COMMISSION STAFF WORKING DOCUMENT IMPACT ASSESSMENT Accompanying the document Proposal for a Council Directive amending Directive 2006/112/EC on the common system of value added tax as regards the special scheme for small enterprises
Date: 2018-01-18
Institutions: Directorate-General for Taxation and Customs Union, European Commission
Subjects: VAT, administrative formalities, liberalisation of trade, simplification of legislation, small business, tax exemption, tax harmonisation, tax law, turnover

EN 

  EN 

   EUROPEAN COMMISSION  Brussels, 18.1.2018  SWD(2018) 9 final  COMMISSION STAFF WORKING DOCUMENT  IMPACT ASSESSMENT  Accompanying the document Proposal for a Council Directive amending Directive 2006/112/EC on the common system of value added tax as regards the special scheme for small enterprises  {COM(2018) 21 final} - {SWD(2018) 11 final}  
 
 
Table of Contents 

1. 

INTRODUCTION AND CONTEXT ....................................................................... 11 

1.1. 

Introduction ..................................................................................................... 11 

1.2.  Scope and objective of the initiative: a modern, simplified and comprehensive 
regime for small enterprises ............................................................................ 12 

1.3.  Current framework for SMEs provided for under the VAT Directive ............ 14 

1.3.1.  Functioning  of  the  common  system  of  value  added  tax  and 
administrative obligations ................................................................. 14 

1.3.2.  The notion of an SME under the VAT Directive .............................. 15 

1.3.3.  Rules on taxation of SMEs under the VAT Directive ....................... 16 

1.3.4.  Simplified VAT obligations (outside of the SME scheme) ............... 17 

1.3.5.  Simplified  procedures  for  charging  and  collecting  VAT  (part  of  the 
SME scheme) ..................................................................................... 18 

1.3.6.  The SME exemption (part of the SME scheme) ............................... 18 

2.  WHAT IS THE PROBLEM AND WHY IS IT A PROBLEM? ............................... 20 

2.1. 

Introduction ..................................................................................................... 20 

2.2.  The problems ................................................................................................... 21 

2.2.1.  Compliance costs: domestic and cross-border .................................. 21 

2.2.2.  Lack of neutrality of the current system ............................................ 24 

2.2.3.  VAT revenue losses for Member States ............................................ 25 

2.3.  Problem drivers ............................................................................................... 27 

2.3.1.  Driver 1 – The complexity of the current VAT rules on obligations 27 

2.3.2.  Driver 2  –  The  diversity  of  the  current  rules  on  VAT  obligations 
within the EU ..................................................................................... 29 

2.3.3.  Driver 3 – Design of SME exemption ............................................... 30 

2.4.  Problem Tree ................................................................................................... 31 

2.5.  Evolution of the problem without action at EU level ...................................... 31 

3.  WHY SHOULD THE EU ACT? .............................................................................. 33 

4.  WHAT SHOULD BE ACHIEVED? ........................................................................ 34 

4.1.  General objectives ........................................................................................... 34 

4.2.  Specific objectives ........................................................................................... 34 

4.3.  Consistency of the objectives with other EU policies ..................................... 35 

5.  WHAT ARE THE VARIOUS OPTIONS TO ACHIEVE THE OBJECTIVES? ..... 35 

5.1.  Selection of options ......................................................................................... 35 

2 

 
5.2.  Options analysed ............................................................................................. 36 

5.2.1.  Option 1: Status quo, including e-Commerce changes ..................... 36 

5.2.2.  Option 2: SME exemption extended to supplies from other Member 
States and including streamlined simplified VAT obligations .......... 38 

5.2.3.  Option 3:  Option 2  plus  measures  to  reduce  the  negative  impact  of 
transition  from  exemption  to  taxation  (the  so-called  ‘threshold 
effect’) ............................................................................................... 45 

5.2.4.  Option 4: Option 3 plus mandatory common treatment of occasional 
traders ................................................................................................ 46 

5.3.  Discarded options ............................................................................................ 48 

5.3.1.  Option  5:  Option 2  with  full  harmonisation  of  the  SME  exemption 
threshold ............................................................................................ 48 

5.3.2.  Option 6: Removing the SME exemption from the VAT Directive . 49 

5.4.  Key features of the proposed policy options ................................................... 49 

6.  WHAT  ARE  THE  IMPACTS  OF  THE  DIFFERENT  POLICY  OPTIONS  AND 
WHO WILL BE AFFECTED? ................................................................................. 50 

6.1.  Methodology .................................................................................................... 50 

6.2.  Analysis of the impacts of each of the options ................................................ 52 

6.2.1.  Option 1 – Status quo, including e-Commerce changes .................... 52 

6.2.2.  Option 2B  –  SME  exemption  extended  to  supplies  from  other 
Member  States  with  EU 
including 
turnover 
streamlined simplification measures ................................................. 55 

threshold  and 

6.2.3.  Option 3 – Option 2B plus measures to reduce the negative impact of 
transition from exemption to taxation ............................................... 59 

6.2.4.  Option 4 – Option 3 plus mandatory common treatment of occasional 
traders ................................................................................................ 62 

7.  HOW DO THE OPTIONS COMPARE? .................................................................. 65 

7.1.  Summary assessment of the impacts ............................................................... 65 

7.2. 

Identification of the preferred option .............................................................. 67 

7.3.  VAT treatment of occasional traders: option not favoured ............................. 68 

7.4.  Subsidiarity of the preferred option ................................................................. 69 

7.5.  Proportionality of the preferred option ............................................................ 69 

7.6. 

Impact on SMEs .............................................................................................. 69 

7.7. 

Impact from the REFIT perspective ................................................................ 70 

8.  HOW WOULD ACTUAL IMPACTS BE MONITORED AND EVALUATED? .. 71 

9.  ANNEXES ................................................................................................................ 75 

ANNEX 1:  

PROCEDURAL INFORMATION ................................................... 76 

3 

 
ANNEX 2:  

STAKEHOLDER CONSULTATION .............................................. 78 

ANNEX 3:  

WHO IS AFFECTED BY THE INITIATIVE AND HOW .............. 90 

ANNEX 4.  

ANALYTICAL  MODELS  USED  IN  PREPARING  THE  IMPACT 
ASSESSMENT ......................................................................................................... 92 

ANNEX 5:  

MEASURES FOR SMES AVAILABLE IN THE VAT DIRECTIVE102 

ANNEX 6:  

INTERPLAY  AMONG  THE  LEGISLATIVE  PROPOSALS  ON 
THE DESTINATION PRINCIPLE AND ADMINISTRATIVE COOPERATION108 

ANNEX 7: 

FUNCTIONING OF OPTION 2 IN AN INTRA-EU CONTEXT . 111 

ANNEX 8: 

EVALUATION OF THE CURRENT VAT SYSTEM FOR SMES117 

ANNEX 9:  

SME EXEMPTION THRESHOLDS IN THE EU (APRIL 2017) . 126 

ANNEX 10:  
STATES 

SPECIAL  VAT  SME  MEASURES  APPLIED  IN  MEMBER 
128 

ANNEX 11:  

VAT OBLIGATIONS LINKED TO THE SME EXEMPTION PER 
MEMBER STATE .................................................................................................. 130 

ANNEX 12:  

ENTERPRISE  EUROPE  NETWORK  –  SME  FEEDBACK 

DATABASE  132 

4 

 
 
 
 
 
List of tables 

Table 1: Summary of VAT administrative obligations for businesses......................................... 14 

Table 2: Definition of SMEs for VAT purposes (magnitudes in EUR millions) ......................... 15 

Table 3: Linking problems to specific objectives......................................................................... 34 

Table 4: Overview of the key features of different policy options ............................................... 49 

Table 5: Summary of methodology used ..................................................................................... 51 

Table 6: Simplification scenarios linked to Option 2 and their impact on compliance costs ...... 55 

Table 7: Summary table of the wider economic impact of Option 2 ........................................... 58 

Table 8: Overview of the impacts on compliance costs for businesses under Option 3 .............. 59 

Table 9: Impact of Option 3 on the wider economy ..................................................................... 61 

Table 10: Businesses’ compliance costs under Option 4 ............................................................. 62 

Table 11: Impacts of Option 4 on the wider economy ................................................................. 64 

Table 12: Summary analysis of impacts ....................................................................................... 66 

Table 13: Monitoring and evaluation framework ......................................................................... 73 

Table 14: Overview of the consultation activities ........................................................................ 78 

Table 15: Overview of the consultation results (by stakeholder category) .................................. 88 

Table 16: Impacts on compliance costs under Option 2 ............................................................... 95 

Table 17: Impacts on compliance costs under Option 3 ............................................................... 96 

Table 18: Impacts on compliance costs under Option 4 ............................................................... 96 

Table 19: Impacts on Member States’ VAT revenues under Option 2 ........................................ 97 

Table 20: Impacts on Member States’ VAT revenues under Option 3 ........................................ 98 

Table 21: Impacts on Member States’ VAT revenues under Option 4 ........................................ 99 

Table 22: Interplay among the legislative proposals on the destination principle ..................... 110 

Table 23:  Compliance  costs  for  SMEs  within  and  outside  the  SME  exemption  in  selected 
Member States .................................................................................................................... 121 

Table 24: Examples from the SME feedback database .............................................................. 132 

5 

 
 
 
 
List of figures 

Figure 1: Measures for SMEs available in the VAT Directive .................................................... 17 

Figure 2: Key VAT-related barriers to cross-border trade ........................................................... 28 

Figure 3: Problem Tree ................................................................................................................. 31 

Figure 4: Functioning of the baseline scenario (including e-Commerce proposal) ..................... 38 

Figure 5: Simplified VAT obligations under Option 2, as compared to the baseline scenario .... 44 

Figure 6: SME Panel results – most burdensome VAT obligations ............................................. 82 

Figure 7: OPC results – distribution of respondents (by category) .............................................. 83 

Figure 8: OPC results – VAT provisions for SMEs currently applied ......................................... 84 

Figure 9: OPC results – weight of VAT obligations in deciding to sell cross-border.................. 84 

Figure 10: OPC results – opening up of the SME exemption ...................................................... 85 

Figure 11: OPC results – need to further simplify VAT obligations ........................................... 86 

Figure 12: Example of the application of the flat-rate scheme .................................................. 104 

Figure 13: Example of the application of the SME exemption .................................................. 106 

Figure 14: Example of the functioning of the graduated relief in the Netherlands .................... 107 

Figure 15: Impact of taxing at destination on the VAT rules for small businesses.................... 108 

Figure 16: Example Option 2A .................................................................................................. 112 

Figure 17: Example Option 2B................................................................................................... 113 

Figure 18: Example Option 2C................................................................................................... 115 

List of Boxes 

Box 1: Characteristics of simplified VAT obligations ................................................................. 17 

Box 2: Characteristics of the simplified procedures for charging and collecting VAT ............... 18 

Box 3: Characteristics of the SME exemption ............................................................................. 20 

Box 4: Example – VAT burdens faced by an SME wanting to engage in cross-border supplies 23 

6 

 
 
List of abbreviations 

B2B 

B2C 

CGE 

CIT 

Business to Business 

Business to Consumer  

Computable General Equilibrium 

Corporate Income Tax 

CJEU 

Court of Justice of the European Union 

DG AGRI 

Directorate-General for Agriculture and Rural Development 

DG BUDG 

Directorate-General for Budget  

DG 
CONNECT 

Directorate-General for Communications Networks, Content and 
Technology 

DG COMP 

Directorate-General for Competition 

DG ENER 

Directorate-General for Energy 

DG ENV 

Directorate-General for Environment 

DG FISMA 

Directorate-General for Financial Stability, Financial Services and Capital 
Markets Union 

DG GROW 

Directorate-General for Internal Market, Industry, Entrepreneurship and 
SMEs 

DG JUST 

Directorate-General for Justice and Consumers 

DG TAXUD 

Directorate-General for Taxation and Customs Union 

EEN 

EU 

EUR 

GDP 

GFV 

MOSS 

OECD 

OLAF 

OPC 

Enterprise Europe Network 

European Union 

Euro 

Gross Domestic Product 

Group on the Future of VAT 

Mini One Stop Shop 

Organisation for Economic Co-operation and Development 

European Anti-Fraud Office 

Open Public Consultation 

7 

 
 
OSS 

One-Stop Shop 

REFIT 

Regulatory Fitness and Performance Programme 

SCAC 

SCM 

SG 

SJ 

SME 

TBE 

Standing Committee on Administrative Cooperation 

Standard Cost Model 

Secretariat-General 

Legal Service 

Small and Medium-sized Enterprises 

Telecommunications, Broadcasting and Electronic 

TFEU 

Treaty on the Functioning of the European Union 

VAT 

VEG 

Value Added Tax 

VAT Expert Group 

Glossary 

Administrative 
costs 

Cash-
accounting 
scheme 

Compliance 
costs 

Cross-border 
trade  

EUROFISC 

Costs  for  tax  administrations.  Administrative  costs  for  a  tax  administration 
will  typically  include  costs  relating  to  the  following  activities:  processing 
VAT  registrations,  undertaking  VAT  audits,  reviewing  VAT  returns, 
reviewing recapitulative statements, helpline and written query handling and 
the implementation of new legislation. 

Measure  optional  for  Member  States  and  businesses,  according  to  which 
businesses account for the VAT charged (output VAT) only when they have 
received  payment  from  their  customers  and  deduct  VAT  paid  (input  VAT) 
only  once  the  purchases  have  been  paid  to  their  suppliers.  See  Annex 5  for 
more information.  
Costs for businesses. Compliance costs for businesses will typically include 
costs relating to the following activities: registration for VAT, completion of 
periodic VAT returns, dealing with a VAT audit, obtaining customer’s VAT 
registration details, completing recapitulative statements and obtaining proof 
of the intra-EU movement of goods. 
Refers  solely to  intra-EU cross-border B2B trade.  The terms ‘trading across 
the  EU’,  ‘trading  cross-border’,  ‘trading  in  another  Member  State’,  ‘doing 
business in other Member States’, ‘doing business across the EU’, ‘intra-EU 
transactions,  ‘intra-EU  trade’  refer  to  any  situation  where  a  business:  (i) 
makes supplies of goods taxable in a Member State other than that in which 
he  is  established;  (ii)  acquires  goods  from  a  business  established  in  another 
Member  State;  or  (iii)  supplies  goods  to  a  customer  established  in  another 
Member State.   
EUROFISC  is  a  network  for  the  swift  exchange  of  targeted  information 
between Member States.  

8 

 
 
 
Fiscalis 2020 

Flat-rate 
scheme 
Group on the 
Future of VAT 
(GFV) 

Graduated 
relief 

Input VAT 
Occasional 
trader 

Output VAT 
Recapitulative 
statements 
(‘EU Sales 
Lists’) 
SMEs 

SME 
exemption 

Fiscalis  2020  is  an  EU  cooperation  programme  enabling  national  tax 
administrations to create and exchange information and expertise.  
Measure  optional  for  Member  States  and  businesses  which  simplifies  the 
calculation of the VAT due by SMEs. See Annex 5 for more information. 
The Group on the Future of VAT is an informal Commission expert group set 
up  in  2011  in  response  to  the  need  for  a  forum  where  more  in-depth 
discussions  on  the  topics  raised  in  the  2010  Green  Paper  can  be  held.  The 
Group  is  composed  of  delegates  (VAT  experts)  from  the  28  EU  Member 
States’ tax administrations and serves as a forum for in-depth discussion and 
exchange of opinions on the Commission’s pre-legislative initiatives and the 
preparation of future VAT legislation.  
Measure optional for Member States and businesses, according to which the 
amount  of  VAT  to  be  collected  by  a  business  under  the  measure is  reduced 
depending  on  its  turnover,  with  the  relief  gradually  decreasing  with  the 
increase of turnover. See Annex 5 for more information.  
VAT paid by a business to its suppliers. 
Concept not contained in the VAT Directive, often used for describing private 
individuals  carrying  out  economic  activities  on  an  irregular  basis  outside  of 
their main employment (i.e. that activity is therefore incidental). For instance, 
private  individuals  with  photovoltaic  installations  on  their  homes  producing 
electricity  and  selling  it  to  the  general  network;  or  also  private  individuals 
who  on  occasion  carry  out  economic  activities  outside  of  their  main 
employment, such as selling products online, or sharing goods or services on 
collaborative  economy  platforms  in  exchange  for  a  compensation  (e.g. 
sharing their houses or sharing their cars). 
VAT collected by a business from its customers. 
Declarations  submitted  by  businesses  making  intra-EU  supplies  to  their  tax 
administrations, usually on a monthly or quarterly basis. In such statements, 
businesses  have  to indicate the enterprises in other Member States to whom 
they have supplied goods. See Annex 5 for more information. 
At  EU  level,  SMEs  are  generally  defined  according  to  the  Commission 
Recommendation  of  6 May  2003  concerning  the  definition  of  micro,  small 
and medium-sized enterprises. However, for VAT purposes the definition of 
SMEs is much more restrictive. With its rules for small enterprises, the VAT 
Directive targets businesses operating on a much smaller scale, which under 
the  general  definition  would  be  considered  as  ‘micro-enterprises’  (that  is, 
with turnover of up to EUR 2 000 000). 
Therefore,  and  also  in  line  with  the  2017  Deloitte  SME  study,  for  the 
purposes  of  this  Impact  Assessment  ‘SMEs’  (and  also  the  terms  ‘small 
enterprises’ and ‘small businesses’) are meant to be: 

  Generally, businesses with turnover of up to EUR 2 000 000. 
  However,  some  of  the  measures  in  the  policy  options  (e.g.  the  SME 
exemption)  target  an  even  more  restricted  sub-set  of  SMEs.  Hence, 
the  analysis  sometimes  focuses  on  this  specific  category,  which  has 
been determined to cover businesses below the turnover threshold of 
EUR 100 000. 

Measure optional for Member States and businesses according to which small 
enterprises are exempted from collecting and paying VAT, provided that their 
annual  turnover  does  not  exceed  a  certain  threshold.  See  Annex 5  for  more 
information. 

