New VAT Rules for Small Enterprises

Introduction

As of 1 January 2025, Council Directive (EU) 2020/285 introduces a new special VAT regime for small enterprises, known as the SME scheme. This optional scheme aims to reduce VAT compliance burdens and encourage cross-border trade within the European Union (EU). For the first time, small enterprises can apply VAT exemptions in multiple Member States, eliminating the need for multiple VAT registrations.

While this provides clear benefits, businesses must carefully consider eligibility criteria, turnover thresholds, and the impact on VAT deductions before opting in.

Background: What Changed?

Before 2025, VAT exemptions for small enterprises were strictly domestic, meaning businesses had to register for VAT in every EU country where they conducted taxable transactions.

The new SME scheme changes this by allowing small enterprises to apply VAT exemptions in other Member States, provided they meet specific conditions. However, businesses opting for the exemption lose the right to deduct input VAT on purchases related to exempt supplies.

Key Benefits of the SME Scheme

No VAT is charged – Small enterprises can sell goods and services without applying VAT.
Simplified VAT compliance – Reduced VAT reporting and administrative burdens.
Single VAT registration – Businesses only need to notify their Member State of establishment (“MSEST”) instead of registering in multiple Member States.
Quarterly reporting – Instead of multiple VAT returns, businesses submit a single quarterly report to the MSEST, which coordinates with other tax authorities.

How the SME Scheme Works

Two-Tier Structure: Domestic & Cross-Border Schemes

The SME scheme consists of two layers:

Domestic Scheme – A small enterprise only applies the VAT exemption in its home country (MSEST).
Cross-Border Scheme – A small enterprise extends the VAT exemption to other Member States where it operates, even if it does not use the scheme domestically.

Turnover Thresholds

To qualify, businesses must meet specific turnover limits:

Domestic Threshold – Set by each Member State but cannot exceed EUR 85,000 (or equivalent in national currency).
Cross-Border Threshold – A total EU-wide annual turnover limit of EUR 100,000 across all 27 Member States.

Defining Turnover

National Annual Turnover – The total value of supplies within one Member State, excluding VAT.
Union Annual Turnover – The total value of supplies across all EU Member States, excluding VAT.

Eligibility Criteria

Domestic Scheme

To qualify for the domestic SME scheme, a business must:

Be established in an EU Member State.
Have annual turnover within the national threshold of that Member State.

Cross-Border Scheme

To apply for VAT exemptions in multiple Member States, a business must:

Be established in an EU Member State.
Have union-wide turnover below EUR 100,000 in both the current and previous calendar years.
Ensure its national turnover in the target Member State does not exceed that country’s domestic threshold.

Non-EU small enterprises cannot apply for the SME scheme.

Simplified VAT Compliance: Key Features

Single Registration

Eligible small enterprises only need to notify the tax authority in their MSEST to apply for the SME scheme. Upon approval, they receive a unique EX number, valid across all participating Member States.

Single Quarterly Report

Instead of filing separate VAT returns, SMEs submit one consolidated quarterly report to their MSEST, covering turnover in all Member States. The MSEST then coordinates with tax authorities in other countries.

VAT Exemption & Deduction Impact

No VAT on Sales – Businesses using the SME scheme do not charge VAT on their supplies.
No Input VAT Deduction – Since sales are VAT-exempt, businesses cannot reclaim VAT on purchases related to those supplies.

Malta’s Implementation of the SME Scheme

Malta has updated its VAT legislation to align with the new EU rules, introducing:

Article 11A – VAT exemption for small enterprises established in Malta that supply goods/services in other EU Member States.
Article 11B – VAT exemption for small enterprises not established in Malta but making supplies within Malta.

Key Changes in Malta

Unified Domestic Threshold – A single threshold of EUR 35,000 now applies to all domestic supplies, replacing previous sector-specific thresholds.
Quarterly Reporting – Businesses using Article 11A must submit quarterly reports to Malta’s tax authority, listing supplies in all Member States. Reports are due by the last day of the month following each quarter.

Key Considerations Before Opting In

Eligibility Check – Ensure total turnover stays within the set thresholds.
Impact on VAT Deductions – Consider the loss of input VAT recovery before opting in.
Administrative Benefits – Weigh the reduction in VAT compliance obligations against potential business costs.
Member State Implementation – Not all EU countries may implement the SME scheme the same way.

Seeking expert VAT advice is strongly recommended to ensure full compliance and avoid unexpected VAT liabilities.

Conclusion

The 2025 SME VAT scheme introduces a major shift in how small businesses manage VAT across the EU. By allowing cross-border VAT exemptions, it removes previous registration burdens. However, businesses must carefully assess their turnover, compliance obligations, and impact on VAT deductions before making a decision.

Understanding the nuances of the SME scheme is essential for businesses looking to leverage VAT exemptions while remaining compliant in a changing regulatory landscape.