EU – Simplified Reporting Under Domestic and Cross-Border SME Scheme

Introduction 

The importance of small and micro enterprises in the EU could be withdrawn from Eurostat’s yearly statistical articles. Each year, we witness the growth of the number of employees working for SME’s. The continuously growing contribution of SMEs to the revenue that EU institutions gather from collecting the VAT shows how important it is to make this sector less chained with bureaucracy and compliance costs. 

The factually supported data indicates that around 50% of all employees within the ranks of EU-established enterprises belong to SMEs. Their contribution to the collection of the EU VAT is around one-third of the entire sum. The level of importance of SMEs for the EU business landscape is, without exaggeration, essential for the prosperity of the entire community. 

Introducing this simplified scheme resulted in a massive success regarding regulatory burden reduction for SMEs.  The costs that this group of businesses incurred before introducing this simplification scheme showed a significant disproportion between their turnover and compliance costs. 

The adoption of the SME scheme reduced this expenditure and permitted the expansion of the SME network within the EU. The SME scheme is widely accepted as a legal concept in most EU countries. The adoption of the SME scheme through the national legislation of Member States permits economic operators to be out of the scope of VAT requirements. 

Adherence to the SME’s scheme permits EU-established businesses not to charge VAT on their supplies of goods and services, and this tax relief permits these businesses to make their VAT compliance costs radically smaller or obsolete. However, the downside is that these businesses cannot deduct input VAT from purchasing goods and services connected to VAT-exempt supplies. 

The SME scheme is reserved only for EU-based persons(businesses and natural persons) and can only be adhered to in the Member State where VAT is due. If the place of supply for transaction/transactions is in Germany, only Germany-based economic operators(businesses or natural persons) could adhere to the SME scheme. 

In cases where the above-mentioned taxable person makes supplies to customers in other Member States, the supplier based in Germany should often register for VAT in that country. 

The EU has adopted a “new” SME scheme to reduce compliance costs for SMEs that make supplies in other Member States in which VAT is due. The introduction of the Cross-border business SME EU scheme will also reduce compliance costs for SMEs. 

Timeline 

The adopted legislation indicates that the effective date of new measures should be January 1, 2025. 

Regulatory Landscape

As previously noted, most EU countries have implemented Domestic SME schemes. The usage of the SME scheme is optional. The threshold, registration, and other relevant requirements for adhering to or leveraging the domestic SME scheme are defined through national legislation. 

Adopting new EU VAT legislation(Directive, Regulation, and Implementing Decree) related to the SME scheme has introduced significant changes concerning the Domestic SME scheme and an entirely new concept of Cross-border SME scheme. 

Domestic SME scheme

The adoption of new legislation concerning the simplified SME scheme unquestionably shows the EU support for small businesses. One of the Community institutional priorities for the upcoming year concerning the business landscape is to elevate the sustainability for SMEs EU. 

The domestic SME scheme remains optional. The national legislation of the Member States defines the requirements for adhering to the scheme. Adopting new legislation concerning VAT rules for Small enterprises has also reshaped some of the regulations governing domestic SME schemes. 

One of the novelties concerns how the threshold for the SME scheme could be defined. New rules allow Member States to determine the threshold for this type of scheme, up to EUR 85 000 yearly. 

Cross-border SME scheme 

The introduction of the cross-border SME scheme, plainly put, represents implementing a new type of SME scheme. We want to emphasize that, to eliminate any confusion, is the Cross-border SME scheme just a sort of extension of the domestic SME scheme or an alternative? 

The answer is no. The cross-border SME scheme is a new type of simplified reporting scheme that permits EU-based businesses to make taxable supplies of goods and services without mandatory VAT registration if the stipulated prerequisites are met. 

What are the principal requisites for the usage of the cross-border SME scheme? 

• Economic operators must be established in the EU. 
• The SME must file a prior notification to adhere to the cross-border SME scheme in its Member State of establishment. 
• When the registration procedure is completed, the SME will obtain a unique registration number that will be used for all occasions concerning the cross-border SME’s operations, such as submitting quarterly reports, invoicing, and other compliance-related administrative tasks. 
• The applicant’s total turnover cannot surpass the EU-based threshold of EUR 100,000 for the entire community. 
• Small enterprises that want to use the cross-border SME scheme cannot surpass the national SME threshold in the Member State to which it intends to extend this scheme. 
• From January 1, 2025, the domestic threshold for simplified VAT reporting under the SME scheme is the same for local businesses as for those established in other Member States. 
• Following the adoption of the new simplified VAT reporting system for SMEs, cross-border SMEs should file quarterly reports to report turnover in all Member States. The report should be sent to the Member State of the establishment. 
• When the EU-based SME threshold is surpassed, the SME loses the right to use cross-border schemes.

Can cross-border SME schemes coexist with domestic SME schemes or other simplified schemes?

The simple answer would be yes. From the practical perspective, EU-based small enterprises can simultaneously use domestic and cross-border SME schemes when the conditions are met. When the EU-based threshold for cross-border schemes is reached, but the domestic threshold isn’t, the business could still profit from the domestic SME scheme. 

The EU-based businesses could simultaneously use the cross-border SME and OSS schemes. 

Fewer Compliance Challenges for SME’s 

EU SME strategy 2025 guarantees lower compliance costs for EU-based businesses looking to extend their scope of operations to other Member States. The introduction of the cross-border SME scheme and modification of norms that govern the usability of domestic SME schemes undoubtedly show the EU’s willingness to support small businesses. 

Starting from January 1, 2025, small enterprises established in a different Member State than the Member State where VAT is due can exempt their supplies under the same rules as those established in that Member State. New rules enacted equality treatment for supplies made by domestic and cross-border SMEs. 

As mentioned previously, the usage of SME schemes, both domestic and cross-border ones, depends on the adoption of this simplified scheme by the concerned Member State. Any SME with a total annual turnover of less than EUR 100 000 at the EU level can use the cross-border SME scheme. However, to be eligible for the usage of this scheme in other MS, it shouldn’t surpass the national SME threshold. 

It is important to notice that the SME scheme can be used for both B2C and B2B supplies. Almost all goods and services supplied under this scheme can be reported, with some exceptions. 

EU legislators have adopted various pieces of legislation that will significantly reshape the VAT rules starting in the first months of 2025. One of these measures is the extension of the SME scheme to cross-border transactions. 

With the introduction of the cross-border SME scheme and modifications of the rules that govern the rules surrounding domestic SME schemes, new compliance challenges for small businesses will arise. Even though the primary goal of the SME schemes is to reduce compliance costs for the concerned businesses, new compliance requirements will be put in place. 

The cross-border SME scheme could be a great simplification tool when it comes to reporting intra-community distance sales of goods and services for small enterprises. By registering for this type of scheme, they would be able to VAT-exempt their transactions.