Until 2025, the VAT special scheme for small enterprises (SME) was only meant for companies carrying out transactions in their home country. This measure allowed a company trading below a certain threshold not to charge VAT on its domestic sales. At the same time, the company was unable to deduct VAT on its purchases. While this mechanism aimed at offering a greater level of simplicity for SMEs, it did not always achieve this goal. As soon as companies started selling in other European Member States, the mechanism could not apply causing many VAT issues to SMEs.
From January 2025, the exemption scheme was harmonised within the European Union (EU), which sounds like a great initiative, but there is always two sides to every coin so let’s have a closer look to better understand the intricacies of this reform.
Pre-2025 situation and challenges faced by SMEs.
The SME exemption scheme was not harmonised within the European Union: a company could benefit from the simplification on a domestic level but had to find solutions as soon as it started selling cross-border in other EU Member States.
This situation was encountered by businesses more often than you think. Let’s take the example of a small ecommerce company that could benefit from the special VAT scheme in its home country but started selling through Amazon to reach new customers. In this example, goods were dispatched from the company’s home country to avoid further complications. Even though the company could exempt from VAT its domestic sales, it had to comply with EU VAT laws on sales carried out to European consumers.
Since 2021, companies exceeding € 10 000 of Intra-Community distance sales of goods have to charge VAT in the country of destination. To comply with EU VAT laws, the company had two options:
- Opting out of the SME scheme in its home country to gain access to the OSS-EU Scheme. This solution would simplify the VAT treatment of sales to EU consumers by avoiding multiple VAT registrations but would also mean adding VAT on domestic sales, which is not the case with the VAT exemption scheme.
- Registering for VAT purposes in other EU Member States: the company could also decide to keep using the domestic SME exemption scheme and register for VAT purposes in other EU Member States to collect and remit VAT on Intra-Community distance sales of goods that exceeded the annual threshold while not charging VAT on domestic sales.
In light of these two options, the company faced a strategic choice: prioritise administrative simplification by opting out of the SME scheme or maintain its VAT exemption domestically while navigating multiple VAT registrations abroad. This decision highlights the impact of the EU’s evolving VAT framework on small businesses engaged in cross-border trade. The 2025 reform introduces significant changes to these rules, reshaping how SMEs manage their VAT obligations within the EU.
Key changes introduced by the 2025 reform and impacts for SMEs
The 2025 reform comes with two main changes:
- The previously domestic scheme will be applicable on an EU scale ;
- The implementation of a new EU threshold of € 100 000.
While these changes may sound extremely positive to reduce the administrative burden for SMEs, a closer look at the reform shows just how complex it will remain for SMEs to comply with these new changes.
Level of application of the new EU SME scheme :
The new EU SME scheme will be available not only to domestic businesses but also to companies established in another Member State. The first complexity of this reform is to understand that the new scheme has, in fact, 3 different levels of applications. A small company can decide to implement the scheme either:
- on a domestic level only (meaning that the company will exempt from VAT domestic sales but will add VAT on cross-border transactions) ;
- on a cross-border level only (meaning that the company will add VAT on its domestic sales but will benefit from the exemption on cross-border sales) ;
- on both a domestic and a cross-border level (meaning that the company will exempt from VAT both domestic and cross-border transactions).
On top of this, if a company decides to opt for the cross-border solution, it has to confirm the list of Member States in which the EU SME scheme will be implemented. This is directly linked to the threshold change that we are going to address now.
Harmonisation of an EU threshold of € 100 000 :
The new EU SME scheme comes with a new threshold of € 100 000. To be eligible to use the scheme, a company cannot breach the €100 000 threshold at a cross-border level. However, Member States kept their national threshold in place. Therefore, to benefit from the exemption, a small company must meet two conditions: a) not breaching the EU threshold of € 100 000 and b) not breaching the national threshold in countries where the company sells.
In other words, companies will have to know each Member State’s national threshold to ensure compliance with this new scheme. If a turnover exceed the national threshold, companies can start adding VAT in this Member State while continuing to use the scheme in other Member States.
To illustrate this level of complexity, let’s take the example of a small company carrying out transactions across several Member States:
| National threshold for sale of goods | Turnover (EUR) | Application of SME scheme | Country |
|---|---|---|---|
| € 22 000 | € 20 000 | Allowed | Germany |
| € 25 000 | € 22 000 | Allowed | Belgium |
| € 20 000 | € 45 000 | Not allowed | Netherlands |
| – | € 87 000 | – | Total |
This company has to think of two aspects :
- Am I trading below the EU threshold of € 100 000 to be eligible to use the scheme?
- Am I trading below each country’s own threshold to be eligible to use the scheme in each country?
While the 2025 reform aims to simplify VAT compliance for SMEs, its implementation remains complex. Businesses will need to carefully navigate the three levels of application of the new EU SME scheme and monitor both the EU-wide and national thresholds. The promise of reduced administrative burdens comes with new challenges, requiring SMEs to maintain a clear understanding of VAT obligations across multiple Member States. Adapting to these changes will be key for small businesses seeking to maximise their VAT position while remaining compliant.
The 2025 reform : not so straight-forward for SMEs
The 2025 reform marks a significant step toward the Europeanisation of the VAT special scheme for small enterprises, aiming to create a more harmonised framework for SMEs operating across borders. While the extension of the exemption scheme to an EU-wide level and the introduction of a unique € 100 000 threshold may appear to simplify compliance, the reality is far more nuanced. The coexistence of national thresholds, the need for businesses to navigate different levels of application, and the administrative complexities of monitoring cross-border transactions all add new layers of difficulty.
For SMEs, this reform represents both an opportunity and a challenge. It does offer a more flexible approach to VAT compliance, potentially reducing the need for multiple VAT registrations ; but businesses must be prepared to carefully assess their turnover across different Member States and ensure compliance with both EU-wide and national requirements.
Ultimately, while the reform is a step toward greater VAT harmonisation in the EU, it does not eliminate the complexities of cross-border trade. SMEs will need to stay informed, adapt their strategies, and potentially seek expert guidance to make the most of the new scheme while avoiding costly compliance pitfalls.
Contact our VAT experts if you want to navigate through the complexities of this new SME scheme, ensure full compliance with thresholds or register for VAT purposes when you breach thresholds across one or more Member States.