9 

 
Treasury 

VAT 
accounting 
(‘VAT record 
keeping’ or 
‘bookkeeping’) 
VAT 
Committee 

A  government  department  related  to  finance  and  taxation  of  a  particular 
jurisdiction (of a Member State or a third country). 
VAT  obligation  for  businesses to  keep  their  accounts  in  sufficient  detail  for 
VAT to be collected and declared, and such procedure to be checked by the 
tax authorities. See Annex 5 for more information. 

Under Article 398 of the VAT Directive, the VAT Committee deals with the 
obligatory  consultations  required  by  certain  Articles  of  that  Directive.  In 
addition, it examines questions on the application of the EU VAT provisions 
raised  by  the  Chairman  on  his  own  initiative  or  at  the  request  of  a  Member 
State. The VAT Committee is also a forum for the exchange of views in order 
to reach guidelines on a uniform application of common practices with regard 
to VAT provisions. 

VAT due 

VAT Expert 
Group (VEG) 

VAT Directive  Council Directive 2006/112/EC of 28 November 2006 on the common 
system of value added tax – as amended (OJ L 347, 11.12.2006, p. 1). 
Difference between Output VAT and Input VAT (VAT due = Output VAT – 
Input VAT).  
The  VAT  Expert  Group  was  set  up  in  2012  by  the  Commission  Decision 
2012/C 188/02 of 26 June 2012 in response to the request by stakeholders for 
greater  involvement  in  the  process  of  preparing  EU  VAT  legislation 
expressed  during  the  public  consultation  launched  by  the  2010  Green  Paper 
on  the  future  of  VAT.  The  Group  is  composed  of  40  members:  individuals 
with the requisite expertise in the area of VAT, organisations representing in 
particular  businesses,  tax  practitioners  and  academics.  The  VEG  serves  as  a 
bilateral  forum  to  allow  for  an  open,  structured  and  transparent  dialogue 
between  the  Commission  and  stakeholders  on  any  matter  relating  to  the 
preparation and implementation of EU legislation and other policy initiatives 
taken at EU level in the field of VAT.  

VAT invoicing  VAT obligation for businesses to issue invoices for every supply made.  See 

Annex 5 for more information. 

VAT payment  Obligation to pay the VAT due on a transaction to the tax authorities, which 

VAT 
registration 

usually lies on the supplier. See Annex 5 for more information. 
VAT  obligation  for  businesses  to  register  for  VAT  purposes  when  their 
activity  as  a  business  starts,  changes  or  ceases.  See  Annex 5  for  more 
information. 

VAT reporting   VAT  obligation  for  businesses  to  submit  VAT  returns  and  recapitulative 

VAT return 

statements. See Annex 5 for more information. 
Declaration  made  by  businesses  to  their  tax  administrations  where  they 
indicate which are the transactions made, the VAT that they have charged to 
their customers (output VAT), the VAT that they have paid to their suppliers 
(input  VAT),  and  the  amount  of  VAT  payable  or  refundable  (difference 
between output VAT and input VAT). See Annex 5 for more information. 

10 

 
 
 
 
 
 
 
 
 
1. 

INTRODUCTION AND CONTEXT 

1.1. 

Introduction 

Value  Added  Tax  (VAT)  is  a  general  tax  on  consumption  applied  to  supplies  of  goods  and 
services along the whole production and distribution process. It is a major and growing source of 
tax revenue in the European Union (EU). VAT raised slightly more than EUR 1 trillion in 2015, 
which corresponds to 7% of EU GDP or 17.6% of total national tax revenues1. One of the EU’s 
own  resources  is  also  based  on  VAT  (12.4%  of  the  EU  budget  in  2015)2.  As  a  broad-based 
consumption tax, it is considered to be one of the most growth-friendly forms of taxation. 

One of the key strengths of VAT is that, by allowing taxpayers to exactly offset the tax incurred 
in previous stages of the production chain, it is much better suited than other types of indirect 
taxes to operate an internal market free of tax distortions. This was the main reason for its early 
adoption  by  the  EU.  It  is  governed  by  the  VAT  Directive3  which  aims  at  ensuring  that  the 
principles underlying the functioning of this tax apply consistently in all Member States.  

In recent years, however, the VAT system has been unable to keep pace with the challenges of 
the  global  economy  and  the  opportunities  offered  by  new  technologies.  Therefore,  the 
Commission adopted on 7 April 2016 an Action Plan on VAT4 (hereinafter ‘2016 VAT Action 
Plan’) setting out ways to modernise the VAT system so as to make it simpler, more fraud-proof 
and business-friendly. In this context, the Commission announced its intention to adopt in 2017 
four VAT-related proposals: 

1)  a  definitive  VAT  system  for  intra-EU  cross-border  trade  based  on  the  principle  of 
taxation in the Member State of destination in order to create a robust single European 
VAT area (first step); 

2)  a  modernised  VAT  rates  policy  so  as  to  allow  Member  States  greater  autonomy  on 

setting the VAT rates; 

3)  a comprehensive simplification VAT package for SMEs; 
4)  a proposal to enhance VAT administrative cooperation and EUROFISC. 

This  Impact  Assessment  relates  to  the  proposal  for  a  comprehensive  simplification  VAT 
package  for  SMEs,  which  involves  a  review  of  the  special  scheme  for  small  enterprises  under 
the  VAT  Directive.  That  is  a  proposal  which  is  linked  in  particular  to  two  other  legislative 
initiatives stemming from the VAT Action Plan: (i) the proposal for removing VAT obstacles to 
cross-border  e-Commerce,  which  was  adopted  in  December  2016  (hereinafter  ‘e-Commerce 
proposal’)5;  and  (ii)  the  proposal  on  a  definitive  VAT  system  for  intra-EU  cross-border  trade 

1   Eurostat, Tax revenue statistics, Eurostat (gov_10a_taxag) 

http://ec.europa.eu/eurostat/statistics-explained/index.php/Tax_revenue_statistics. 

2   European Commission, EU Budget 2015, Financial Report 

http://ec.europa.eu/budget/financialreport/2015/lib/financial_report_2015_en.pdf. 

3   Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax – as amended 

(OJ L 347, 11.12.2006, p. 1). 

4   Communication  from  the  Commission  to  the  European  Parliament,  the  Council  and  the  European  Economic 
and  Social  Committee  on  an  action  plan  on  VAT  –  Towards  a  single  EU  VAT  area  –  Time  to  decide 
(COM(2016)  148  final).  See  also  Communication  from  the  Commission  to  the  European  Parliament,  the 
Council and the European Economic and Social Committee – On the follow-up to the Action Plan on VAT – 
Towards a single EU VAT area – Time to act (COM(2017) 566 of 4 October 2017). 

5   Proposal  for  a  Council  Directive  amending  Directive  2006/112/EC  and  Directive  2009/132/EC  as  regards 
certain value added tax obligations for supplies of services and distance sales of goods (COM(2016) 757 final). 

11 

 
 
                                                 
foreseen for adoption in September this year (hereinafter ‘definitive VAT system proposal’)6. It 
is  also  closely  related  to  the  VAT  place  of  supply  rules  for  telecommunications,  broadcasting 
and electronically supplied services7, which entered into force in 2015 (hereinafter ‘2015 place 
of supply rules’).  

1.2. 

Scope  and  objective  of  the  initiative:  a  modern,  simplified  and  comprehensive 
regime for small enterprises 

The  scope  of  the  present  initiative  covers  the  review  of  the  VAT  rules  for  small  enterprises 
(hereinafter ‘SMEs’)  provided  for in  the VAT  Directive, namely:  the exemption in  the special 
scheme for small enterprises laid down in Articles 281-294 (hereinafter, the ‘SME scheme’) and 
other measures outside the scheme which allow to simplify different VAT obligations. The other 
provisions  provided  for  in  the  SME  scheme,  such  as  other  simplified  procedures  for  charging 
and collecting VAT are not part of this initiative and therefore will not be reviewed in substance.   

The small enterprises that will be impacted by the review are those with an annual turnover not 
exceeding  EUR 2 000 000,  as  in  VAT  terms  only  these  businesses  are  generally  referred  to  as 
SMEs  (see  section 1.3.2).  These  small  enterprises  constitute  the  vast  majority  of  businesses  in 
the EU (98%). 

In  addition  to  the  review,  this  Impact  Assessment  covers  a  specific  issue  relating  to  the 
expansion of new opportunities for trade  and entrepreneurship resulting from the collaborative 
economy  and  digital  technologies,  which  is  the  VAT  treatment  of  the  so-called  occasional 
traders.  These  traders  are  private  individuals  offering  services  on  an  occasional  basis  (e.g. 
sharing  assets  or  selling  electricity  home  made  to  the  network)  which  may  qualify  as  taxable 
person  for  VAT  purposes  and  consequently  benefit  from  the  SME  scheme.  The  increasing 
number of occasional traders exploiting the opportunities offered by the digital technologies can 
indeed be a challenge for both Member States and businesses with regard to the application of 
VAT rules as these traders blur the lines between consumer and supplier, professional and non-
professional service provider, private and economic activity. As a result of the assessment, this 
issue (tackled by the policy option 4 described in section 5.2.4) has not been taken on board in 
the  final  SME  package,  as  it  would  require  legislative  changes  touching  upon  complex  VAT 
issues that need a distinct evaluation exercise (see section 7.3).  

The  review  is  long  overdue  for  several  reasons.  First  of  all,  despite  the  fact  that  the  VAT 
Directive  gives  Member  States  the  possibility  to  exempt  small  enterprises  from  VAT,  a 
possibility widely used by the Member States, these enterprises as a category continue to suffer 
from  disproportionate  VAT  compliance  costs  that  among  others  represent  a  real  obstacle  to 
SMEs'  growth  (see  section 2.2.1).  It  has  been  assessed  indeed  that  the  current  SME  scheme 
presents  several  drawbacks  that  make  the  scheme  unable  to  fully  address  this  problem.  In 

6   Proposal for a Council Directive amending Directive 2006/112/EC on the common system of value added tax 
as  regards  certain  harmonisation  and  simplification  rules  within  the  current  value  added  tax  system  and 
introducing the definitive system for the taxation of trade between Member States, and Proposal for a Council 
Implementing Regulation amending Implementing Regulation (EU) No 282/2011 as regards certain exemptions 
for intra-Community transactions, not yet adopted. 

7   For  an  overview  of  the  2015  place  of  supply  rules,  see  here:  Council  Implementing  Regulation  (EU) 
No 1042/2013 of 7 October 2013 amending Implementing Regulation (EU) No 282/2011 as regards the place 
of  supply  of  services  (OJ  L  284,  26.10.2013,  p.  1);  and  Council  Regulation  (EU)  No 967/2012  of  9 October 
2012 amending Implementing Regulation (EU) No 282/2011 as regards the special schemes for non-established 
taxable  persons  supplying  telecommunications  services,  broadcasting  services  or  electronic  services  to  non-
taxable persons (OJ L 290, 20.10.2012, p. 1).  

12 

 
                                                 
particular, the SME exemption does not reflect the Single Market perspective and the move to a 
definitive system based on the destination principle: the scheme is distortive and targeted mostly 
at businesses trading domestically and in the B2C context8. 

Moreover, there are two other reasons that call for action. Firstly, the SME scheme is obsolete 
already now, given that it works on the basis of deviations from the general provisions laid down 
in  the  VAT  Directive9.  And  secondly,  the  SME  scheme,  which  provides  for  measures  to  be 
applied  in  the  Member  State  where  the  small  enterprises  are  established,  will  become 
unsustainable  when  the  evolution  of  the  VAT  system  towards  taxation  at  destination  is 
completed. This aspect is further explained in section 2.5. 

The goal of the initiative is therefore to set a modern, simplified and comprehensive regime for 
small enterprises that would allow the achievement of the general objectives: to contribute to the 
creation of an environment conducive to SMEs’ growth, to contribute to the creation of a single 
EU VAT area and to contribute to the smooth functioning of a deeper and fairer Single Market. 
The specific objectives are to achieve greater effectiveness in reducing VAT compliance costs 
for SMEs, more level playing  field for them  and to  contribute to  fighting the VAT fraud. The 
present initiative contributes to the construction of an efficient and robust VAT system based on 
the destination principle. The general and specific objectives of the initiative are further clarified 
in section 4.  

The proposal draws on the Commission’s experience as regards prior initiatives for simplifying 
VAT  rules  for  small  businesses.  In  this  respect,  it  should  be  noted  that  this  proposal  will  not 
impose  harmonised  exemption thresholds on Member States  (see section 5.2.2). Moreover, the 
scope  of  the  present  initiative  is  much  larger  than  the  previous  ones  as  it  covers  not  only  the 
exemption for small enterprises but also simplified VAT obligations for both exempt and non-
exempt  businesses.  Finally,  the  initiative  encompasses  any  type  of  transaction:  B2B  and  B2C 
supplies of goods and services, in a domestic and cross-border context. 

While  Member  States  keep  their  prudent  attitude  towards  harmonisation  of  the  VAT  SME 
exemption  and  simplification  of  obligations,  the  situation  has  evolved  since  the  previous 
proposals were adopted by the Commission in 200410 and 201311. In particular, the construction 
of  the  Single  Market  has  progressed  and  the  VAT  system  evolved  towards  taxation  at 
destination. 

The  SME  initiative  is  particularly  linked  with  the  proposal  on  the  definitive  VAT  regime 
because  the  current  provisions  of  the  SME  scheme  are  temporary  in  character  and  apply  only 
until the definitive arrangements for B2B cross-border trade enter into force (Article 292 of the 
VAT Directive). With the new rules, the currently existing exemption for the B2B cross-border 
supply of goods will disappear and businesses making such supplies will be liable for declaring 
and paying VAT in the Member State of arrival of the goods. In order to minimise the burden for 
SMEs making intra-EU transactions in goods, the SME package will allow them to benefit from 
simplified VAT obligations irrespective of whether they make use of the SME exemption. 

It should be noted that the move towards taxation at destination has been pursued in the VAT 
system already for a while. One such example referred to above are the place of supply rules for 

8  The main findings of the evaluation of the current VAT rules for SMEs are presented in Annex 8. 
9   See, for instance, Annex 9 concerning the applicable SME exemption thresholds.  
10  COM(2004) 728 final. 
11  COM(2013) 721 final. 

13 

 
                                                 
telecommunications, broadcasting and electronically supplied services, which entered into force 
in  2015,  another  –  the  e-Commerce  proposal  currently  under  discussion  in  the  Council.  It  is 
therefore  clear  that  the  present  initiative  does  not  necessarily  depend  on  the  one  on  definitive 
regime and its success in the Council.   

The interplay among the different VAT proposals is further explained in Annex 6. 

This  initiative  is  part  of  the  Commission’s  Regulatory  Fitness  and  Performance  Programme12 
(REFIT), which aims to make EU law simple and less costly, in particular for small enterprises.  

1.3.  Current framework for SMEs provided for under the VAT Directive 

Some basic explanation of the functioning of the VAT system in general and of the VAT rules 
for SMEs in particular is provided below in order to set out the context of the review. A more 
detailed picture is provided in Annex 5. 

1.3.1.  Functioning of the common system of value added tax and administrative obligations  

VAT is a consumption tax, borne ultimately by the final consumer13. 

Under the EU VAT system, businesses14 supplying goods or services collect the VAT paid by 
the consumer, while being able to deduct from the VAT they have collected the amount of tax 
they  have  paid  to  other  suppliers  on  purchases  for  their  business  activities.  The  difference 
between VAT collected from consumers (output VAT) and VAT paid to other suppliers (input 
VAT) is the VAT due to the tax authorities. 

As  a  result  of  businesses  having  to  collect  VAT,  the  VAT  Directive  lays  down  a  series  of 
administrative  obligations15  which  aim  at  ensuring  a  correct  functioning  of  the  system.  These 
obligations can be summarised as follows: 

Table 1: Summary of VAT administrative obligations for businesses16 

VAT obligation 

Description 

VAT registration 

Registration for VAT purposes 

VAT invoicing 

Issue of invoices 

VAT accounting (‘record 
keeping’ or ‘bookkeeping’) 

Keeping accounts in sufficient detail for VAT to be applied and its application 
checked by the tax authorities 

VAT reporting (VAT returns) 

Preparing and submitting periodical VAT returns and recapitulative 
statements 

12   For REFIT aspects of this initiative, see Annex 1 to the Communication from the Commission to the European 
Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions  – 
Commission Work Programme 2017 (COM(2016) 710 final), p. 3. On the REFIT programme itself, see here. 
13   A final consumer means for VAT purposes the last person in a production/distribution chain who is not allowed 

to deduct the VAT he paid on his purchases (contrary to VAT taxable persons who can do so). 

14   Reference is made to ‘businesses’ (or ‘SMEs’) for simplification reasons throughout this Impact Assessment, 
but  the  correct terminology would be ‘taxable  persons’. The  scope  of  the  concept of ‘taxable  person’  can be 
found in Articles 9 to 13 of the VAT Directive. 

15   For a description of each VAT obligation, see Annex 5. 
16   For further details, see Annex 5. 

14 

 
                                                 
VAT payment 
Source: Commission services 

Collecting the VAT and paying it over to the tax authorities 

The  compliance  burden  derived  from  the  need  to  observe  these  obligations  creates  a  cost  for 
businesses  that  is  normally  referred  to  as  ‘compliance  cost’.  VAT  obligations  are  particularly 
burdensome  for  businesses  that  are  small  given  that  they  operate  with  more  limited  resources 
than  large  enterprises,  which  leads  to  small  businesses  bearing  proportionally  higher  VAT 
compliance  costs  than  larger  businesses17.  Hence,  the  VAT  Directive  sets  out  several 
provisions18 designed to alleviate the burden that small businesses face in dealing with VAT. 

