authorising Hungary to apply a special measure derogating from Article 287 of Directive 2006/112/EC 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 introduce 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 13 November 2017, Hungary requested an authorisation to introduce a measure derogating from Article 287 of the VAT Directive allowing the exemption from VAT of taxable persons with an annual turnover not exceeding EUR 48 000.

In accordance with Article 395(2) of the VAT Directive, the Commission informed the other Member States by letters dated 6 February 2018 of the request made by Hungary. By letter dated 7 February 2018, the Commission notified Hungary 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 Member States to apply special schemes to small enterprises, including the possibility of exempting taxable persons whose annual turnover does not exceed a certain threshold. 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(12) of the VAT Directive, Hungary may exempt from VAT taxable persons whose annual turnover is no higher than the equivalent in national currency of EUR 35 000 at the conversion rate on the day of its accession. Hungary requests to increase the exemption threshold from EUR 35 000 to EUR 48 000 as from 1 January 2019.

From the information provided by Hungary, raising the exemption threshold from EUR 35 000 to EUR 48 000 would increase the number of small enterprises that may benefit from the reduction of administrative burdens and compliance costs. Moreover, since this threshold would be aligned with another threshold concerning income tax, small enterprises would benefit from fully simplified tax arrangements.

Bearing in mind that economic growth has led to a steady increase in revenue, raising the personal exemption threshold could be justified according to Hungary.

Taxable persons whose turnover does not exceed the threshold will still have the option to be registered for VAT purposes.

Considering that Hungary has been authorised to exempt taxable persons from VAT with an annual turnover not exceeding a threshold of EUR 35 000 and that it has re-evaluated the situation, a higher threshold seems to be acceptable. It is therefore proposed to allow Hungary to increase the exemption threshold for SMEs from EUR 35 000 to EUR 48 000 until 31 December 2021 or the the date from which Member States are to apply any national provisions that they are required to adopt in the event that a directive is adopted amending Articles 281 to 294 of Directive 2006/112/EC governing the special scheme for small enterprises.

•Consistency with existing policy provisions in the policy area

Similar derogations have been granted to other Member States. Luxembourg was granted a threshold of EUR 30 000, Poland and Estonia a threshold of EUR 40 000, Italy a threshold of EUR 65 000, Croatia a threshold of EUR 45 000, Latvia a threshold of EUR 40 000 and Romania a threshold of EUR 88 500.

Derogations from the VAT Directive should always be limited in time so that their effects can be assessed. Moreover, the provisions of Articles 281 to 294 of the VAT Directive on a special scheme for small enterprises are currently subject to review. As announced in the VAT Action Plan, and the 2017 Commission Work Programme, the Commission's proposal on the SMEs scheme has recently been presented.

It is therefore proposed to grant the derogating measure and increase the threshold until 31 December 2021 or until the date from which Member States are to apply any national provisions that they are required to adopt in the event that a directive is adopted amending Articles 281 to 294 of Directive 2006/112/EC.

•Consistency with other Union policies

The measure is in line with the Union's objectives for small businesses, as laid down in the Commission Communication "Think small first" – a "Small Business Act" for Europe" which calls on the Member States to take account of the special features of SMEs when designing legislation and, therefore, to simplify the existing regulatory environment.

2.LEGAL BASIS, SUBSIDIARITY AND PROPORTIONALITY