The European Parliament recently commented on the European Commission’s (EC) amended draft of proposals on a simplified VAT regime for SMEs. The new SME VAT rules, coming into force by the beginning of 2025, are:
- A VAT Directive amendment to revise the rules on VAT exemption for small enterprises; in addition to
- A simplification of VAT obligations for both exempt and non-exempt small enterprises.
These changes will ensure that the domestic VAT registration threshold in individual Member States cannot exceed €85,000. It will also permit businesses established in one Member State and make supplies across the EU benefit from that threshold. There should also be other compliance simplifications they can benefit from where their EU-wide annual turnover does not exceed €100,000.
The New Rules
The EC say that the revision of these rules is necessary for SMEs to do business in the EU. This is part of an ongoing theme; the EC continues to simplify compliance obligations and costs for businesses where possible. They have given the following three reasons in how the changes will be useful:
- Member States may exempt small enterprises from VAT (an option that is widely used), but some continue to suffer from disproportionate VAT compliance costs. This is due to the design of the exemption for small enterprises (i.e. it can only be enjoyed by businesses established in that Member State);
- The current system has distortive effects on competition on both domestic and EU markets; and
- The review provides the opportunity to encourage voluntary compliance and therefore help reduce revenue losses due to non-compliance and VAT fraud.
The amendments to the VAT Directive are currently only a compromise text that EU Member States recently agreed. There are still some reservations in regard to the level of threshold to be set. For example, some Member States would prefer a €100,000 threshold and €115,000 annual turnover.
However, the Presidency believes the text of the draft Directive “strikes the right balance between a number of diverging concerns and provides a good basis for further progress in these negotiations.”
The SME VAT rules are another major change to the EU VAT Directive. They form part of the VAT Action Plan for a simplified VAT System across the EU. However, if eventually adopted it will be of benefit to SME’s albeit will require careful monitoring and managing to enjoy.