1.3.2.  The notion of an SME under the VAT Directive 

At  EU  level,  SMEs  are  generally  defined  according  to  the  Commission  Recommendation  of 
6 May  2003  concerning  the  definition  of  micro,  small  and  medium-sized  enterprises19 
(hereinafter  ‘SME  definition’).  However,  for  VAT  purposes  the  definition  of  SMEs  is  much 
more  restrictive.  With  its  rules  for  small  enterprises,  the  VAT  Directive  targets  businesses 
operating on a much smaller scale, which under the general definition would be considered as 
‘micro-enterprises’ (see Table 2).  

Therefore, for  the  purpose  of  this  initiative, SMEs  are  defined  as  businesses  with  annual 
turnover  not  exceeding  EUR 2 000 000,  which  according  to  the  EU  definition  of  SME 
qualify  as  micro-businesses.  These  businesses  make  up  about  98%  of  all  EU  enterprises  and 
contribute  about  15%  of  total  turnover  generated  in  the  EU  and  about  25%  of  net  VAT 
revenues20.  In  addition,  about  69%  of  all  businesses  have  a  turnover  of  less  than  EUR 50 000 
and generate 1% of the total turnover in the EU21. 
The above definition is also consistent with other simplification measures available in the VAT 
Directive, but outside the SME scheme, which are specific for businesses with turnover below 
EUR 2 000 000 (e.g. cash accounting).  

Table 2: Definition of SMEs for VAT purposes (magnitudes in EUR millions) 

Commission Recommendation 2003/361 

Definition for VAT purposes 

  SME definition based on the following criteria: 

  No definition as such: reference to ‘small 

Company 
category 
Medium-
sized 
Small 
Micro 

Staff 
headcount 

Turnover or 
Balance sheet total 

< 250 

≤ € 50 m  ≤ € 43 m 

< 50 
< 10 

≤ € 10 m  ≤ € 10 m 
≤ € 2 m 

≤ € 2 m 

  Target: up to EUR 50 m 

Source: Commission services 

enterprises’ in the VAT Directive 

  Target: much smaller businesses (approximately 
equivalent to the category ‘micro’ according to 
the Commission Recommendation 2003/361, up to 
EUR 2 m) 

  Several measure-specific thresholds, the higher of 
which is EUR 2 m turnover (for cash-accounting22)  

17   See section 2.2.1. 
18   See sections 1.3.3 to 1.3.5 and Annex 5. 
19   Commission Recommendation of 6 May 2003 concerning the definition of micro, small and medium-sized 
enterprises (OJ L 124, 20.5.2003, p. 36). See also http://ec.europa.eu/growth/smes/business-friendly-
environment/sme-definition/. 

20   Deloitte,  Special  scheme  for  small  enterprises  under  the  VAT  Directive  2006/112/EC  –  Options  for  review, 

Final Report (hereinafter ‘2017 Deloitte SME study’), Volume I, 2017, p. 27. See also section 2.5. 

21   2017 Deloitte SME study, Volume I, p. 27. 
22   For information on the cash-accounting scheme, see Annex 5. 

15 

 
                                                 
1.3.3.  Rules on taxation of SMEs under the VAT Directive 

The  measures  foreseen  in  the  VAT  Directive  for  small  enterprises23  can  broadly  speaking  be 
grouped into three categories: 

1)  Simplified VAT obligations  
2)  Simplified procedures for charging and collecting VAT  
3)  SME exemption  

These  measures  are  optional  for  Member  States  to  apply.  In  addition,  small  businesses  are 
frequently, but not always, free to choose whether to avail themselves of such  measures, as in 
certain cases an SME may have an economic advantage in using the general rules rather than the 
SME-specific  provisions  (e.g.  businesses  paying  a  high  amount  of  VAT  to  other  suppliers, 
which may not be interested in applying the SME exemption, given that it would preclude them 
from deducting such input VAT24).  

The majority of such measures aim at reducing compliance costs for businesses (e.g. simplified 
invoicing,  or  longer  periods  for  submitting  a  VAT  return),  but  some  are  intended  to  alleviate 
cash-flow problems by deferring payment of VAT by the business collecting it to the moment 
that it receives the tax from its client (e.g. cash-accounting25), and others release businesses from 
the obligation to collect VAT altogether (i.e. SME exemption26).  

Some of those measures, but not all, are part of the SME scheme. Other measures are available 
for small businesses, however, outside of the SME scheme. As can be seen from Figure 1 below, 
the  fact  that  all  of  these  measures  are  scattered  throughout  the  VAT  Directive  increases  the 
complexity  of  the  current  rules.  Moreover,  they  are  conceived  as  measures  independent  from 
each  other  rather  than  as  a  full  simplification  regime  for  small  enterprises,  which  affects  the 
overall effectiveness of the SME scheme27. 

23   See Annex 5 for a detailed explanation of such measures.  
24   For information on the SME exemption, see section 1.3.6 and Annex 5.  
25   For information on the cash-accounting scheme, see Annex 5.  
26   For information on the SME exemption, see section 1.3.6 and Annex 5.   
27   Simplified VAT obligations are not part of the SME scheme, but are linked to the use of the SME exemption in 
particular,  which  means  that  small  enterprises  outside  of  the  SME  exemption  (e.g.  because  they  exceed  the 
threshold or because they opted out) have no access to such simplification measures.  

16 

 
                                                 
Figure 1: Measures for SMEs available in the VAT Directive 

Source: Commission services 

1.3.4.  Simplified VAT obligations (outside of the SME scheme) 

Simplified VAT obligations provided for in the VAT Directive28 are optional for Member States 
to apply and for businesses to avail themselves of. If available, Member States have considerable 
flexibility  as  regards  their  implementation.  As  a  result  of  this  extensive  range  of  options,  the 
existing  simplified  VAT  obligations  and  their  characteristics  vary  among  Member  States,  thus 
increasing complexity for small enterprises operating cross-border.  

Simplification measures may therefore concern VAT obligations of a diverse nature, such as the 
registration  of  businesses,  invoicing,  accounting,  reporting,  and  the  payment  of  VAT.  Some 
measures  are  available  to  all  businesses  (e.g.  simplified  invoicing),  and  others  are  specific  for 
small businesses using the SME exemption29 (e.g. release from certain or all VAT obligations of 
businesses  availing  themselves  of  that  exemption).  Moreover,  the  eligibility  of  businesses  to 
apply the existing simplification measures varies (e.g. some simplification measures are linked 
to  use  of  the  SME  exemption;  others,  such  as  the  cash-accounting  scheme,  are  conditional  on 
business turnover being below certain thresholds). Where simplification measures are linked to 
use  of  the  SME  exemption,  small  businesses  not  eligible  for  exemption  or  opting  not  to  avail 
themselves of it cannot benefit from them. 

Box 1: Characteristics of simplified VAT obligations 

  Optional character: For both Member States and businesses. 

 

Complexity  of  rules  (at  domestic  level):  Simplified  VAT  obligations  may  concern  registration, 
invoicing,  accounting  (‘record  keeping’),  reporting  (e.g.  VAT  returns),  and  payment  of  VAT.  These 
simplification  measures  are  provided  for  in  the  VAT  Directive  outside  of  the  SME  scheme,  while  also 
being available for small businesses.  

  Different  eligibility  criteria:  Requirements  for  businesses  to  be  able  to  use  existing  simplification 
measures may vary (e.g. some are linked to the use of the SME exemption; others, such as the cash-
accounting  scheme,  are  nonetheless  conditional  on  the  business  turnover  being  below  certain 
thresholds).  Where  simplification  measures  are  linked  to  the  use  of  the  SME  exemption,  businesses 
outside of the exemption cannot benefit from them.  

28   Article 272(1)(d)  (all  VAT  obligations),  Articles 220a  and  238-240  (VAT  invoicing),  Article 272(3)  (VAT 
accounting), Articles 252 and 270-271 (VAT reporting), and Articles 66(b) and 167a (VAT payment). For more 
information, see Annex 5. 

29   Pursuant to Article 272(1)(d) of the VAT Directive.  

17 

ExamplesObjectivesMeasuresxxVAT DirectiveSME schemeSimplifiedproceduresfor chargingand collectionReductionof compliancecostsFlat-rate schemeSME exemption and graduatedreliefElimination of the burdenof collectingtaxRelease fromobligation to payVATOutsideof the SME schemeSimplifiedVAT registrationReductionof compliancecostsRelease fromobligation to register, if exemptSimplifiedinvoicingReductionof compliancecostsRelease fromobligation to issue invoices, if exempt; or simplifiedinvoicingSimplifiedVAT accountingReductionof compliancecostsRelease fromobligation to keepaccounts, if exempt SimplifiedVAT reportingReductionof compliancecostsRelease fromobligation to submitVAT returns, if exempt; or longer periodsfor reportingSimplifiedVAT paymentSupport cash-flowCash-accountingscheme 
 
                                                 
  Diversity of rules (at EU level): Given their optional character, the applicable simplification measures 

vary across the EU, increasing the compliance costs of small businesses trading cross-border. 

Source: Commission services 

1.3.5.  Simplified procedures for charging and collecting VAT (part of the SME scheme)  

Member States which might encounter difficulties in applying the normal VAT arrangements to 
small businesses, by reason of the activities or structure of such enterprises, may set simplified 
procedures  for  charging  and  collecting  VAT  provided  that  such  measures  do  not  lead  to  a 
reduction  of  the  tax  due30.  Such  simplified  procedures  are  thus  optional  for  Member  States  to 
apply  (although  they  are  not  widely  used,  with  only  8  Member  States  having  implemented 
them31) and for businesses to avail themselves of. An example of such simplified procedures is 
the flat-rate schemes32  used to  simplify the calculation  and  payment of the VAT due  by small 
businesses. Moreover, Member States may be authorised by the Council, acting unanimously on 
a  proposal  from  the  Commission,  to  introduce  special  measures  for  derogation  from  the 
provisions  of  the  VAT  Directive  in  order  to  simplify  the  procedure  for  collecting  VAT  or  to 
prevent certain forms of tax evasion or avoidance, provided that certain conditions are met33. 

Box 2: Characteristics of the simplified procedures for charging and collecting VAT 

  Optional character: For both Member States and businesses. 

  Different  eligibility  criteria:  Requirements  for  businesses  to  be  able  to  use  existing  simplified 
procedure  may  vary  (e.g.  some  Member  States  have  set  a  turnover  threshold,  while  others  apply  the 
flat-rate scheme on the basis of business sectors).  

  Diversity  of  rules  (at  EU  level):  The  design  of  flat-rate  schemes  may  vary  among  Member  States 
having introduced such schemes, with some enabling small businesses to apply a flat-rate to calculate 
their  output  VAT  and  others  requiring  such  businesses  to  charge  VAT  on  their  outputs  in  accordance 
with the normal VAT rules whilst allowing a fixed flat-rate sum to be deducted from the amount of VAT 
due.  

Source: Commission services 

1.3.6.  The SME exemption (part of the SME scheme) 

The VAT Directive allows Member States to exempt small businesses from VAT provided that 
their annual turnover does not exceed a certain threshold34. The SME exemption is optional for 
Member  States  to  implement  and  for  eligible  businesses  to  use.  This  measure  has  a  very  high 
implementation  rate  among  Member  States  (26  of  them  have  implemented  the  SME 
exemption35) and also a very high participation rate among eligible businesses (on average 63% 
across Member States)36.  

30   Pursuant to Article 281 of the VAT Directive.  
31   See Annex 10. 
32   For information on flat-rate schemes, see Annex 5.  
33   According to Article 395 of the VAT Directive, the measures intended to simplify the procedure for collecting 
VAT may not, except to a negligible extent, affect the overall amount of the tax revenue of the Member State 
collected at the stage of final consumption.  

34   Pursuant to Articles 282-292 of the VAT Directive. For information on the SME exemption, see Annex 5; and 
for an overview of the thresholds currently applicable in the Member States making use of the SME exemption, 
see Annex 9 and here. 

35   Sweden is the most recent Member State to have introduced this scheme. For more information, see Annex 10. 
36   2017 Deloitte SME study, Volume I, p. 42. 

18 

 
                                                 
This  exemption,  which  for  the  small  businesses  eliminates  the  burden  of  collecting  VAT,  is 
usually  accompanied  by  simplification  measures  (e.g.  release  of  the  obligation  to  register  for 
VAT  purposes,  or  to  indicate  VAT  on  invoices),  which  lower  the  compliance  burden  of 
businesses concerned.   

It  is  up  to  Member  States,  within  the  limits  established  by  the  VAT  Directive,  to  set  the 
thresholds  under  which  the  exemption  applies.  The  threshold  is  an  important  element  in  the 
design  of  the  scheme  as  it  should  reflect  the  trade-off  between  the  need  to  reduce  compliance 
and administrative costs and the need for Member States to  collect VAT revenue. The level at 
which  Member  States  decide  to  set  the  exemption  threshold  depends  on  the  combination  of 
different economic and policy factors linked to the national context. As a result of this, the level 
of thresholds varies substantially across the EU. According to information available for 201737, 
from the Member States making use of the exemption, the lowest threshold is that set by Sweden 
(EUR 3 168)38, while the UK applies the highest one (EUR 97 808)39.  

The SME exemption is also optional for small businesses to apply. However, small businesses 
using the exemption cannot deduct their input VAT (i.e. a business cannot deduct the VAT paid 
in respect of its input supplies from the VAT which the business is liable to pay on the output 
supplies). Eligible businesses may for instance decide to opt out of the exemption in cases where 
taxation,  which  entails  deduction  of  input  VAT,  is  more  favourable  than  being  under  the 
exemption without the right to deduct.  

The SME exemption is  available only to  businesses  established in  the Member State in  which 
VAT  is  due  (i.e.  it  is  not  possible  to  apply  the  exemption  in  cross-border  trade)40.  This  strict 
territorial  application  is  not  aligned  with  the  ongoing  reforms41  of  the  VAT  system  moving 
towards taxation at destination42, according to which many small businesses may have to charge 
VAT to their customers in Member States other than their own.  

The  VAT  Directive  also  lays  down  a  variation  of  the  SME  exemption,  known  as  graduated 
relief43, which reduces the burden for small businesses of collecting VAT, albeit not completely. 
A  business  applying  this  measure  would  receive  a  VAT  relief  on  part  of  its  turnover,  which 
would  gradually  decrease  with  the  increase  of  the  turnover  (the  more  turnover,  the  less  VAT 
relief). However, due to high compliance and administrative costs that it induces the graduated 
relief does not seem to be a particularly effective measure in practice. It is applied by only three 
Member States (Spain, Finland and the Netherlands), and only 5.7% of the business respondents 
to the open public consultation recently carried out were using the scheme.  

37   See Annex 9. 
38   Original amount of SEK 30 000. 
39   Original amount of GBP 83 000.  
40   See Article 283(1)(c) of the VAT Directive. 
41   Notably,  the  e-Commerce  proposal;  and  also  the  ongoing  work  on  the  definitive  VAT  system  proposal.  For 

more information on the interaction with the principle of taxation at destination, see Annex 6. 

42   2016 VAT Action Plan, p. 4. 
43   Pursuant to Articles 282-292 of the VAT Directive. For information on the graduated relief, see Annex 5. 

19 

 
                                                 
Box 3: Characteristics of the SME exemption 

 

Temporary  character  of  the  exemption:  Arrangements  regarding  exemptions  and  graduated  relief 
for small businesses apply only until the definitive arrangements enter into force44. 

  Optional character: Both for Member States and businesses. 

 

 

Strict  territorial  application:  Exemption  only  covers  enterprises  established  in  the  Member  State  in 
which the VAT is due. 

Exemption thresholds: Set out in the VAT Directive or granted by way of derogation. The thresholds 
currently  applied  vary  greatly  and  range  from  slightly  above  EUR 3 000  to  about  EUR 100 000  (see 
Annex 9).  

  Basis  for  the  calculation  of  the  threshold:  Turnover,  calculated  in  accordance  with  the  provisions  of 

the VAT Directive. 

 

 

Businesses using the scheme may not indicate VAT on their invoices. 

Businesses using the scheme cannot deduct input VAT paid. 

Source: Commission services 

2.  WHAT IS THE PROBLEM AND WHY IS IT A PROBLEM? 

2.1. 

Introduction 

As set out in the 2011 Communication45 and the 2016 VAT Action Plan46, the EU VAT system 
is highly complex for businesses generally, and particularly for small enterprises which bear on 
average proportionally higher VAT compliance costs than large enterprises. In that regard, the 
Commission receives frequent complaints from business, which confirms the need for action. In 
addition, the current VAT system does not take into account the Single Market perspective and 
the evolution towards taxation at destination. 

According to the OECD and Eurostat statistics47, the SMEs worldwide are most present in the 
services  sector,  with  smaller  firms  active  particularly  in  the  wholesale  and  retail  trade,  horeca 
sector,  communications,  business  services  (e.g.  computer  software,  information  processing, 
marketing,  human  resource  development,  etc.)  as  well  as  construction  and  manufacturing, 
providing a very important source of employment. The sectors they tend to operate in allow their 
business models to reach cross-border. This, combined with increased outsourcing of specialised 
services  (often  provided  by  SMEs),  new  technologies  and  ever  growing  e-commerce,  allows 
SMEs to break out of their traditional role and seize opportunities offered by the Single Market. 
However, in doing so, they face numerous problems related to complying with the diverse rules 
on VAT for small enterprises, which in design were to support them.      

The need to act was supported in the open public consultation48 for this initiative whereby 87% 
of respondents either agreed or strongly agreed with the objective of the Commission to simplify 
VAT obligations for small enterprises and 71% supported harmonisation of SME exemptions in 
the  EU.  Also  enterprises  that  participated  earlier,  in  the  summer  of  2016,  in  the  SME  panel 

44   In this respect, the definitive VAT system proposal is scheduled for adoption in September this year. 
45  2011 Communication, p. 5. 
46  2016 VAT Action Plan, p. 6. 
47   OECD  Policy  Brief  ‘Small  and  medium-Sizes  Enterprises:  Local  Strength,  Global  Reach’,  p. 2-3; 
http://ec.europa.eu/eurostat/web/structural-business-statistics/structural-business-statistics/sme  as  accessed  on 
17.07.2017. 

