Scope:

The evaluation covers all the SME measures currently provided for in the VAT Directive 2006/112/EC, namely, the special scheme for small enterprises laid down in Articles 281-294 and other measures outside the scheme, which allow to simplify different VAT obligations (e.g. registration and invoicing).

Evaluation findings:

Evaluation findings showed that although the SME exemption scheme is widely applied by the Member States (with a participation rate of 63%), small enterprises as a category continue to suffer from disproportionate VAT compliance costs estimated at EUR 68 billion. Overall, the evaluation confirmed that, given the complexity of the current VAT system and the high compliance costs faced by small businesses when dealing with VAT, the existence of a special scheme for SMEs in the VAT Directive is still amply justified. Complying with VAT rules is extremely complex and costly, particularly when SMEs engage in EU-intra trade. The current SME scheme presents several drawbacks that make the current scheme unable to fully address this problem. In particular, the scheme is targeted mostly at businesses trading domestically and in the B2C context, offering a limited and fragmented response to small businesses. External supportive studies showed that the SME exemption is more beneficial where SMEs deal with final consumers or exempted businesses (with no right to deduct input VAT) and where the amount of input VAT is relatively lower than output VAT. Furthermore, the scheme creates distortive effects on competition at both domestic and cross-border level, as the businesses not established in the Member States where they make taxable supplies cannot benefit from the scheme. The current system was found to be outdated as it does not take into account the Single Market perspective and the move to a definitive system based on the destination principle. Finally, the VAT system does not provide any support to SMEs' growth, such as measures helping the smooth transition to full taxation and standard VAT regime.

Estimated savings and benefits

The exemption for small businesses under the current special regime reduces alone compliance costs by approximately 60% compared to businesses using the standard VAT regime (saving on average around EUR 1 500 per business per year). The effectiveness of the measure varies substantially across Member States, depending on the simplified VAT obligations attached to the measure. The exemption may also reduce administrative costs of tax collection and control for tax authorities, as in most of the Member States it lowers the number of VAT registrations.

Which objective(s) did the Commission pursue?

The initiative is expected to reduce compliance costs related to VAT for small businesses, simplify VAT obligations for small businesses and reduce distortions within the Single market by opening the SME scheme to supplies made by non-established businesses in the Member State applying the scheme.

It will also contribute to the creation of an environment favourable to the growth of SMEs and cross-border trade and is expected to provide a level playing field for EU business and to facilitate VAT compliance of small businesses.

Estimated savings and benefits

The estimated compliance cost savings are around EUR 11.9 billion per year (18% reduction compared to the baseline) for approximately 1.9 million businesses. These cost savings are expected to be higher as the estimates refer only to the sub-set of small businesses with turnover below EUR 100 000, while the impacted businesses are those with turnover up to EUR 2 billion. The proposal may also enable businesses affected to increase their economic activity by over 16%. Other indirect benefits: increase in GDP 0.09%, decrease in prices -0.11%, increase in consumer demand 0.12 %.

Outcome of Legislative Procedure

On 18 February 2020, the Council 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 VAT scheme for SMEs will apply as of 1 January 2025.

Member States will be allowed to continue exempting small businesses with an annual turnover not exceeding a given threshold, which cannot be higher than EUR 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 EUR 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.

In order to ensure the proper functioning and monitoring of the exemption as well as to minimise the administrative burden on small enterprises, the amending Directive sets out single window arrangements in which the Member State of establishment is the single point of contact.