended to effectively manage the application of cross-border exemptions. This differs from the current rules, which do not require member states to register individuals covered by the small and medium enterprise regime. Once identified, companies must report to the member states of their operations the total amount of supplies manufactured in each member state.
Regarding domestic exemptions, the upcoming rules will not result in any major changes. Member States can still apply this exemption, but it is optional. The annual turnover threshold will be set at 85,000 euros, with each canton able to set a lower national standard in line with its economic and political circumstances. It is important to note that when setting thresholds, Member States cannot distinguish between established and non-established companies. If only national exemptions are used, member states can exempt companies from registration requirements. Additionally, countries that require tax-exempt entities to file their own VAT returns should allow simplified returns covering a calendar year.
Impact of the new small business system on other businesses
The proposed changes to the small business regime are expected to bring about a number of changes for businesses dealing with small businesses. With the introduction of a higher maximum exemption threshold, it is expected that each country's threshold will gradually rise and more companies will choose to sell VAT exempt under the SME system. As a result, businesses that purchase goods and services from small businesses that move into the small business regime will no longer be subject to VAT tax. This can cause issues with the system flagging purchase invoices as inaccurate.
Companies established in the EU that choose to apply for the Small and Medium Enterprise Regime may lack a valid VAT identification number despite qualifying as a company under EU VAT rules . As a result, tax authorities in some Member States may consider such SMEs to be consumers and may require foreign service providers to sell digital services or goods cross-border to such enterprises. may be required to impose value-added tax on Although this position is controversial, tax professionals have already observed instances where this approach has been adopted. Therefore, companies currently engaged in business-to-business (B2B) cross-border sales of digital services and goods to customers in the EU will need to know whether their customer base still includes only businesses and whether You may therefore need to reassess whether you are exposed to new VAT compliance obligations. The scheme for small and medium-sized enterprises will change.
Collaboration between the new small business system and one-stop shop
In addition to the Small and Medium Enterprises Scheme, the EU offers another simplification mechanism called the One Stop Shop (OSS). This streamlines his VAT declaration and payment on certain cross-border transactions. This system works similarly to the Small and Medium Enterprises System in that it allows EU companies to interact only with their member states. However, although both regimes aim to reduce his VAT compliance obligations, their scope of application is fundamentally different.
The Small Business Regime currently applies to domestic B2B and B2C transactions and is intended to reduce the burden of tax compliance on small businesses. From January 1, 2025, cross-border sales will also be eligible. On the other hand, OSS simplifies his VAT compliance by limiting it to his B2C sales across borders within the EU. This allows a company to declare and pay his VAT on these transactions in a single member state, rather than registering his VAT in each country where he sells.
An interesting aspect arises when small and medium-sized enterprises are subject to both the SME regime and the OSS. In such cases, it is possible to apply both methods simultaneously. With the help of OSS, a small business can collect his VAT on his B2C sales across borders while benefiting from the VAT exemption on sales in the domestic market.
A special type of OSS is the Import One Stop Shop (IOSS). This allows businesses selling low-cost imported goods to charge the customer's country's VAT at the time of sale, without having to collect her VAT at the border when the goods arrive in the country. european union. The commercial advantage of using IOSS is transparency. The customer pays her VAT-inclusive price at the time of sale and no additional charges are levied when the goods enter her EU. To use IOSS, EU companies must register separately in their country of establishment. According to European Commission guidance, IOSS and SME schemes are mutually exclusive. This means that if a company chooses to use her IOSS to import goods, it must first opt out of the Small and Medium Enterprises Regime. Although the guidance in this regard is clear, the VAT law lacks clear provisions preventing companies from taking advantage of both regimes, creating uncertainty for small and medium-sized enterprises importing goods into the EU. .
conclusion
The new SME regime extends VAT exemption to SMEs established in other EU countries and is estimated to reduce overall VAT compliance costs by up to 18% per year. These changes primarily target small and medium-sized enterprises established within the EU, but may also affect other companies involved in transactions with such small and medium-sized enterprises.
Non-EU companies that do not have a physical presence in the EU will not benefit from the SME regime and will therefore remain liable to pay VAT from the time of their first sale. However, there is debate as to whether non-EU companies with a fixed establishment in an EU member state are considered “established” and are allowed to apply to the small and medium enterprise regime. To ensure legal certainty, it is important to clarify the eligibility of the system before it comes into force in January 2025.
The opinions expressed in this article are those of the author and do not necessarily reflect the views of the organization with which the author is affiliated.