48   See Annex 2. 

20 

 
                                                 
consultation49  emphasised  in  their  general  comments  the  need  for  further  harmonisation, 
simplification and clarification of VAT rules across the EU. 

2.2.  The problems 

There  are  in  essence  three  main  problems  with  the  current  VAT  rules  for  SMEs.  These 
problems  are  inter-related  and  stem  from  the  complexity  of  the  current  system,  the  lack  of 
alignment between the different SME schemes in place in the 28 Member States, and from the 
design of the SME exemption. They are further linked to the evolution of the EU VAT regime 
towards taxation at destination.  

The identification of the problems and the problem drivers derive from the 2017 Deloitte SME 
study and consultations with business and Member States.  

2.2.1.  Compliance costs: domestic and cross-border 

This  problem  is  caused  by  all  the  three  drivers  discussed  further  below  in  section 2.3: 
complexity  and  diversity  of  rules  on  VAT  obligations  across  the  EU  and  the  design  of  the 
SME exemption due to which SMEs trading cross-border cannot benefit from this exemption in 
Member States others than the one in which they are established. 

As pointed out in the 2016 VAT Action Plan50 and confirmed by the 2017 Deloitte SME study51, 
small enterprises bear proportionally higher VAT compliance costs than large businesses. In 
more  general  terms,  in  2008  it  was  estimated  that  where  a  big  company  spends  EUR 1  per 
employee because of a regulatory duty, a small business might have to spend on average up to 
EUR 1052.  

Compliance costs are notoriously difficult to measure. The main methodological challenge in 
such assessment on the targeted stakeholders is assessing the population that will have to bear 
the costs and the unit cost. Estimates of VAT-related burdens typically do not include the costs 
for international activities, let alone to the level of granularity of data distinguishing the smallest 
of  enterprises.  While  Eurostat  provides  some  data  on  the  incidence  of  SMEs  selling  cross-
border, for most countries this data does not include the smallest businesses (those with fewer 
than  10  employees).  Moreover,  the  data  available  only  covers  the  incidence  of  cross-border 
trade; no data is available on the value of sales in each country or the number of firms reaching 
the  VAT  registration  threshold  in  each  market.  Therefore,  the  effective  burden  is  difficult  to 
pinpoint.  However,  the  economic  literature  is  unequivocal  on  the  fact  that  any  such  costs 
are  heavier  for  SMEs53.  SMEs  spend  on  average  2.6%  of  their  sales  revenues  on  tax 
compliance  costs,  for  large  enterprises  these  costs  represent  only  0.02%  of  their  sales 
revenues54.  

These costs stem from the complexity of VAT rules relating to businesses’ obligations – as 
described  in  greater  detail  in  section 2.3  –  and  the  extensive  and  recurrent  reporting 
requirements. In addition, compliance costs are multiplied for businesses trading cross-border 
due  to  the  mere  need  to  comply  with  the  different  sets  of  obligations  in  place  in  the 

49   Ibid.  
50  2016 VAT Action Plan, p. 6. 
51  2017 Deloitte SME study, Volume I, p. 22-27. 
52  See also 2008 SBA Communication, p. 7. 
53  See for example OECD, Taxation of SMEs in OECD and G20 Countries, 2015, p. 104. 
54  See European Commission, European Tax Survey 2004, p. 52.  

21 

 
                                                 
respective Member States in which their supplies are taxable. Some of these costs are one-off, 
fixed  setup  costs,  more  or  less  independent  of  the  size  of  the  company  or  volume  of  taxed 
transactions. They could be seen as an ‘entry fee’ to another market, inhibiting the entry of new 
companies  into  cross-border  trade.  These  costs  press  relatively  heavier  on  small  enterprises 
seeking to make the transition from a business orientated purely to the domestic market to one 
trading  throughout  Europe.  They  could  thus  distort  both  the  pattern  of  trade  and  the  size 
structure of industry by favouring larger firms, for whom the fixed compliance costs and burdens 
are smaller in proportion of total costs and revenues. 

Despite  a  certain  degree  of  harmonisation  as  regards  obligations,  large  differences  remain 
between national systems. Research shows that on average a firm trading in two Member States 
would  have  to  deal  with  11  differences  in  VAT-related  procedures55.  The  average  cost  for 
SMEs to account for VAT in another Member State is estimated to be EUR 4 100 annually per 
Member State they supply to56. This discourages SMEs from exploiting the opportunities offered 
by the Single Market by increasing the costs of border-crossing trade flows relative to domestic 
sales.  Such  costs  are  likely  to  bear  relatively  heavily  on  small  and  medium-sized  businesses 
which  may  only  be  trading  small  volumes,  creating  a  real  market-entry  barrier  and  anti-SME 
bias in intra-EU trade57.   

The VAT regulations are complex. Small enterprises may lack the knowledge required to use the 
correct  policies,  time  schedules  and  rates  for  all  their  transactions.  The  onus  rests  on  the 
companies to comply with the VAT rules with financial and even criminal sanctions for failing 
to  do  so.  On  the  other  hand,  companies  in  their  willingness  to  comply,  may  register  for  VAT 
unnecessarily,  potentially  due  to  the  apparent  uncertainty  about  international  VAT  treatment  – 
thereby  creating  additional  administrative  costs58  for  tax  administrations.  Overall,  this 
complexity  is  such  that  it  forces  the  majority  of  small  businesses  to  have  recourse  on  a 
permanent  basis  to  costly  advisory  services.  In  reply  to  the  questionnaire  published  in  the 
framework  of  an  SME  panel  consultation  in  spring  2016,  over  55%  of  respondents  indicated 
having used services of an external consultant in the last financial year in order to advise on and 
help them to comply with their VAT obligations.  

Indeed, as demonstrated in the case study on the cost of compliance for small businesses in 
Germany  under  the  2011  IFS  retrospective  evaluation  of  the  VAT  system  study59,  the 
proportion  of  firms  which  are  exporters  is  very  much  lower  among  small  firms  than  among 
larger  firms.  Fewer  than  5%  of  firms  in  the  two  smallest  size  classes  are  engaged  in  any 
exporting  at  all  (compared  with  11%  of  firms  overall,  and  more  than  40%  of  firms  with  an 
annual  turnover  in  excess  of  EUR 1 million).  The  export  turnover  of  the  1.5 million  German 
firms  in  the  two  smallest  size  classes  is  of  almost  trivial  economic  significance,  less  than 
EUR 650 million  (less  than  1/10  of  1%  of  all  firms’  exports).  Nevertheless,  those  small  firms 

55 

Institute for Fiscal Studies (IFS) and others, A retrospective evaluation of elements of the EU VAT system, 2011 
(hereinafter ‘2011 IFS retrospective evaluation of the VAT system study’), available here. The study refers in 
this context to two EU15 Member States. By contrast, the countries that joined the EU in the major enlargement 
in 2004 have fewer administrative differences in their VAT regimes than the EU15 countries. A possible reason 
is  that  these  countries  were  able  to  start  a  VAT  system  from  scratch  and  have  chosen  to  adapt  best-practice 
procedures from the EU15 countries. 

56  Deloitte Study for the Commission on ‘Modernising VAT for cross-border e-Commerce’ – Lot 1, p. 45. This 
study  refers  to  the  notion  of  an  SME  in  the  sense  of  the  general  definition  as  set  out  in  Recommendation 
2003/361. 

57  2011 IFS retrospective evaluation of the VAT system study, p. 22. 
58   2017 Deloitte SME study, Volume I, p. 47. 
59  2011 IFS retrospective evaluation of the VAT system study, p. 78-79. 

22 

 
                                                 
that  do  participate  in  exporting  have  quite  substantial  levels  of  exports  in  relation  to  their 
turnover – more than 20% of turnover in the lowest two size classes, a higher percentage than in 
medium-sized  firms,  and  broadly  equal  to  the  export  share  for  exporting  firms  as  a  whole. 
Although by no means a conclusive demonstration, this pattern of exporting behaviour strongly 
suggests  that  small  firms  encounter  ‘fixed  entry  cost’  barriers  to  exporting  that  are 
proportionately more significant than for larger firms. 

Some similar concerns that engaging in international trade is a major source of complexity for 
small enterprises were raised as well by the  UK’s Office of Tax Simplification60 during their 
investigation of the scope for further simplification of taxes for small businesses. It concluded 
that although international trade is dominated by large firms, it does not indicate that the small 
business  problem  is  unimportant:  most  trade  could  be  conducted  by  large  firms  precisely 
because small firms are deterred, which (if true) would indicate that the problem is severe61.  

While it is difficult to be precise about the costs and burdens, to appreciate better the difficulties 
faced  by  the  small  enterprises  an  anecdotal  example62  as  put  forward  in  the  2011  IFS 
retrospective evaluation of the VAT system study63 may come useful. 

Box 4:  Example  –  VAT  burdens  faced  by  an  SME  wanting  to  engage  in  cross-border 
supplies 

Consider a small business in a provincial town, which one day receives a phone call from a firm in another EU 
Member  State  who  wishes  to  place  an  order.  The  trader  is  delighted  to  receive  the  call,  but  is  immediately 
apprehensive  about  accepting  the  order.  First  of  all,  she  does  not  know  which  tax  regime  would  apply  to  the 
supply. Would it be taxed in her country or in her customer’s country? Would she have to register for VAT in the 
destination country, and would that depend on whether sales to customers in that country alone exceeded that 
country’s registration threshold? If the destination country’s VAT regime is relevant at all, what VAT rate applies 
to  her  products  in  that  country?  What  paperwork  would  she  have  to  complete,  and  would  her  record-keeping 
have to change from what she already did for domestic VAT purposes?  

Not only does our would-be exporter not know the answers to these questions (and many more); her regular tax 
advisor  –  a  high  street  accountant  accustomed  to  dealing  only  with  domestic  tax  –  does  not  know  either. 
Moreover, neither of them knows quite where to find out. Their domestic tax authority does not consider it their 
concern; the tax authority in the foreign country may have a website, but they do not know where to find the 
relevant information, and indeed the website or paper literature may be in a language they do not understand 
(even a different alphabet). The best way to find out the VAT implications of accepting this order may well be to 
approach a firm of tax advisors with greater specialist knowledge, but this is likely to be expensive. 

All of this is before the would-be exporter has even found out what the VAT implications of accepting this order 
would  be,  let  alone  actually  incurred  any  actual  additional  costs  of  selling  her  products  abroad.  Even  before 
considering the costs of actually complying, the costs of merely ascertaining her obligations must be considered. 

And  at  the  time  she  receives  the  phone  call,  she  may  have  little  idea  what  the  costs  (in  time  and  money)  of 
finding out the VAT implications of this sale would be. The sheer uncertainty  might be enough to dissuade her 
from accepting the order, to choose to ‘play safe’. 

Much of the costs described above relate to the category of costs that can be called as the ‘hassle’ costs. They 
are  even  more  difficult  to  quantify/monetize  or  relate  to  specific  obligation.  They  are  the  costs  felt  by  the 
businesses and relate  to  situations of administrative delays, cumbersome access to information, familiarisation 
time, the opportunity cost of waiting time, sorting out cases of inconsistencies between received information or 
instructions,  lengthy  litigations,  etc.  Whereas  unquantifiable,  one  can  assume  that  these  costs,  exacerbated  in 
the  cross-border  situations  by  other  factors  such  as  geo-blocking  or  simply  language-related  difficulties,  when 
falling on the shoulders of fewer staff in the smallest enterprises, are felt hardest.  

Source: 2011 IFS retrospective evaluation of the VAT system study 

60   An independent office of HM Treasury giving independent advice to the government on simplifying the UK tax 

system: https://www.gov.uk/government/organisations/office-of-tax-simplification/about . 

61   2011 IFS retrospective evaluation of the VAT system study, p. 78-79. 
62   See Annex 12 for other examples, obtained from the Enterprise Europe Network.  
63   Ibid., p. 77-78. 

23 

 
                                                 
2.2.2.  Lack of neutrality of the current system 

The  problem  described  in  this  section  stems  mainly  from  drivers  linked  respectively  to  the 
design of the SME exemption and to diversity of rules on VAT obligations. 

Strict territorial limitation of the VAT exemption provided for under the SME scheme, leaving 
only small enterprises established within the Member State of taxation to benefit, raises serious 
issues. It has a negative impact on the competitive situation of suppliers established in other 
Member States compared to that of domestic suppliers of goods and services.  

The issues are set to increase with the shift towards taxation at destination. One such example is 
linked  to  the  rules  by  which  telecommunications,  broadcasting  and  electronically  supplied 
services provided to final consumers have been taxed at destination since 1 January 2015. These 
rules  imply  that  small  enterprises  having  had  no  VAT  obligations  in  their  own  Member  State 
(because they were  able to  make  use of the SME exemption)  now have to  charge VAT in  the 
Member  State  of  their  customer  without  having  access  to  the  exemption  from  which  their 
competitors established in that Member State can benefit. 

This  means  that  there  is  no  level  playing  field  for  small  enterprises  to  trade  within  the 
European  Union.  Some  respite  is  given  by  the  common  EU  threshold  introduced  by  the  e-
Commerce proposal (see section 5.2.1) but it is not sufficient to alleviate the distortive effects. 
UEAPME, 
the  European  SME  umbrella  organisation,  representing  about  12 million 
enterprises64,  in  its  position  paper  on  the  SME  scheme,  published  in  June  2017,  confirms  the 
distortive effects of the current VAT rules on competition and calls for a more level playing field 
for SMEs in order to encourage them to fully seize the potential of the Single Market65.  

The  competitive  disadvantage  vis-à-vis  domestic  suppliers  contributes  further  to  discouraging 
SMEs  from  carrying  out  cross-border  operations  and  in  consequence  prevents  broader 
exploitation  of  the  opportunities  that  the  Single  Market  should  bring.  These  problems  were 
signalled already in reaction to the 2010 Green Paper on the future of VAT66 (hereinafter ‘2010 
Green Paper’). That Paper was followed by a six-month public consultation on how the EU VAT 
system could be strengthened and improved to the benefit of all stakeholders. The Commission 
received  1 726  replies  from  businesses,  academics,  citizens  and  tax  authorities,  which 
constituted a record response to a tax consultation at the time. As regards the SME scheme under 
the VAT Directive, these respondents pointed, indeed, to the distortion of competition created by 
the territorial application of the SME exemption. 

Also more recent data stemming from the 2017 Deloitte SME study support the above claims. It 
shows that while on average 30% of enterprises make supplies to other Member States, among 
the smallest enterprises (with turnover of less than EUR 50 000) only around 12% sell to other 
Member States67.  

45%  of  respondents  to  the  recent  public  consultation,  closed  on  20 March  2017,  indicated 
interest  in  benefitting  from  the  SME  exemption  in  other  Member  States.  50%  of  respondents 

64  See UEAPME’s website at http://www.ueapme.com/. 
65  UEAPME,  Position  Paper,  UEAPME’s  policy  recommendations  for  a  Special  Scheme  for  Small  Enterprises 

under the VAT Directive, 29.06.2017,  p. 2-3: 
http://www.ueapme.com/IMG/pdf/UEAPME_position_paper_on_VAT_SME_Scheme.pdf . 

66  Green  Paper  on  the  future  of  VAT  –  Towards  a  simpler,  more  robust  and  efficient  VAT  system  

(COM(2010) 695 final). 

67  2017 Deloitte SME study, Volume I, p. 45. 

24 

 
                                                 
 
found  that  businesses  from  other  Member  States  should  be  able  to  benefit  from  the  SME 
exemption provided for in their own Member State. As the most important potential benefits of 
the  opening  of  the  SME  exemption  to  suppliers  from  other  Member  States,  43%  of  the 
respondents  indicated  that  it  would  primarily  make  it  easier  to  carry  out  supplies  in  other 
Member States  and 39% stated that it would primarily encourage  start-ups and  SMEs to  grow 
quicker and that it would help to achieve a more level playing field for companies.  

In addition to the cross-border dimension, lack of neutrality of the SME exemption also affects 
competition  on  domestic  markets  –  that  is  between  suppliers  benefitting  from  the 
exemption and suppliers not able to benefit from it despite having similar turnover; because 
they  have  exceeded  the  threshold  or  they  have  opted  for  the  application  of  the  normal  VAT 
rules.  Such  a  distortive  effect  is  inherent  in  any  threshold  and  is  not  limited  to  the  SME 
exemption. In addition to distortive impact on competition, the existence of the threshold means 
also  that  SMEs  due  to  the  fear  of  going  above  the  threshold  may  limit  their  turnover  which 
would impede growth. This is supported by the analysis of ‘bunching’ behaviour of businesses 
below  the  threshold,  i.e.  high  concentration  of  enterprises  immediately  below  the  threshold68, 
limiting the growth of taxed sales, for example, by redirecting production to less taxed goods or 
services or by scaling down investment and marketing, in order to prevent taxation. The firms 
could also be artificially split when the turnover seems to exceed the threshold giving the retailer 
below the threshold an unfair competitive advantage over taxed retailers69. On the basis of the 
existing evidence, it is difficult to assess the magnitude of the problem. Feedback provided by 
stakeholders  suggests  that  the  ‘threshold  effect’  of  the  exemption  may  indeed  prevent  SMEs 
from  growing,  but  is  not  conclusive70.  Nevertheless,  addressing  some  of  the  disincentives 
inherent to the ‘threshold effect’ should contribute to securing more level playing field for the 
EU’s SMEs.   

Another  feature  of  a  non-neutral  EU  VAT  system  is  linked  to  the  high  level  of  divergence 
between  the  different  national  rules  on  VAT  obligations  –  as  described  further  in 
section 2.3.2 – which creates a fixed-cost trade barrier, because of the costs that the companies 
would need to bear in adapting to VAT regimes of other Member States. Such fixed-cost trade 
barriers  could  have  a  negative  impact  even  on  the  intent  to  participate  in  cross-border  trade, 
particularly for small enterprises. On a global scale such divergence inhibits the completion of 
the Single Market, effectively distorting the competitive conditions for its enterprises. 

