amending Implementing Decision (EU) 2018/1490 as regards authorisation to Hungary to apply for a further period the special measure derogating from Article 287 of Directive 2006/112/EC

EXPLANATORY MEMORANDUM

Pursuant to Article 395(1) of Council Directive 2006/112/EC of 28 November 2006 on the common system of valued 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 19 April 2021, Hungary requested an authorisation to continue to apply, until 31 December 2024, a measure derogating from Article 287 of the VAT Directive, allowing Hungary to exempt from VAT taxable persons whose annual turnover is no higher than the equivalent in national currency of EUR 48 000.

In accordance with Article 395(2), second subparagraph, of the VAT Directive, the Commission informed the other Member States by letter dated 28 June 2021 of the request made by Hungary. The Commission notified Hungary by letter dated 29 June 2021 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 supplies and, consequently, he or she cannot deduct the VAT on his inputs.

Under Article 287 of the VAT Directive, particular Member States which acceded after 1 January 1978 may exempt taxable persons whose annual turnover is no higher than the equivalent in national currency of the amounts at the conversion rate on the day of their accession as specified in that provision.

Under point 12 of Article 287 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.

By virtue of Council Implementing Decision (EU) 2018/1490 Hungary was authorised, until 31 December 2021, to apply a higher threshold and thus to exempt from VAT taxable persons whose annual turnover is no higher than the equivalent in national currency of EUR 48 000 at the conversion rate on the day of its accession.

An authorisation to continue to use the exemption beyond 2021 for taxable persons whose annual turnover is no higher than the equivalent in HUF of EUR 48 000 would be a significant simplification for persons operating relatively small businesses. Taxable persons covered by this exemption do not have to deduct and pay VAT, be registered for VAT or keep a full detailed record of transactions subject to VAT. Thanks to these simplifications, small business owners can devote more time and resources to developing their business. The derogating measure remains optional for taxable persons. 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.

Moreover, the cost of collecting VAT from taxable persons operating businesses with relatively low turnover, resulting from providing taxpayer services to these taxable persons and auditing their tax returns, is disproportionately high in comparison to the amount of tax collected. Accordingly, by applying a VAT exemption to small business owners, the revenue administration may direct more resources towards preventing and combating tax fraud, evasion and avoidance, and towards improving the quality of taxpayer services and the effectiveness of collecting VAT from large-scale business operators.

The measure does not significantly affect the total amount of revenue from VAT or the overall amount of tax revenue collected at the stage of final consumption.

The derogating measure, simplifying the obligations of small operators, is in line with the objectives set out by the European Union for small businesses.

It is therefore appropriate to authorise Hungary to apply the derogating measure until 31 December 2024.

•Consistency with existing policy provisions in the policy area

The derogating measure is in line with the objectives of Directive (EU) 2020/285 amending Articles 281 to 294 of the VAT Directive on a special scheme for small enterprises, which resulted from the VAT action plan, and aims to create a modern, simplified scheme for those businesses. In particular, it seeks to reduce VAT compliance costs and distortions of competition both domestically and at EU level, reduce the negative impact of the threshold effect, and facilitate business compliance as well as monitoring by tax administrations.

Moreover, the threshold of EUR 48 000 is consistent with Directive (EU) 2020/285, insofar as it allows Member States to set the annual turnover threshold required for an exemption from VAT at a level no higher than EUR 85 000 (or the equivalent in national currency).