Key takeaways
- Standardized thresholds with cross-border relief: From January 1, 2025, SMEs with under €100,000 in EU-wide turnover can benefit from national VAT exemption thresholds capped at €85,000—even when trading across borders.
- New compliance steps for eligible businesses: SMEs must stay below national thresholds, notify their home country, and use an ‘EX’-suffix VAT ID to access the exemption.
- Implications beyond SMEs: Larger and non-EU businesses must adapt to changes in invoice handling and VAT treatment, especially where exempt SMEs are involved.
In short: The EU's revised SME scheme took effect on January 1, 2025. It caps national VAT exemption thresholds at €85,000 and lets small businesses use the exemption across borders. To qualify, a business must stay below €100,000 in annual EU-wide turnover and below the threshold in each member state, and must hold an 'EX' identification number.
SMEs (small and medium-sized enterprises) make up 99% of all businesses in the EU, so they are a key part of Europe’s economy. The European Union’s SME scheme was introduced to ease the heavy VAT burden that SMEs face. The scheme has gone through major changes, which took effect on January 1, 2025. These changes have a big impact on SMEs, especially businesses that trade across borders within the EU.
What is the revised SME Scheme?
The revised SME scheme is an updated EU VAT exemption for small businesses that now also covers cross-border activity. The amendments add flexibility and inclusion, mainly through new cross-border exemptions. For a closer look, see EU VAT exemptions for small businesses registered in Poland.
In the past, the SME scheme let each member state set its own VAT exemption threshold. This led to a wide range of limits, from €10,000 in Greece to €85,000 in Italy. Under the revised framework, the maximum threshold is capped at €85,000. The more notable update, though, is that SMEs based in one member state but operating across borders can now qualify.
To qualify for the cross-border exemption, a business must meet two conditions. It must stay below €100,000 in annual turnover across all EU states. It must also not exceed the VAT threshold of €85,000 in any member state where it operates. This dual test targets the scheme at truly small businesses and could cut their VAT compliance costs by up to 18% a year.
What is the impact on domestic and cross-border transactions?
The revised SME scheme gives eligible businesses more choice over where they charge VAT, but it also brings new admin. The changes aim to harmonize the VAT system across the EU, and they create both new challenges and opportunities. Related reading: Belgium Introduces VAT Exemption Opportunity for Small Businesses in 2024.
For instance, a business that qualifies for the SME scheme may choose not to charge VAT in its home country. It may still need to collect VAT on sales in other member states where it goes over the local threshold. This flexibility lets businesses optimize their tax position to match where they operate. We cover this in more detail in EU Implementing New Registration and Reporting Rules From January 2025.
Also, businesses must notify their home member state and get an identification number ending in 'EX'. This adds an extra admin task. However, it is a necessary step to keep the scheme transparent and properly monitored.
How does a small business apply for the cross-border SME scheme?
A small business applies through a single prior notification in its own member state of establishment. The European Commission's SME scheme guidance sets out these steps:
- Notify your home country: Give your business details, the member states where you want the exemption and your sales in each country for the current and previous calendar year.
- Receive your EX number: Your home country issues it and confirms where you can use it. This should take no more than 35 working days.
- Start exempting sales: The exemption applies from the date your EX number is granted and confirmed.
- Report every quarter: File a quarterly report in your home country covering your turnover in all 27 member states. It is due within one month after the quarter ends.
Example: In the Commission's example, a business notifies on 3 February 2025 and receives confirmation on 5 March 2025. It can apply the exemption from 5 March 2025.
What happens if a business exceeds the thresholds?
If EU-wide turnover goes above €100,000, the business leaves the scheme in all member states. Its EX number is deactivated, except at home if it still qualifies for the domestic scheme there. It must then meet normal VAT obligations wherever it trades, and cannot rejoin for one calendar year.
If turnover passes a national threshold, the exemption in that country normally ends from the sale that crosses it. Some member states allow a transitional margin of up to 10% or 25% until the end of the calendar year.
What does the SME scheme mean for EU and Non-EU businesses?
The SME scheme helps EU-established small businesses, but its effects also reach larger businesses and non-EU entities. The higher maximum exemption threshold could lead more SMEs to opt out of charging VAT. This affects the input tax calculations of their business customers. Large businesses may need to adjust their accounting systems for invoices from exempt SMEs, which may no longer include VAT.
Small businesses without a VAT identification number under the new scheme can also cause confusion. It may be hard to tell whether to treat them as businesses or consumers, especially for digital services. This distinction is crucial, because it decides whether VAT should be charged at the point of sale.
Conclusion
The updated SME scheme affects the full range of businesses operating in the EU. It reduces VAT compliance burdens for small enterprises. It also challenges larger businesses and tax professionals to adapt to a changing regulatory environment.
For businesses inside and outside the EU, staying informed is vital. Working closely with tax advisors and tracking new legislation will help you handle the new VAT landscape well.
Do you need help with your VAT compliance? Book a free call with one of our VAT experts to find bespoke solutions for your business, optimize your VAT costs, and reach millions of new potential customers.
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Frequently asked questions
What is the new SME VAT scheme in the EU?
It’s a revised VAT exemption framework in effect since January 1, 2025, allowing eligible SMEs to benefit from national exemption thresholds capped at €85,000—even when trading across borders within the EU.
Who qualifies for the cross-border VAT exemption?
SMEs with under €100,000 in total EU turnover and no more than €85,000 in any single EU member state may qualify.
What are the new compliance requirements?
Eligible SMEs must notify their home member state and obtain a VAT identification number ending in 'EX' to benefit from the exemption.
How will this impact larger or non-EU businesses?
Larger companies may need to adjust invoicing and input VAT processes, especially when dealing with exempt SMEs who no longer charge VAT.
Does this mean SMEs are VAT-free in all EU countries?
No. The exemption applies only if both the EU-wide and per-country thresholds are met. SMEs exceeding local thresholds must register and charge VAT in those states.