2.2.3.  VAT revenue losses for Member States 

The problem described in this section stems from all the three drivers set out in section 2.3. 

More precisely, challenges for Member  States and tax administrations in  terms of VAT losses 
are  derived  both  from  the  VAT  foregone  from  the  SME  exemption  and  non-compliance 
stemming  from  the  complexity  of  VAT  rules  and  differences  between  rules  applicable  in  the 
respective Member States. 

68  2017 Deloitte SME study, Volume I, p. 121-122. 
69   2011 IFS retrospective evaluation of the VAT system study, p. 85. 
70  The threshold effect of the exemption was spontaneously invoked in replies to the 2010 public consultation on 
the 2010 Green Paper. More recently though, in the public consultation closed on 20 March 2017, only 7% of 
respondents  indicated  that  they  limit  the  growth  of  their  sales  in  order  to  keep  turnover  levels  below  the 
exemption threshold. 

25 

 
                                                 
Firstly,  as  regards  the  VAT  foregone,  the  2017  Deloitte  SME  study  estimates  the  gross  VAT 
revenue  that  exempt  businesses  would  generate  at  EUR 13.4 billion  or  1.3%  of  net  VAT 
revenues.  However,  accounting  for  the  fact  that  businesses  would  then  be  able  to  deduct  their 
input VAT, the actual net VAT revenue at stake is estimated at EUR 3.8 billion, or 0.4% of net 
VAT revenues collected in the EU71. It should be noted that it is Member States’ choice to forgo 
the VAT that would have been collected from the small enterprises. The main reason behind it is 
the  socio-economic  motives  linked  to  the  creation  of  growth  friendly  conditions  for  small 
enterprises.  Moreover,  the  negligible  contribution  of  the  small  enterprises  to  the  overall  VAT 
revenues is often outweighed by the enforcement costs that the authorities would need to bear to 
monitor SMEs’ compliance with their VAT obligations. The present initiative aims nevertheless 
at ensuring that within the current framework, the Member States can exert the desired level of 
control and ensure that VAT is duly paid and no VAT is unduly refunded.  

Secondly, regarding non-compliance of businesses with VAT rules, it is important to note that 
part  of  it  is  not  necessarily  due  to  fraudulent  intentions  on  the  side  of  entrepreneurs,  but  to 
complexity  of  VAT  rules  for  SMEs.  As  pointed  out  in  the  2017  Deloitte  SME  study72,  while 
SMEs already find it difficult to comply with domestic VAT obligations, compliance with cross-
border obligations is an even more serious obstacle. Lack of alignment among Member States’ 
rules  on  VAT  obligations  for  SMEs  together  with  the  domestic  nature  of  SME  schemes  may 
create problems for businesses which start trading cross-border or have incidental cross-border 
supplies  (taxable  in  another  Member  State).  One  simple  example  (referred  by  some  of  the 
businesses  interviewed  for  the  study)  is  where  an  SME  supplier  is  benefitting  from  the  SME 
exemption and is also relieved from VAT obligations on his domestic supplies. Such SMEs will 
not easily understand the consequences of starting trading in another Member State (e.g. that it is 
required to register for VAT and cannot benefit from the SME exemption in the other Member 
State or apply the domestic scheme to all its cross-border supplies). It should be noted that the 
situation  should,  to  a  certain  limited  extent,  improve  already  with  the  introduction  of  the 
Common EU threshold set out in the e-Commerce proposal. It is, however, up to the initiative 
subject to this Impact Assessment to propose a more systemic solution. 

While the 2017 Deloitte SME study confirms broadly  concerns  regarding non-compliance and 
fraud linked to SME exemption, it provides no quantitative data. Neither are these available in 
the existing VAT gap calculations73. 

Legitimate claims of input VAT may also cause problems. This is, in particular, the case of 
the so-called occasional traders whose treatment is currently not harmonised across the EU and 
puts  in  doubt  the  fairness  of  taxation  while  reducing  potentially  revenues  due  from  VAT.  The 
notion of an occasional trader would need to be further defined for the purposes of the review. In 
the current Impact Assessment it is used to denote individual users of the collaborative economy 
platforms74  and  individuals  whose  incidental  activities  may  qualify  as  an  economic  activity75. 
While having a very limited taxable turnover and, consequently, output VAT, occasional traders 

71  2017 Deloitte SME study, Volume I, p. 123. 
72  2017 Deloitte SME study, Volume I, p. 114 and the following. 
73  2017 Deloitte SME study, Volume I, p. 123. 
74  See  VAT  Committee  Working  Paper  No 878,  VAT  treatment  of  sharing  economy,  taxud.c.1(2015)4370160-
EN,  Brussels,  22 September  2015  and  the  Guidelines,  taxud.c.1(2016)1162824-EN,  Brussels,  1 March  2016, 
both available at https://ec.europa.eu/taxation_customs/business/vat/vat-committee_en. 

75  See  e.g.  Court  of  Justice  of  the  European  Union  (CJEU),  judgment  of  20  June  2013,  Finanzamt  Freistadt 
Rohrbach  Urfahr,  C-219/12,  ECLI:EU:C:2013:413,  on  the  basis  of  which  individuals  using  photovoltaic 
installations qualify as economic operators.  

26 

 
                                                 
may  have  paid  important  input  VAT  which  may  result  in  disproportionate  deductions.  These 
losses are currently of limited magnitude, but the situation is bound to evolve in the future as a 
result  of  developments  relating  to  new  forms  of  economic  activity  and  technological 
development that ultimately blur the lines between consumers and businesses, that is, private and 
economic activity. The 2017 Deloitte SME study estimated the number of occasional traders at 
6.4 million businesses and individuals, or 15% of all EU enterprises76. The VAT treatment of an 
increasing  number  of  occasional  traders  poses  significant  challenges  for  Member  States’  tax 
administrations,  since  compliance  control  costs  are  disproportionate  compared  to  revenue 
collected. 

Finally, the complexity of the VAT rules for SMEs alone can also have a noticeable cost to the 
Member States’ economic performance and, by extension, the tax revenues. In fact, the 2011 IFS 
retrospective  evaluation  of  the  VAT  system  study77  estimated  that  a  10%  reduction  in 
differences in VAT procedures could boost intra-EU trade by up to 3.7% and the GDP by up to 
0.4%.  

In  addition,  compliance  is  difficult  to  monitor  due  to  the  large  number  of  small  businesses 
making  use  of  the  SME  exemption  and  due  to  the  simplification  measures  attached  to  this 
exemption.  As  businesses  benefitting  from  the  SME  exemption  generally  do  not  submit  VAT 
returns, it is reportedly challenging for tax authorities to check whether their turnover is below 
the SME exemption threshold78. 

2.3. 

Problem drivers 

The problems indicated above are caused by a set of interlinked drivers. It is not really possible 
to attribute a single driver to every problem. It is rather  so that the combination of the drivers 
causes a series of problems. For example, high compliance costs for SMEs are driven not only 
by  complexity  of  VAT  rules,  but  for  cross-border  trading  companies  they  result  also  from  the 
diversity  of  rules  across  the  EU  and  from  the  design  of  the  SME  exemption  which  makes  it 
impossible for them to benefit from that exemption in other Member States. 

2.3.1.  Driver 1 – The complexity of the current VAT rules on obligations 

The evidence collected through stakeholder consultations, external studies and in-house research 
clearly shows that the rules on VAT obligations are complicated, non-harmonised, costly for 
business and difficult for Member States when it comes to ensuring compliance. 

Already  the  2010  Green  Paper  emphasised  compliance  burdens  on  businesses  stemming  from 
the complexity of the VAT rules79. It pointed out that dealing with VAT accounted for almost 
60%  of  the  total  burden  measured  for  13  priority  areas  identified  under  the  Better  Regulation 
Agenda.  Particular  areas  of  concern  included  key  elements  in  the  system  such  as  obligations, 
deduction and rates. These can be particularly severe for SMEs which cannot always afford tax 
expertise to deal with increasingly complex VAT rules.  

76  2017 Deloitte SME study, Volume I, p. 177. 
77   2011 IFS retrospective evaluation of the VAT system study, p. 15. 
78  2017 Deloitte SME study, Volume I, p. 164. 
79  2010 Green Paper, p. 4. 

27 

 
                                                 
In this context it is telling that, according to an ongoing study, despite the fact that the average 
compliance cost is lower for VAT than for Corporate Income Tax (CIT), on average, enterprises 
find VAT compliance to be more irritating than CIT compliance80. 

In the context of the 2015/2016 Deloitte e-Commerce study81, a mix of 25 businesses across 8 
Member States were interviewed with the view to rank four VAT-related barriers to cross-border 
trade:  (1)  varying  distance  sales  thresholds,  (2)  monitoring  of  distance  sales  thresholds,  (3) 
distortion  of  competition,  and  (4)  dealing  with  different  tax  legislation  and  procedures  in 
different  countries.  As  shown  in  Figure 2,  the  need  to  deal  with  complex  legislation  and 
administrative procedures in different countries was found most burdensome irrespective of the 
size  of  the  enterprises.  The  most  burdensome  procedures  were  identified  to  be  the  VAT 
registration  and  VAT  declaration/refund.  The  interviewed  companies  highlighted  the  need  to 
resort to external advisors to deal with national authorities of other Member States, which led to 
additional cost incurred. 

Figure 2: Key VAT-related barriers to cross-border trade 

Source: 2015/2016 Deloitte e-Commerce study 

As mentioned above, in sections 2.1 and 2.2, in spring 2016 the Commission launched an SME 
panel  consultation82  with  a  view  to  reaching  out  to  SMEs  in  order  to  obtain  their  input.  The 
Commission  received  more  than  1 700  replies  to  the  survey,  which  constitute  an  important 
contribution  to  the  works  on  the  SME  reform  package.  The  replies  gathered  through  the 
consultation  help  to  understand  the  experience  of  SMEs  with  VAT  obligations  and  the 
compliance burden that these entail as well as SMEs’ views on the most needed simplification 
measures. Of the replies received over 70% came from enterprises with a stated turnover of up to 
EUR 2 000 000, i.e. microenterprises in the sense of the general SME definition83. One-third of 
all respondents were enterprises with a stated turnover not exceeding EUR 100 000, which were 
the ones possibly most concerned with the issues linked to the SME exemption. 

Almost  one-third  of  the  respondents  considered  complexity  of  VAT  legislation  as  the  main 
problem  in  ensuring  compliance  with  VAT  obligations.  As  the  most  problematic  VAT 
obligations almost 15% of respondents indicate filing VAT returns and over 12% deadlines for 
VAT payments. 

80  KPMG, Study on tax compliance costs for SMEs, Draft Second Interim Report, 12.4.2017, p. 37. 
81   Deloitte Study for the Commission on ‘Modernising VAT for cross-border e-Commerce’ – Lot 1. 
82   See section 2.2 of Annex 2 for details. 
83  See table 2. 

28 

 
 
                                                 
In  their  spontaneous,  general  comments  enterprises  that  participated  in  the  survey  emphasised 
the need for further harmonisation, simplification and clarification of VAT rules across the EU. 
In  particular,  several  respondents  referred  to  the  need  for  simplification  of  requirements 
regarding record keeping, invoicing and reporting. 

Also in the most recent open public consultation84, closed in March 2017, 87% of respondents 
either agreed or strongly agreed that VAT obligations on SMEs should be further simplified.  

2.3.2.  Driver 2 – The diversity of the current rules on VAT obligations within the EU 

Currently  Member  States  apply  different  simplified  procedures  for  charging  and  collecting 
VAT and a number of simplification measures aimed at reducing the compliance burden 
on SMEs. While all these measures are designed to simplify the obligations on SMEs, the mere 
existence of different sets of obligations in the respective Member States causes additional costs 
to  small  enterprises  trading  cross-border.  The  2011  IFS  retrospective  evaluation  of  the  VAT 
system study85 provided a unique matrix of VAT dissimilarity indices for every bilateral country 
pair  in  the  EU,  which  aggregated  116  various  –  qualitative  and  quantitative  –  aspects  and 
functional  domains  in  national  VAT  regimes,  including  rate  structures,  heterogeneity  of 
administrative  procedures, and the compliance cost burdens  created by national  VAT regimes. 
They capture the degree to which two EU Member States differ in their policies or practices and 
demonstrate that, as already mentioned before, a firm trading in two Member States would have 
to  deal  on  average  with  11  differences  out  of  the  30  general  VAT-related  procedures86.  This 
result was found statistically significant and having an impact on the levels of cross-border trade.  

Indeed, the VAT Directive leaves considerable flexibility to Member States as regards measures 
aimed at simplifying VAT obligations on SMEs. This means that, despite coordination at the EU 
level  on  the  basic  structure  of  the  VAT  system,  the  situation  is  still  such  that  companies 
operating in the Single Market have to deal with a complex and heterogeneous web of different 
national VAT rules.  

The  2017  Deloitte  SME  study87  illustrates  well  the  diversity  of  national  rules  on  obligations 
which  virtually  form  a  patchwork  of  schemes  applicable  to  small  enterprises  in  the  EU.  An 
overview of the special VAT measures for SMEs applied in all 28 Member States is included in 
Annex 10. A table showing the diversity of obligations linked to the SME exemptions in place in 
the EU Member States is provided in Annex 11. 

Also in the before mentioned most recent open public consultation88, 80% of respondents either 
agreed or strongly agreed that simplified VAT obligations on SMEs should be harmonised. This 
claim is supported as well by UEAPME in its Position Paper referred to above in section 2.2.289. 

However, it must be pointed out that despite a clear case for harmonisation of VAT obligations 
for small enterprises, the Commission while preparing a proposal in this respect must be mindful 

84   See section 2.3 of Annex 2. 
85   2011 IFS retrospective evaluation of the VAT system study, Chapter 5. 
86  2011  IFS  retrospective  evaluation  of  the  VAT  system  study,  p. 22.  The  main  procedures  included  in  the 
methodology  to  calculate  the  indicator  on  general  administrative  procedures  related  to  VAT  included  VAT 
registration  thresholds,  VAT  refunding  thresholds,  issuing  and  storage  of  invoices,  filing  and  payment 
deadlines, penalties, etc. 

87   2017 Deloitte SME study, Volume I, p. 28 and the following.  
88   See Annex 2. 
89  See http://www.ueapme.com/IMG/pdf/UEAPME_position_paper_on_VAT_SME_Scheme.pdf. 

29 

 
                                                 
of  its  past  experience,  in  particular  two  proposals  regarding  respectively  the  simplified  VAT 
obligations90 and a standard VAT return91 in which simplification and harmonisation of the VAT 
obligations was put forward. Both proposals had to be withdrawn due to a lack of consensus in 
the Council. 

2.3.3.  Driver 3 – Design of SME exemption  

Another  driver  of  the  problems  with  the  current  SME  schemes  across  the  EU  is  linked  to  the 
way the exemption is constructed. The 2017 Deloitte SME study found that the SME schemes 
at  national  level  meet  their  principal  objective  to  reduce  SMEs’  compliance  costs92.  However, 
this  assessment  concerns  only  the  small  enterprises  in  their  domestic  situation  whereas  all  of 
those  benefits  are  neutralised  the  moment  the  company  decides  to  trade  cross-border  and  bear 
the costs of complying with the VAT regime of another Member State.  

The problems with the overall effectiveness of the SME scheme as seen from the perspective of 
the Single Market are linked to several factors.  

First of all, the SME exemption is characterised by the limitation of the territorial application 
of  the  scheme  to  small  enterprises  established in the Member State in which the VAT is  due, 
which  has  a  distortive  impact  on  competition  between  domestic  suppliers  and  suppliers  from 
other  Member  States  and  renders  the  exemption  incompatible  with  the  evolution  of  the  VAT 
system  towards  taxation  at  destination  and  a  genuinely  single  VAT  area.  This  feature  of  the 
current  exemption  schemes  is  moreover  difficult  to  reconcile  with  the  basic  principles  of  the 
Single Market. 

Secondly, there are broad differences between national exemption thresholds (see Annex 9) 
and between simplification measures linked to the exemption in different Member States.  

Thirdly, optionality of the exemption for enterprises can result in disproportionate input VAT 
claims by the so-called ‘occasional traders’ opting for application of normal VAT rules, which 
means that they have the right to deduction of their input VAT93, which in turn results in revenue 
losses for Member States.  

Finally,  the  lack  of  any  transitional  period  to  facilitate  the  transition  from  exemption  to 
taxation may have an effect of discouraging small enterprises from growing. This would be due 
to the fact that exceeding the turnover threshold, even if temporarily, would deprive them of the 
possibility to benefit from the exemption, as mentioned above. They would thus be falling from 
a  situation  of  being  fully  exempt  and  having  lighter  obligations  into  a  situation  of  having  to 
comply  with  a  full  set  of  VAT  obligations  in  addition  to  supporting  the  burden  of  collecting 
VAT.  This  effect  has  been  subject  to  a  study  by  the  existing  literature94.  According  to  some 
authors,  data  suggest  that  as  small  firms  grow  and  approach  the  SME  exemption  threshold,  a 
non-trivial  proportion  of  them  slow  down  their  growth  to  avoid  crossing  the  threshold  and 

90   Proposal for a Council Directive amending Directive 77/388/EEC with a view to simplifying value added tax 

obligations (COM(2004) 728 final). 

91   Proposal for a Council Directive amending Directive 2006/112/EC on the common system of value added tax 

as regards a standard VAT return (COM(2013) 721 final). 

92  2017 Deloitte SME study, Volume I, p. 47-53. 
93   See  e.g.  Finanzamt  Freistadt  Rohrbach  Urfahr,  on  the  basis  of  which  individuals  using  photovoltaic 
installations qualify as economic operators and therefore as VAT taxable persons. Similar problems may relate 
also to the users of collaborative economy platforms. 

