authorising the Republic of Lithuania to apply a measure derogating from Article 287 of Directive 2006/112EC on the common system of value added tax

EXPLANATORY MEMORANDUM

Pursuant to Article 395(1) of Directive 2006/112/EC of 28 November 2006 on the common system of value added tax (‘the VAT Directive’), the Council, acting unanimously on a proposal from the Commission, may authorise any Member State to apply special measures for derogation from the provisions of that Directive in order to simplify the procedure for collecting VAT or to prevent certain forms of tax evasion or avoidance.

By letter registered with the Commission on 18 June 2020, Lithuania requested an authorisation to apply, as of 1 January 2021, a measure derogating from Article 287 of the VAT Directive, allowing Republic of Lithuania to exempt from VAT taxable persons whose annual turnover is no higher than EUR 55 000. In accordance with Article 395(2) of the VAT Directive, the Commission informed the other Member States by letters dated 10 August 2020 and 11 August 2020 of the request made by the Republic of Lithuania. By letter dated 12 August 2020, the Commission notified the Republic of Lithuania that it had all the information necessary to consider the request.

1.CONTEXT OF THE PROPOSAL

•Reasons for and objectives of the proposal

Chapter 1 of Title XII of the VAT Directive allows for the possibility for Member States to apply special schemes for small enterprises, including the possibility of exempting taxable persons below a certain annual turnover. This exemption implies that a taxable person does not have to charge VAT on his or her supplies and, consequently, he or she cannot deduct VAT on the inputs.

Under Article 287(11) of the VAT Directive, Lithuania may exempt from VAT taxable persons whose annual turnover is no higher than the equivalent in national currency of EUR 29 000 at the conversion rate on the day of its accession. The Republic of Lithuania joined the euro on 1 January 2015.

By raising the threshold for a person to be identified for VAT purposes from EUR 45 000 to EUR 55 000, it is anticipated that the measure will reduce significantly the administrative burden on businesses eligible for the scheme, and in particular on micro-enterprises, by releasing them from the VAT obligations under the normal VAT arrangements, such as keeping VAT records or submitting VAT returns.

Moreover, there will also be a reduction in the workload for the tax authorities.

According to the Lithuanian authorities, an analysis of three factors has been carried out. The first factor, taking into account persons registering as VAT taxpayers, shows that the number of VAT taxpayers in the Republic of Lithuania is constantly increasing since 2017 and the vast majority (around 90%) of persons registered as taxpayers for VAT purposes and paying VAT into the State budget consist in people who have opted for the voluntary registration.

The second factor refers to the impact on State budgetary revenue of increasing the threshold from EUR 45 000 turnover threshold to EUR 55.000. According to estimates provided by the Lithuanian authorities this increase would result in an annual EUR 6.4 million additional decrease in VAT revenue. Currently the VAT not collected due to the EUR 45 000 threshold amounts to EUR 13.2 million per year (with the minimum threshold of EUR 29 000). In comparison, the total VAT revenue was EUR 3.8 billion in 2019.

The third factor, relates to the number of taxpayers affected. Lithuania indicates that 7% of the total amount of taxpayers engaged in economic activities in Lithuania in 2019 is eligible for applying the scheme with the current threshold of EUR 45 000. Of this 7% only 1.8% is registered for VAT purposes. Based on the information collected by the national authorities in 2019, there are 5 463 taxpayers with a turnover between EUR 45 000 to EUR 55 000. All those taxpayers would be eligible for the SME scheme upon increasing the threshold.

Further, the Lithuanian authorities explain that in the last years they observed that the EUR 45 000 threshold has not had any substantial impact on the collection of VAT revenues.

An annual turnover threshold of EUR 55 000 for registering for VAT would benefit small businesses, particularly natural persons engaged in small business, farmers subject to the compensatory VAT tariff scheme, and persons engaged in the provision of services to end-consumers and parties, from which a small portion of VAT would be deducted, i.e. the possibility of such people not having to register for VAT up to an annual turnover threshold of EUR 55 000 significantly eases the administrative and tax burden on them. This measure would also help small businesses, which have been hardly hit by the Covid-19 pandemic.

The measure has an optional character. Therefore, small businesses whose turnover does not exceed the threshold will still have the possibility to exercise their right to apply the normal VAT arrangements. Derogations are normally granted for a limited period to allow an assessment of whether the derogating measure remains appropriate and effective. Moreover, the provisions of Articles 281 to 294 of the VAT Directive on the special scheme for small enterprises have recently been reviewed. The new directive laying down simpler VAT rules for small enterprises requires that Member States adopt and publish the laws, regulations and administrative provisions, which are necessary to comply with the new rules, by 31 December 2024 at the latest. Member States will have to apply those national provisions from 1 January 2025.

It is therefore requested to authorise the derogation until 31 December 2024.