94   L. Liu and B. Lockwood B., ‘Efficiency and welfare costs of VAT: Evidence from VAT notches’, 2015, p. 26. 

30 

 
                                                 
having to  register  for VAT purposes.  In such circumstances, the saving in tax and compliance 
costs  exceeds  the  reduction  in  sales  volume95.  Such  an  effect  of  the  design  of  the  SME 
exemption threshold clearly runs counter to the Commission’s objective of removing the barriers 
for start-ups scaling up into bigger firms as proclaimed in the 2016 Start-Up Communication96. 

2.4. 

Problem Tree 

A summary of the problems, the problem drivers and the effects is presented below. 

Figure 3: Problem Tree 

Problem Drivers 

Complexity of rules on VAT 
obligations 

Diversity of rules on VAT 
obligations across the EU 

Design of the SME exemption 

Problems 

Compliance costs 

Lack of neutrality 

VAT Revenue Losses  

Primary Effects 

Businesses will not trade 
cross-border 

Unlevel playing field 

Less tax revenues for public 
services 

Secondary Effects 

Impediment to small 
enterprises' growth 

Opportunities of Single 
Market not fully exploited 

Less employment and GDP growth 

Source: Commission services 

2.5.  Evolution of the problem without action at EU level 

SMEs  with  turnover  of  up  to  EUR 2 000 000  constitute  about  98%  of  all  EU  enterprises  and 
contribute about 15% of total turnover generated in the EU and about 25% of net VAT revenues. 
The smallest businesses, those with less than EUR 50 000 of turnover represent about 69% of all 
businesses and generate only about 1% of the EU-wide turnover, with a negligible or negative 
amount  of  net  VAT  revenues97.  All  these  SMEs  face  disproportionate  VAT  compliance  costs 

95   Ibid., p. 26. 
96  COM(2016) 733 final  
97  See 2017 Deloitte SME study, Volume I, p. 27. 

31 

 
 
                                                 
compared to larger enterprises and as a result their performance and growth is impaired across 
the EU and their entry into the Single Market is discouraged. 

The  problems  identified  in  section 2.2,  particularly  the  lack  of  a  level  playing  field  for 
businesses and revenue losses for Member States, will only increase if there is no action at EU 
level. Furthermore, the high compliance costs for businesses wishing to trade cross-border will 
continue, in the absence of simplification, to hold back the development of the Single Market. 

In addition, it must be noted that already today the provisions of the VAT Directive as regards 
taxation  of  SMEs  require  a  serious  update.  The  basic  threshold  for  SME  exemption  set  out  in 
Article 284 amounts to EUR 5 000 of annual turnover98. Today only one Member State99 out of 
26 applying the exemption sets its threshold at a lower level and nine100 Member States set their 
exemption thresholds on the basis of derogations from the VAT Directive’s provisions101. 

Moreover,  as  the  VAT  system  gradually  evolves  towards  taxation  at  destination,  the  current 
provisions of the VAT Directive on taxation of SMEs and, in particular, on the SME exemption, 
will become completely out of date. Strict territorial limitation of the VAT exemption provided 
for under the SME scheme, leaving only small enterprises established within the Member State 
of taxation to benefit and for their domestic supplies only, was established when the vision of the 
EU VAT system was still based on the principle of origin. It will not work in a system based on 
taxation  at  destination.  In  such  a  system  VAT  has  to  be  declared  and  accounted  for  in  the 
Member State where the customer is established (Member State of ‘destination’), rather than in 
the Member State where the SME making the supply is established (Member State of ‘origin’). 
The  principle  of  taxation  at  destination  is  being  mainly  implemented  by  a  set  of  three 
complementary legislative initiatives: (i) the 2015 place of supply rules, which entered into force 
in  2015;  (ii)  the  e-Commerce  proposal,  adopted  in  2016;  and  (iii)  the  definitive  VAT  system 
proposal, to be adopted in 2017102. While some of these initiatives foresee measures to smooth 
the effects of SMEs having to declare and pay VAT in the Member State of destination, further 
support is needed103.  

The above changes mean that in practice a small enterprise established in one Member State and 
selling to customers in all other Member States will have to declare and pay VAT in 27 different 
Member  States  from  the  very  first  supply  (because  no  SME  exemption  is  available  in  the 
Member State of destination); and also observe 27 different sets of VAT rules (e.g. as regards 
registration, or other VAT obligations)104. This scenario is distortive for small enterprises selling 
cross-border  vis-à-vis  those  selling  only  domestically  and  also  hampers  SMEs’  growth  and 
discourages  them  from  fully  seizing  the  opportunities  of  the  Single  Market.  Some  of  the 

98   This basic level of threshold was set in 1977 and has not since been changed. 
99  Sweden which only recently took up this option. 
100  Belgium, Croatia, Italy, Latvia, Lithuania, Luxembourg, Poland, Romania, and Slovenia.  
101   For  an  overview  of  the  thresholds  currently  applicable  in  the  Member  States  making  use  of  the  SME 

exemption, see Annex 9. 

102  For  more  explanation  on  the  interplay  among  the  legislative  proposals  on  the  destination  principle,  see 

Annex 6. 

103   For more information about how the VAT package for SMEs will complement these proposals, see Annex 6. 
104   Businesses may already have had to declare and pay VAT in the Member State where the customer is located in 
some circumstances, according to the existing place of supply rules. For instance, pursuant to Article 44 of the 
VAT  Directive,  the  place  of  supply  of  services  to  a  taxable  person  acting  as  such,  i.e.  Business  to  Business 
(B2B)  is  the  place  where  that  person  has  established  his  business.  In  contrast,  Business  to  Consumer  (B2C) 
supplies  of  services  are  taxed  where  the  supplier  is  established  pursuant  to  Article 45  of  the  VAT  Directive, 
which may change after the implementation of the destination principle.  

32 

 
                                                 
contributions  received  through  the  REFIT  platform  referred  to  this  problem  (see  Annex 2).  In 
particular, submission XVIII.3.a by the Danish Business Forum, which stressed the complexity 
of the VAT legislation that businesses operating at EU level must face, which goes against the 
Single Market: ‘In the Internal Market it should in principle be just as easy to do business with a 
customer in Poland and Germany as with a customer in Denmark. However, because VAT rules 
are  not  harmonised  the  consequence  is  that  companies  that  begin  to  trade  within  the  internal 
market often encounter difficulties’.  

Having said the above, it should be noted that the first step in order to address this problem, for a 
limited proportion of supplies, has been made in the e-Commerce proposal through the common 
EU  threshold  below  which  B2C  sales  of  goods  and  services  in  other  Member  States  can  be 
treated  as  domestic  transactions.  It  is  up  to  the  present  initiative  to  develop  a  more  systemic 
solution. 

3.  WHY SHOULD THE EU ACT?  

SMEs are the backbone of the European economy but still in all phases of their lifecycle they 
face  obstacles  which  preclude  them  from  seizing  the  full  potential  of  the  Single  Market.  The 
complexity of the EU VAT system can result in a high compliance burden on SMEs, particularly 
when trading with other Member States. This does not only hamper their growth but may even 
prevent  them  from  engaging  in  cross-border  trade  and  reap  the  benefits  of  the  Single  Market. 
Despite representing a significant part of the economic activity in the EU, small businesses only 
generate 15%  of the total EU turnover compared to  large companies which contribute the rest 
75%. 

The main problems which have been identified (distortive effects, high compliance costs, etc.) 
are  triggered  by  the  rules  of  the  VAT  Directive  as  they  stand.  In  particular,  the  current  VAT 
rules  for  small  businesses  suffer  from  several  drawbacks:  the  rules  do  not  reflect  the  Single 
Market perspective and the move to a definitive system based on the destination principle: the 
special  scheme  for  businesses  is  targeted  mostly  at  businesses  trading  domestically  and  in  the 
B2C context. 

Given  that  VAT  is  an  EU  tax,  Member  States  are  currently  not  allowed  to  set  different  rules 
themselves and therefore any initiative to modernise VAT obligations and the SME exemption 
requires a proposal by the Commission to amend the VAT Directive. 

The legal basis is Article 113 of the TFEU which states that  

‘The  Council  shall,  acting  unanimously  in  accordance  with  a  special  legislative  procedure 
and  after  consulting  the  European  Parliament  and  the  Economic  and  Social  Committee, 
adopt provisions for the harmonisation of legislation concerning turnover taxes, excise duties 
and  other  forms  of  indirect  taxation  to  the  extent  that  such  harmonisation  is  necessary  to 
ensure the establishment and the functioning of the internal market and to avoid distortion of 
competition’. 

Therefore, it is necessary for the Commission, which has responsibility for ensuring the smooth 
functioning of the Internal Market and promoting the general interest of the European Union, to 
propose action to improve the situation. 

33 

 
This initiative is in line with the commitments made by the Commission to address several key 
difficulties faced by SMEs105. In particular, in its 2015 Single Market Communication a set of 
actions  were  proposed  in  order  to  remove  economically  significant  barriers  that  hold  back 
Europe’s jobs, growth and investment agenda. Moreover, in the 2016 VAT Action Plan106, the 
Commission  took  further  commitment  to  prepare  a  simplification  package  for  SMEs,  as  also 
reflected in the 2016 Start-Up Communication107.  

4.  WHAT SHOULD BE ACHIEVED?  

4.1.  General objectives 

The general objectives of this initiative are:  

1)  to contribute to the creation of an environment that is conducive to SMEs’ growth108; 
2)  to  contribute  to  the  creation  of  an  efficient  and  robust  VAT  system  with  a  view  to 

creating a single EU VAT area109; and  

3)  to contribute to the smooth functioning of a deeper and fairer Single Market110.  

4.2. 

Specific objectives 

The specific objectives of this initiative are identified below, together with how they link to the 
problems.  

Table 3: Linking problems to specific objectives 

Problem 

Specific objectives 

1)  Compliance costs 

1)  To reduce VAT compliance costs for SMEs at two levels, domestically and 

within the EU: 

  Compliance costs for domestic small businesses, derived from complex 

national VAT rules. 

  Compliance costs for small businesses trading cross-border, derived from 

the diversity of VAT rules across the EU.  

2)  Lack of neutrality 

2)  To reduce distortions at two levels, domestically and within the EU (more 

level playing field for SMEs): 

  Distortions between small businesses under the SME exemption and the 

small businesses that do not make use of the exemption. 

  Distortions between domestic suppliers and suppliers established in 

other Member States. 

3)  To reduce the negative impact of the threshold effect (small firms slowing 

105   Communication  from  the  Commission  to  the  European  Parliament,  the Council,  the  European  Economic  and 
Social  Committee  and  the  Committee  of  the  Regions  upgrading  the  Single  Market:  more  opportunities  for 
people and business (COM(2015) 550 final), p. 4. 

106   2016 VAT Action Plan, p. 6. 
107   Communication  from  the  Commission  to  the  European  Parliament,  the Council,  the  European  Economic  and 
Social  Committee  and  the  Committee  of  the  Regions  –  Europe’s  Next  Leaders:  The  Start-Up  and  Scale-Up 
Initiative (COM(2016) 733 final), p. 4. 

108   2016 VAT Action Plan, p. 6. 
109   Ibid., p. 9. 
110   Ibid., p. 6; and the 2015 Single Market Communication, p. 4. 

34 

 
 
 
 
 
 
                                                 
down their growth to avoid crossing the SME exemption threshold) – seen 
also in the context of providing a more level playing field. 

4)  To facilitate compliance by SMEs and monitoring by tax administrations. 

3)  VAT revenue losses for 

Member States 

5)  To reduce revenue losses caused by occasional traders.  

Both of the above objectives should be seen in the context of fighting the VAT 
fraud. 

Source: Commission services 

4.3.  Consistency of the objectives with other EU policies 

The initiative is consistent with the creation of a simple, modern and fraud-proof VAT system 
which is one of the fiscal priorities set out by the Commission for 2017 (Annual Growth Survey 
2017111).  

Moreover, the proposed initiative and its objectives are consistent with the specific policy of the 
EU as regards SMEs. In this respect, the need to reduce VAT compliance costs derived from the 
complexity of the rules for SMEs provided for in the VAT Directive, and thus ease compliance 
by SMEs and monitoring by tax administrations, is set out in the 2008 SBA Communication112, 
the  2011  Communication113,  and  the  2016  VAT  Action  Plan114.  The  Commission  has  also 
committed to reduce distortions derived from the design of the current rules and to help SMEs to 
fully  benefit  from  the  potential  of  the  Single  Market  in  the  2008  SBA  Communication115,  the 
2015  Single  Market  Communication116,  the  2016  VAT  Action  Plan117,  and  the  2016  Start-Up 
Communication118.  

The  objectives  of  this  initiative  are  also  consistent  with  the  EU  objectives  under  the  REFIT 
programme to make EU law simple and less costly, in particular for small enterprises. They do 
not have an impact on fundamental rights.  

5.  WHAT ARE THE VARIOUS OPTIONS TO ACHIEVE THE OBJECTIVES?  

5.1. 

Selection of options 

Based on the problem assessment and policy objectives, four policy options have been identified 
as follows: 

Option 1: 
Option 2: 

Status quo, including e-Commerce changes (baseline scenario)  
SME  exemption  extended  to  supplies  from  other  Member  States  and  including 
streamlined simplified VAT obligations 

111  Communication from the Commission to the European Parliament, the Council, the European Central Bank, the 
European Economic and Social Committee, the Committee of the Regions and the European Investment Bank – 
Annual Growth Survey 2017 (COM(2016) 725 final), p. 13.  

112   2008 SBA Communication, p. 4-5 and 7-8. 
113   2011 Communication, p. 7. 
114   2016 VAT Action Plan, p. 6. 
115   2008 SBA Communication, p. 4-5 and 12-14. 
116   2015 Single Market Communication, p. 4. 
117   2016 VAT Action Plan, p. 6. 
118   2016 Start-Up Communication, p. 4. 

35 

 
 
 
 
                                                 
Option 3: 

Option 4: 

Option 2  plus  measures  to  reduce  the  negative  impact  of  transition  from 
exemption to taxation  
Option 3 plus mandatory common treatment of occasional traders  

These options, which were already laid down in the Inception Impact Assessment119, have been 
analysed  in  the  2017  Deloitte  SME  study  and  tested  with  businesses  and  Member  States  at  a 
Fiscalis 2020 Workshop in Wroclaw in March 2017. 

The  options  are  targeted  at  reducing  VAT  compliance  costs  for  SMEs,  reducing  the  distortive 
effects of the exemption and the complex and diverse rules on VAT obligations for SMEs and at 
contributing  to  the  creation  of  an  environment  that  is  conductive  to  the  SMEs’  growth.  The 
policy options also take into account the Member States’ perspective, and in particular the need 
to minimise the risks of abuse and to facilitate the monitoring by tax administrations.  

The main focus of the policy options is on simplifying VAT obligations for SMEs and reviewing 
the SME exemption. The need for simplified VAT obligations has been pointed out by SMEs as 
one  of  the  key  elements  of  the  review  during  the  consultation  process120;  while  the  SME 
exemption  as  such  remains  a  key  element  of  the  current  rules,  as  further  explained  in 
section 5.3.2. 

The policy options are built on each other in a gradual manner so that the subsequent options add 
new elements to the ones included in the previous options. Option 4 represents therefore a full 
package of measures. This approach should allow a comprehensive assessment of the cumulative 
cost and benefit effect of each policy option and their comparative analysis.  

In  addition  to  the  options  proposed  for  further  analysis  and  impact  assessment  two  discarded 
options are set out. Their inclusion allows a better understanding of the context of the initiative 
and of the way in which the options subject to impact assessment are shaped. 

5.2.  Options analysed 

5.2.1.  Option 1: Status quo, including e-Commerce changes 

This option serves as the benchmark against which the other options are assessed (baseline), and 
has the characteristics of the current system: 

  SME exemption optional for both Member States and businesses.  
  SME exemption limited to domestic businesses making domestic supplies only.  
  National SME exemption thresholds, generally based on the total turnover derived from 

domestic supplies. 

  Exempt SMEs not able to indicate VAT on their invoices or deduct their input VAT. 
  Possible simplified VAT obligations for businesses benefitting from the SME exemption. 
  Taxation  in  the  Member  State  of  destination  of  B2C  supplies  of  telecommunications, 

broadcasting and electronically supplied services (2015 place of supply rules). 

119   Inception impact assessment on the review of the special scheme for small enterprises under the VAT Directive 

2006/112/EC.  

120   See sections 2.3.1 and 2.3.2, and Annex 2. 

36 

 
 
                                                 
In  addition,  this  policy  option  contains  the  elements  included  in  the  e-Commerce  proposal121, 
notably: 

  Removal of the intra-EU distance selling threshold for B2C supplies of goods.  
  Extension  of  the  existing  MOSS  to  intra-EU  distance  sales  of  tangible  goods  and  to 
services  other  than  electronic  services  as  well  as  to  distance  sales  of  goods  from  third 
countries  –  MOSS  becomes  a  One-Stop  Shop  (OSS).  As  a  result  of  this,  in  general  all 
cross-border B2C supplies of goods and services, as well as imports, will be charged in 
the Member State of the final consumer. 
Introduction  of  a  common  EU  threshold  of  EUR 10 000  (hereinafter,  ‘common  EU 
threshold’),  optional  for  businesses,  below  which  B2C  sales  of  goods  and  services  in 
other  Member  States  can  be  treated  as  domestic  transactions.  Note  that  this  threshold 
refers  to  the  place  of  supply  but  it  is  not  an  exemption,  unlike  the  SME  exemption 
threshold. It is calculated on the basis of the turnover derived from all B2C cross-border 
supplies122 made by businesses to other Member States, and does not take into account 
domestic supplies. 

 

How will the common EU threshold interact with the SME exemption? 

The introduction of the common EU threshold will relieve SMEs, particularly micro businesses 
with  low  value  cross-border  B2C  supplies,  from  having  to  comply  with  the  full  set  of  VAT 
obligations in each Member State of destination.  

Although the SME exemption threshold can be applicable to both B2C and B2B transactions123, 
the common EU threshold of EUR 10 000 only covers B2C supplies.   

An  EU  business  making  B2C  supplies  in  other  Member  States  (which  should  be  taxed  in  the 
Member State of destination) may with the common EU threshold opt to treat these supplies as 
domestic  transactions  if  its  annual  turnover  generated  from  such  supplies  does  not  exceed 
EUR 10 000.  That  business  could  apply  the  SME  exemption  in  its  own  Member  State,  if 
available, as long as the overall domestic turnover of the business (that is, domestic supplies plus 
deemed domestic supplies) remains below the SME exemption threshold. Once the common EU 
threshold  is  exceeded,  the  supplier  will  have  to  register,  declare  and  account  for  VAT  in  the 
Member  States  where  its  customers  are  established  but  can  do  so  through  the  extended  OSS 
(goods and services). That business may decide not to make use of the common EU threshold 
and declare VAT in the Member State of destination straight away, in which case it will also be 
able to register and declare VAT through the extended OSS.  

Figure 4 below illustrates how the common EU threshold interacts with the SME exemption in 
the baseline scenario.  

121   The e-Commerce proposal envisages the introduction of the reforms proposed in two phases: 2018 and 2021. 
For the purposes of this Impact Assessment, the full package of changes proposed to be implemented by 2021 
has been included in the baseline scenario.  

122   For more information, see Article 59c of the e-Commerce proposal. 
123   See Article 283 of the VAT Directive. 

37 

 
                                                 
Figure 4: Functioning of the baseline scenario (including e-Commerce proposal) 

Source: Commission services  

5.2.2.  Option 2: SME exemption extended to supplies from other Member States and including 

streamlined simplified VAT obligations 

This option introduces two significant changes to the current rules for SMEs:  

  The SME exemption would be opened to all eligible SMEs within the EU, and 
  The  simplified  VAT  obligations  would  be  available  to  an  enlarged  category  of  small 

businesses, irrespective of whether they use the exemption: 

a.  Small enterprises with turnover below the SME exemption threshold: 

i.  Exempt 
ii.  Non-exempt (opting for the application of normal VAT rules) 

b.  Small  enterprises  with  turnover  above  the  SME  exemption  threshold  and  up  to 

EUR [2 000 000] 124– non-exempt.   

SME exemption adjusted to a VAT system based on the destination principle 

Under  current  rules,  SMEs  can  only  benefit  from  the  SME  exemption  in  the  Member  State 
where  they  are  established.  This  restrictive  territorial  application  of  the  exemption  creates 

124  The EUR 2 000 000 as the turnover threshold to qualify as a small enterprise eligible for the application of the 
simplified VAT obligations is tentatively proposed in the present initiative – for more explanations – see below, 
p. 43. 

38 

SMEEUR 4 000 (domestic) Member State 1 (MS1) Common EU threshold = EUR 10 000 SME exemption threshold (MS1) = EUR 7 000 Member State 2 (MS2) Common EU threshold = EUR 10 000 SME exemption not availableScenario 1:EUR 3 000(cross-border) Cross-border supplies = EUR 3 000 (below common EU threshold) à treated as domestic (MS1)* Domestic supplies = EUR 4 000 + EUR 3 000 = EUR 7 000 EUR 7 000 (below the SME exemption threshold in MS1) à exemption applicable (MS1)Scenario 2:EUR 4 000(cross-border)Scenario 3:EUR 15 000(cross-border) Cross-border supplies = EUR 4 000 (below common EU threshold) à treated as domestic (MS1)* Domestic supplies = EUR 4 000 + EUR 4 000 = EUR 8 000 EUR 8 000 (above the SME exemption threshold in MS1) à exemption (MS1)×  Cross-border supplies = EUR 15 000 (above common EU threshold) à VAT due in MS2 Domestic supplies = EUR 4 000   EUR 4 000 (below the SME exemption threshold in MS1) à exemption applicable (MS1)* It is assumed that the SME decides to make use of the common EU threshold (voluntary) 
 
                                                 
unequal  treatment  of  SMEs  (the  benefit  of  the  scheme  depends  on  whether  the  business  is 
established)  and,  in  particular,  discourages  SMEs  from  engaging  in  cross-border  activities  and 
fully  seizing  the  opportunities  of  the  Single  Market.  This  option  addresses  these  issues  by 
opening  the  national  SME  exemption  available  in  a  Member  State  to  supplies  made  by 
businesses  established  in  other  Member  States,  in  line  with  the  principle  of  taxation  at 
destination. The opening up of the exemption received much support from businesses, business 
associations and Member States during the consultation process, while ensuring that the system 
is not prone to abuse.  

The  SME  exemption  in  the  Member  State  of  destination  (where  the  VAT  is  due)  would  be 
applicable to eligible businesses having to declare VAT in that Member State (e.g. because their 
cross-border supplies exceed the common EU threshold, or because they have decided to opt out 
of that threshold). A non-established business from another Member State would be eligible for 
applying the SME exemption in the Member State of destination where VAT rules will apply.  
Therefore, SMEs engaged in B2C intra-EU trade125 will have different alternatives as regards the 
VAT treatment of their sales to other Member States:  

  Use the common EU threshold and treat cross-border supplies as domestic, which could 

 

 

 

then benefit from the SME exemption in their own Member State.  
If the common EU threshold is exceeded (or not used), and VAT has to be declared in 
the  Member  State  of  destination,  use  the  SME  exemption  in  the  Member  State  of 
destination, if available and business eligible. 
If the common EU threshold is exceeded (or not used), and VAT has to be declared in 
the  Member  State  of  destination,  register  and  pay  VAT  in  the  Member  State  of 
destination  and  benefit,  if  eligible,  from  simplified  VAT  obligations  in  place  in  that 
Member State. 
If the common EU threshold is exceeded (or not used), and VAT has to be declared in 
the  Member  State  of  destination,  declare  and  pay  VAT  in  the  Member  State  of 
destination on B2C sales via the extended One Stop Shop (OSS). 

SME exemption threshold 

Another element is the threshold below which businesses can apply the SME exemption. Under 
this option, it could be desirable, in terms of simplification for businesses, to fully harmonise the 
exemption threshold at EU level. However, imposing the same threshold on all Member States 
(notwithstanding the political challenge that such a choice implies) would have different impact 
on  Member  States  'revenues  and  domestic  markets  that  not  necessarily  would  bring  a  better 
result  in  terms  of  cost  efficiency  and  level  playing  field.  Indeed,  it  should  be  noted  that  the 
optimal level of the threshold varies among Member States as it depends on the combination of 
different  economic  and  policy  factors.  Additionally,  the  optimal  level  of  the  threshold  should 
reflect  the  trade-off  between  the  need  to  reduce  compliance  and  administrative  costs  and  the 

125   For the purposes of this analysis, it is assumed that businesses engaged in B2B intra-EU trade would continue 
to  apply  the  reverse  charge  mechanism  at  least  until  the  adoption  of  the  definitive  regime.  Under  a  reverse 
charge (Articles 194 to 199b of the VAT Directive), the liability to pay the VAT collected to the Treasury is 
generally moved from the supplier of a good or a service to the customer. Therefore, such businesses will not 
be affected by the extension of the SME exemption as they do not have VAT obligations in the Member State 
of destination (as regards invoice and VAT return obligations, the rules of the Member State of establishment 
apply). However, these businesses will still be able to benefit from the SME exemption in their own Member 
State if they so wish.  

39 

 
                                                 
need for Member States to collect VAT revenue126. For that, the option to introduce a standard 
EU  threshold  was  discarded  (see  section 5.3.1).  Thus,  it  was  considered  more  appropriate  to 
provide  Member  States  flexibility  to  tailor  the  scheme  to  the  characteristics  of  their  domestic 
markets and policy environment; in particular, it was decided to allow Member State to set their 
national thresholds. 

Safeguards 

Although the aim is to ensure equal treatment of domestic businesses selling in a Member State 
and  non-established  businesses  selling  in  that  same  Member  State,  we  cannot  exclude  that 
opening up the SME exemption as described above could create some new distortions. In fact, if 
the only criterion that matters for applying the SME exemption in a Member State would be the 
turnover  generated  by  a  business  in  that  Member  State,  then  non-established  EU  businesses 
trading  cross-border  could  benefit  from  the  SME  exemption  more  extensively  than  businesses 
trading  domestically  only.  During  the  stakeholder  consultation,  business  associations  and 
Member States in particular highlighted the need to limit to some extent the opening up of the 
SME exemption in order to avoid possible abuse.  

Two types of potential adverse distortions have been identified.  

Firstly, it could be that large companies not qualifying as small businesses for the purposes of 
this Impact Assessment end up benefiting from this option. For instance, let us imagine a large 
company with an EU turnover of EUR 10 million with a very low amount of B2C intra-EU sales 
in  a  Member  State  where  it  is  not  established.  If  the  SME  exemption  in  that  Member  State  is 
available for non-established EU businesses based on the turnover generated there, that company 
could  be  eligible  for  applying  the  exemption  in  that  Member  State  (and  in  all  other  Member 
States where it is not established and the exemption is available).  

Secondly,  even  if  a  business  qualified  as  a  small  business  for  the  purposes  of  this  Impact 
Assessment,  it  would  still  be  possible  for  that  business  to  cumulatively  benefit  from  the  SME 
exemption  in  each  of  the  Member  States  where  the  exemption  is  available,  provided  that  the 
turnover generated in each of those Member States was below their respective SME exemption 
thresholds.    

Hence, some safeguards could be introduced in order to prevent such distortions:  

  Putting  in  place  an  overall  EU  turnover  threshold,  in  order  to  limit  the  size  of 
businesses  that  can  benefit  from  the  SME  exemption  in  different  Member  States,  and 
thus ensure that this option is SME-targeted. 

  Leaving Member States the possibility to limit the application of the SME exemption 
by  non-established  SMEs.  This  could  involve,  for  instance,  setting  a  lower  SME 
exemption threshold for non-established businesses (which could be set by each Member 
State or determined at EU level). 

126  Keen  and  Mintz,  "The  optimal  threshold  for  Value-added-tax"  (2004).  See  also  2017  Deloitte  SME  study, 

Volume I, p. 120. 

40 

 
 
                                                 
Below, we have considered three possible scenarios, depending on which safeguards would be 
introduced as regards the cross-border use of the SME exemption127.  

Option 2A – No safeguards: SME exemption fully applicable  

The national SME exemption would be open to non-established EU businesses which meet the 
criteria  set  by  the  Member  State  of  destination.  The  threshold(s)  set  by  each  Member  State 
would apply in the same way to both domestic and non-established businesses. In this respect, 
the  annual  turnover  to  be  taken  into  account  would  be  that  generated  by  a  business  in  the 
Member State of destination only (with the exception of cross-border supplies which are deemed 
to  be  domestic,  if  the  common  EU  threshold  is  applied).  Use  of  the  SME  exemption  in  the 
Member State of destination would not preclude businesses from using the SME exemption in 
the Member State where they are established, if available.  

This option has an advantage for the Member States of destination as it limits the control only to 
the turnover generated by supplies from non-established businesses in their territory. The main 
downside is that it will not prevent a situation of abuse where large companies with low turnover 
in each such Member State could apply the SME exemption.  

Option 2B – Safeguards: EU turnover threshold 

The national SME exemption would be open to non-established EU businesses which meet the 
criteria  set  by  the  Member  States  of  destination,  as  explained  in  Option 2A.  However,  for  a 
business to be able to apply the SME exemption, its overall EU turnover would have to be below 
a certain maximum threshold, set at EU level (e.g. EUR 100 000128). This EU turnover threshold 
would be calculated on the basis of the turnover derived from all supplies made by businesses 
within  the  EU,  both  domestic  and  cross-border.  Its  use  would  be  compatible  with  the  national 
SME exemption thresholds applicable in each Member State and the optional use of the common 
EU threshold129.    

While the opening up of the SME exemption would be effectively targeted at small businesses, 
this option would require important efforts stemming from the need to control and monitor the 
turnover of companies generated at EU level.  

Option 2C  –  Safeguards:  EU  turnover  threshold  and  limit  in  the  application  of  the  SME 
exemption 

The national SME exemption would be open to non-established EU businesses which meet the 
criteria  set  by  the  Member  States  of  destination,  as  long  as  the  EU  turnover  of  the  business 
remains  below  a  certain  maximum  threshold,  as  explained  in  Option 2B.  Moreover,  Member 
States  would  be  able  to  limit  the  extent  to  which  such  a  business  could  apply  the  SME 
exemption  they  provide  for,  by  means  of  a  lower  threshold  specific  for  non-established 
businesses which could be set by each Member State or determined at EU level130.  

127   Examples of how each of these scenarios would work in practice can be found in Annex 7. 
128  The EUR 100 000 threshold is just illustrative. It corresponds approximately to the UK threshold which is the 
highest national threshold in the EU. To note, however, that businesses with less than EUR 50 000 of turnover 
are the ones most likely to be eligible for the SME exemption. See the 2017 Deloitte SME study, Volume I, 
p. 45. 

129   See Annex 7 for an example of how this option would work in practice. 
130   Ibid.  

41 

 
                                                 
However, this option seems not viable for two main reasons.  

Firstly, this option is likely to increase the complexity of the system, due to the use of multiple 
thresholds  for  exemption  in  each  Member  State  (i.e.  that  for  domestic businesses,  and  that  for 
non-established  businesses).  If  that  limited  threshold  for  non-established  businesses  was 
determined  by  each  Member  State,  rather  than  set  out  at  EU  level  for  all  Member  States  (e.g. 
EUR 5 000),  the  complexity  would  be  even  larger.  It  therefore  seems  that  this  option  would 
make  the  system  more  complex  and  bring  results  which  are  inconsistent  with  the  objective  of 
reducing distortions.   

And  secondly,  limiting  the  extent  to  which  non-established  business  could  apply  the  SME 
exemption by means of a specific threshold (lower than that applicable to established businesses) 
would imply treating established and non-established businesses in a different way. This could 
be seen as diverging from one of the general objectives of this initiative131, which is to contribute 
to the smooth functioning of a deeper and fairer Single Market.  

Safeguards: preferred option 

Although  it  may  be  difficult  to  control  whether  companies  remain  below  the  EU  turnover 
threshold,  Option 2B  would  deliver  the  most  appropriate  outcome  and  it  is  thus  the 
preferred one. It would allow targeting the opening up of the SME exemption to SMEs only, 
while not increasing the number of applicable SME exemption thresholds and being in line with 
the functioning of the Single Market.  

Streamlined simplified VAT obligations 

The 2017 Deloitte SME study and the stakeholder consultation132 confirmed the importance of 
simplified VAT obligations as a means to reduce compliance costs for SMEs and support their 
growth.  It  has  been  observed  that  the  reduction  of  the  compliance  burden  for  SMEs  varies 
substantially across Member States, depending on the simplified VAT obligations available133.  

In  particular,  there  was  a  general  agreement  among  stakeholders  as  to  the  need  to  further 
simplify  VAT  obligations  for  SMEs134.  The  contribution  XVIII.3.a  by  the  Danish  Business 
Forum received via the REFIT platform pointed precisely in this direction: ‘…VAT rules are not 
harmonised  the  consequence  is  that  companies  that  begin  to  trade  within  the  internal  market 
often  encounter  difficulties.  Not  only  are  there  major  differences  between  the  documentation 
requirements, requirements of signatures, invoice requirements and texts on the invoices, but the 
challenges  are  growing  with  the  introduction  of  rules  on  reverse  liability,  various  distinctions 
and definitions of delivery point and different rates of VAT’. 

Currently,  simplified  VAT  obligations  for  SMEs  are  optional  for  Member  States  and  only 
applicable together with the exemption. Hence, the Directive does not allow Member States to 
provide less burdensome obligations for small businesses other that those that benefit from the 
exemption and are established in their territory.  

131   See section 4.1. 
132   See Annex 2. 
133   See Annex 8. 
134   In  this  respect,  while  business  and  business  associations  preferred  such  simplified  VAT  obligations  to  be 
mandatory for Member States, Member States were of the view that they should remain optional and adapt to 
the features of the national context.  

42 

 
                                                 
Option 2 extends the application of simplified VAT obligations to both exempt and non-exempt 
small  businesses,  whether  or  not  established  in  the  Member  State  where  they  make  supplies. 
Hence,  this  option  also  provides  an  alignment  between  different  national  practices,  by 
introducing a common minimum set of simplified VAT obligations for all small enterprises.  

Under this option the simplified VAT obligations would be available to: 

1.  Small enterprises with turnover below the SME exemption threshold: 

i.  Exempt 
ii.  Non-exempt (opting for the application of normal VAT rules) 
2.  Small  enterprises  with  turnover  above  the  exemption  threshold  and  up  to 

EUR [2 000 000] – non-exempt. 

While making available simplified VAT obligations to all small enterprises, Option 2 also takes 
into  account  the  fact  that  some  of  such  enterprises  will  not  have  to  collect  and  pay  VAT 
(exempt), and others will have to do so (non-exempt). This has an impact on the minimum set of 
obligations which  could be imposed in  order to ensure correct functioning of the VAT system 
and effective control by tax authorities.  

Option 2 tentatively covers the following common minimum set of simplified VAT obligations, 
which would distinguish between exempt and non-exempt small enterprises.  

For exempt SMEs: 

  Optional  for  Member  States  to  either  release  from  registration,  or  to  provide  for 

simplified registration.  

  Obligatory for Member States to provide for simplified VAT record keeping. Member 
States  would  be  prevented  from  imposing  on  exempt  SMEs  bookkeeping  obligations 
additional to the ones that are already in place based on the existing domestic regulation 
in other domains such as for direct taxation purposes or for accounting purposes. 

  Optional  for  Member  States  to  release  exempt  small  enterprises  from  the  obligation  to 
submit a VAT return. Where this option is not exercised – obligatory for Member States 
to open the possibility to submit a simplified VAT return covering the calendar year. 

  Obligatory for Member States to release from invoicing obligations. 
  The possibility for Member States to release exempt small enterprises from certain other 

or all obligations. 

2) 

For non-exempt SMEs (SMEs with turnover below the exemption threshold, but opting 
for taxation on the basis of general principles + SMEs with turnover above the exemption 
threshold): 

  Obligatory for Member States to provide for simplified registration. 
  Obligatory for Member States to provide for simplified VAT record keeping.  
  Obligatory  for  Member  States  to  put  in  place  (and  optional  for  SMEs  to  use)  less 

frequent filing of VAT returns. 

  Obligatory  for  Member  States  to  apply  certain  simplification  measures  relating  to  the 

VAT payment. 

The  definition  of  enterprises  with  turnover  above  the  exemption  threshold  which  still 
qualify  as  SMEs,  in  the  sense  of  the  VAT  Directive,  refers  tentatively  to  their  annual 
turnover not exceeding EUR 2 000 000. This would be in line with the definition of micro-

43 

 
 
 
enterprises  according  to  the  general  SME  definition,  and  would  also  follow  other 
simplification  measures  available  in  the  VAT  Directive  which  are  specific  for  businesses 
below EUR 2 000 000 (e.g. cash-accounting).  

Figure 5  below  illustrates  the  simplified  VAT  obligations  under  Option 2,  as  compared  to 
the baseline scenario.  

Figure 5: Simplified VAT obligations under Option 2, as compared to the baseline scenario 

Source: Commission services 

It is important to note that this option should be accompanied by the implementation of an EU 
web portal in order to provide non-established SMEs easy access to reliable information on the 
national SME schemes as well as on other relevant VAT provisions in the destination Member 
State. Stakeholders have indeed strongly supported during the consultation process this initiative 
which  was  also  recommended  under  the  REFIT  platform  (see  submission  XVIII.3.a  by  the 
Danish  Business  Forum135)  as  one  of  the  main  difficulties  encountered  by  small  businesses, 
which  often  are  located  in  only  one  Member  State,  is  the  lack  of  information  as  regards  the 
different VAT arrangements applied across the EU.  

The Commission's past experience 

It  should  be  noted  that  the  Commission's  experience  strongly  influenced  the  analysis  and 
definition  of  policy  options.  In  particular,  the  proposal  for  a  Council  Directive  amending 
Directive 77/388/EEC with a view to simplifying value added tax obligations (COM(2004) 728 
final) and the proposal for a Council Directive amending Directive 2006/112/EC on the common 
system of value added tax as regards a standard VAT return (COM(2013) 721 final) were taken 
into account. Both proposals were withdrawn by the Commission – the first one in 2014 and the 
second  one  in  2016  due  to  the  lack  of  agreement  among  Member  States.  It  should  be  kept  in 
mind that the proposal for a Council Directive amending Directive 77/388/EEC with a view to 

135   https://ec.europa.eu/info/sites/info/files/taxation_and_customs_union.pdf  

44 

Businesses with turnover below SME exemption thresholdDecide to apply the SME exemptionDecide to apply the SME exemptionDecide not to apply the SME exemptionDecide not to apply the SME exemptionBusinesses with turnover above SME exemption thresholdFull set of VAT obligationsFull set of VAT obligations1Optional for MS, to release them from registration, invoicing, accounting, and reporting pursuant to Article 272(1)(d).  Optional for MS, to release them from registration, invoicing, accounting, and reporting pursuant to Article 272(1)(d).  Obligatory for MS, and non-harmonised (e.g. registration, invoicing, accounting, and reporting)Obligatory for MS, and non-harmonised (e.g. registration, invoicing, accounting, and reporting)++NOT ExemptExempt× Option 1 (baseline scenario)Businesses with turnover below SME exemption thresholdDecide to apply the SME exemptionDecide to apply the SME exemptionDecide not to apply the SME exemptionDecide not to apply the SME exemptionBusinesses with turnover above SME exemption threshold2Common minimum set of simplified VAT obligations (exempt) Common minimum set of simplified VAT obligations (non-exempt)3Maybe, other simplified VAT obligations++Optional for MS, and non-harmonised (e.g. , cash-accounting…)Optional for MS, and non-harmonised (e.g. , cash-accounting…)ExemptNOT ExemptOption 2BusinessesVAT obligationsNOT ExemptNOT ExemptMaybe, simplified VAT obligationsOptional for MS, and non-harmonised (e.g. simplified record keeping, longer periods for VAT reporting, cash-accounting…)Optional for MS, and non-harmonised (e.g. simplified record keeping, longer periods for VAT reporting, cash-accounting…) Simplified registration (obligatory for MS) Simplified VAT record keeping (obligatory for MS) Less frequent VAT returns (obligatory for MS, optional for businesses).  Simplified registration (obligatory for MS) Simplified VAT record keeping (obligatory for MS) Less frequent VAT returns (obligatory for MS, optional for businesses).  Simplified registration, or non-registration (optional for MS) Simplified VAT record keeping (obligatory for MS) Simplified and less frequent VAT returns (obligatory for MS).  Simplified registration, or non-registration (optional for MS) Simplified VAT record keeping (obligatory for MS) Simplified and less frequent VAT returns (obligatory for MS). 2 Businesses with turnover above the SME exemption threshold, but up to                          EUR 2 000 000 turnover. 3 Non-established businesses making B2C supplies would have access to the extended OSS under the e-Commerce proposal. 2 Businesses with turnover above the SME exemption threshold, but up to                          EUR 2 000 000 turnover. 3 Non-established businesses making B2C supplies would have access to the extended OSS under the e-Commerce proposal. 1 Non-established businesses making B2C supplies would have access to the     extended OSS under the e-Commerce proposal. 1 Non-established businesses making B2C supplies would have access to the     extended OSS under the e-Commerce proposal.  
                                                 
simplifying  value  added  tax  obligations  attempted  to  align  the  level  of  the  SME  exemption 
threshold by proposing a maximum threshold of EUR 100 000. 

Option 2 was actually set in an attempt to balance the need to extend the scope of the exemption 
and to  simplify obligations with the necessity to also take into  account budgetary implications 
for the Member States and their need to ensure control of compliance with VAT laws. 

As regards the exemption, the level of the threshold is on purpose proposed to be set below the 
level of the previously proposed threshold.  

As  regards  obligations,  Option 2  avoids  re-opening  of  the  discussion  on  the  standard  VAT 
declaration.  The  years  of  discussions  on  the  latter  resulted  in  the  withdrawal  of  the 
Commission's proposal last year. However, Option 2 for the first time addresses the problem of 
compliance burden for small enterprises outside the exemption scheme. 

5.2.3.  Option 3:  Option 2  plus  measures  to  reduce  the  negative  impact  of  transition  from 

exemption to taxation (the so-called ‘threshold effect’) 

According to the 2017 Deloitte SME study, SMEs can be discouraged to grow by the fact that 
the SME exemption as applied by most Member States does not allow a gradual passage from 
exemption to taxation, and that businesses exceeding the exemption threshold are immediately 
obliged  to  register  for  VAT,  meet  the  standard  VAT  obligations  and  charge  VAT  on  all  their 
supplies. As a result of this, SMEs have an incentive to remain below the exemption threshold 
(‘threshold effect’). Moreover, this issue reinforces the lack of neutrality of the current system 
and its distortive impacts. 

This  problem  could  be  tackled  by  introducing  some  flexibility  to  the  application  of  the  SME 
exemption, and thus supporting SMEs’ transition to full taxation. This could be done in several 
ways.  

One  option  is  the  graduated  relief136,  already  available  in  the  VAT  Directive137,  according  to 
which  a  business  applying  this  measure  would  receive  a  VAT  relief  on  part  of  their  turnover, 
which  gradually  decreases  with  the  increase  of  the  turnover.  However,  this  measure  does  not 
provide  for  simplified  VAT  obligations  and  it  does  not  seem  to  be  effective  in  practice,  as 
confirmed by businesses and Member States during the stakeholder consultation138.  

Another  option  would  be  to  allow  businesses  exceeding  the  SME  exemption  threshold 
temporarily  to  continue  using  the  SME  exemption  during  a  transition  period139,  which  is  the 
solution that we would favour.  

As this would be a temporary measure, it ought to have an endpoint which could be either time-
related (e.g. 1 year) or turnover-related (e.g. exceeding the threshold by a fixed percentage). The 
risk  is  that  a  solely  turnover-related  measure  might  lead  to,  in  practice,  having  a  higher  SME 
exemption threshold which could be prone to abuse140. A combined measure allowing temporary 

136   Already applied by Spain, Netherlands, and Finland.  
137   See Article 282 of the VAT Directive. For more information, see section 1.3.6 and Annex 5. 
138   See Annex 2.  
139   Already applied by some Member States, such as Belgium and the UK.  
140   For  instance,  by  businesses  under-declaring  their  sales,  so  that  their  turnover  does  not  formally  exceed  the 
‘higher’  SME  exemption  threshold  (that  is,  the  SME  exemption  threshold  plus  the  fixed  percentage,  under 
which businesses could benefit from the transition period).  

45 

 
                                                 
continuation of the SME exemption for a limited time period and setting a maximum percentage 
by  which  the  threshold  can  be  exceeded  would  be  more  effective  and  could  also  limit  the 
negative impact on VAT revenue141. Hence, Option 3 envisages two limitations: 

  a time-related limitation: e.g. 1 year; 
  a turnover-related limitation: e.g. exceeding the SME exemption threshold by 50%. 

Under  Option 3,  businesses  exceeding  the  SME  exemption  threshold  could  continue  using  the 
SME  exemption  for  one  more  year  or  until  their  turnover  exceeds  the  threshold  by  a  certain 
percentage (e.g. 50%), whichever condition is met first. 

This  extended  flexibility  aims  at  reducing  the  negative  impact  of  the  ‘threshold  effect’  and 
encouraging SMEs’ growth, since it would give businesses more time than is currently the case 
to  prepare  for  having  to  apply  the  full  set  of  VAT  obligations,  both  financially  and 
administratively.  It  would  as  well  contribute  to  reducing  the  distortive  impacts  of  the  SME 
exemption. The measure would be optional for Member States and for businesses that would still 
have the possibility to opt out of the SME exemption.  

During the stakeholder consultation, SMEs strongly agreed that small enterprises should be able 
to benefit from the SME exemption if their turnover temporarily exceeds the threshold. Business 
associations showed more discreet support and indicated that some anti-abuse measures should 
be foreseen. Likewise, Member States perceived the measure positively (some of them already 
use  it  domestically),  provided  that  some  anti-abuse  measures  are  foreseen.  In  this  respect,  the 
time-related  and  turnover-related  limitations  address  the  concerns  of  business  associations  and 
Member States as regards possible abuse.  

5.2.4.  Option 4: Option 3 plus mandatory common treatment of occasional traders 

Technological developments create new opportunities for consumers and entrepreneurs as well 
as new forms of economic activity that blur the lines between consumers and businesses, that is, 
private and economic activity142. According to current rules143, any individual supplying goods 
or  services,  such  as  users  of  collaborative  platforms144  and  private  owners  of  photovoltaic 
installations145,  may qualify as  a taxable person within the meaning of the VAT Directive and 
thus  be  responsible  for  charging,  collecting  and  paying  VAT  to  the  tax  authorities.  Such 
individuals normally qualify as small enterprises within the meaning of the VAT Directive and 
are therefore eligible for the SME exemption. However, the optional character of the exemption 

141  See 2017 Deloitte SME study, Volume I, p. 156.  
142  Communication  from  the  Commission  to  the  European  Parliament,  the Council,  the  European  Economic  and 
Social  Committee  and  the  Committee  of  the  Regions  –  a  European  agenda  for  the  collaborative  economy 
(COM(2016) 356 final). 

143   According to Article 2 of the VAT Directive, supplies of goods and services are subject to VAT where they are 
made for consideration, within the territory of the Member State, by a taxable person acting as such. The notion 
of  a  taxable  person  as  defined  in  the  VAT  Directive  is very  wide.  It  can  be  any  person  who,  independently, 
carries  out  in  any  place  any  economic  activity,  whatever  the  purpose  or  results  of  that  activity,  pursuant  to 
Article 9 of that Directive. Economic activity comprises any activity of producers, traders or persons supplying 
services. The concept of taxable person also covers the exploitation of tangible or intangible property for the 
purposes of obtaining income therefrom on a continuing basis.  

144  As  regards  the  VAT  treatment  of  users  of  collaborative  platforms,  see  guidelines  resulting  from  the 
105th meeting of 26 October 2015 – Document B – taxud.c.1(2016)1162824 – 889: VAT Committee guidelines 
(p. 207). 

145   As  regards  the  VAT  treatment  of  owners  of  photovoltaic  installations,  as  interpreted  by  the  CJEU,  see 

Finanzamt Freistadt Rohrbach Urfahr. 

46 

 
                                                 
means that they can also opt for the application of normal VAT rules on the basis of which they 
have  the  right  to  deduct  the  input  VAT  which  often  results  in  substantial  reimbursements  as 
these  traders  have  very  small  output  tax.  The  cost  to  the  respective  national  budgets  may  be 
significant. 

The VAT treatment of an increasing number of occasional traders using collaborative economy 
platforms  and  other  emerging  technologies  poses  therefore  significant  challenges  for  Member 
States.  In  particular,  VAT  compliance  control  of  such  traders  can  be  disproportionately 
burdensome for tax authorities. In addition, the assessment of whether these new traders actually 
qualify  as  taxable  persons  is  not  straightforward  and  has  to  be  carried  out  on  a  case-by-case 
basis. 

In  addressing  these  issues,  two  alternative  ways  of  VAT  treatment  for  occasional  traders  have 
been assessed: 

Option 4A – Mandatory application of the SME exemption 

Under  this  option,  an  occasional  trader  would  still  be  treated  as  a  taxable  person  for  VAT 
purposes,  but  the  application  of  the  SME  exemption  would  be  mandatory.  Occasional  traders 
would therefore not be able to opt out of the exemption unless a non-incidental business activity 
could be proven. Such traders would benefit from the SME exemption and consequently would 
be  relieved  from  all  or  most  of  the  VAT  obligations.  As  a  consequence  of  applying  the 
exemption, that trader would not have the right to deduct VAT on inputs.   

Option 4B – Mandatory common treatment as non-taxable person  

With this second option, the occasional trader would be fully kept out of the VAT system, with 
no  right  to  register  for  VAT  and  so  no  VAT  related  obligations.  As  regards  purchases,  the 
occasional trader would be treated as a final consumer with no right to claim back input VAT. 
Only  if  the  trader  proved  to  the  tax  authorities  to  carry  out  an  economic  activity  on  a  regular 
basis his activities could become subject to VAT.  

Preferred option 

Both options for the common VAT treatment proposed above – if applied by Member States – 
would  provide  certainty  for  individuals  engaging  in  incidental  economic  activity,  especially 
where  it  involves  an  incidental  cross-border  transaction.  From  the  perspective  of  the  tax 
authorities it should reduce the administrative and monitoring costs (e.g. by reducing the number 
of voluntary VAT registrations)  and would reduce  the margin  for VAT  fraud (in particular on 
the input tax side).  

However, Option 4B offers a more clear-cut treatment for occasional traders given the full relief 
of VAT obligations and from the perspective of tax authorities it has the most positive impact on 
administrative costs and revenues. Therefore, this would be the preferred of the two options.  

Such  a  measure  would  be  optional  for  Member  States  in  order  to  provide  them  with  the 
flexibility to apply it only when considered necessary. Since the measure is targeted at traders 
with incidental sales only, the impact on cross-border transactions and the place-of-supply rules 
is likely to be minimal.  

47 

 
The difficulty is to define the group of traders targeted by Option 4. The concept of ‘occasional 
traders’  is  not  contained  in  the  VAT  Directive.  During  the  stakeholder  consultation146, 
businesses  and  Member  States  recommended  not  to  introduce  new  concepts  at  EU  level  but 
rather  to  clarify  how  Articles 9  and  12  of  the  VAT  Directive  should  be  applied  in  the 
circumstances described (e.g. through VAT Committee guidelines), in order to make for a better 
distinction between private and economic activity.  

For the purpose of this analysis, occasional traders are meant to be private individuals carrying 
out  an  economic  activity  on  an  occasional  basis  outside  of  their  main  employment  or  an 
incidental  economic  activity  that  does  not  create  distortions  of  competition  and  where  the 
amount  of  VAT  potentially  collected  is  negligible.  To  identify  the  number  of  individuals 
impacted  by  this  option,  it  was  assumed  that  only  those  generating  less  than  EUR 5 000  in 
turnover could potentially be classified as occasional traders.  

5.3.  Discarded options 

5.3.1.  Option 5: Option 2 with full harmonisation of the SME exemption threshold 

As set out in section 5.2.2, a fully harmonised SME exemption threshold at EU level could make 
the functioning of the exemption in a cross-border context easier for businesses. As mentioned 
above, the Commission has attempted to align the SME VAT schemes before, by proposing an 
increase of the maximum threshold to EUR 100 000. The main reasons for this were to provide 
Member States more flexibility in determining their thresholds (providing them more autonomy 
in setting up the most appropriate regime in view of the structure of their national economy) and 
remove the need for the use of the derogation procedure for any changes in the threshold, which 
is time consuming147. The discussions of this part of the proposal were stalled in the Council in 
2007, and the proposal was eventually withdrawn by the Commission in May 2014.   

Despite the fact that the proposal dates back from 2004, the difficulties standing in the way of 
agreement persist, as confirmed during the consultation process. They are mainly linked to the 
differences in economic and regulatory situation among Member States. 

The identification of the appropriate level of the SME exemption threshold would indeed be the 
most  challenging  task  as  it  should  reconcile  for  all  Member  States  the  diverging  needs  of 
reducing administrative and compliance costs and collecting VAT revenues (or limiting negative 
revenue  impact).  The  level  at  which  domestic  thresholds  are  currently  set  depends  on  several 
factors  (e.g.  compliance  risks,  economic  system,  resources,  tax  policy,  environment)  linked  to 
the  national  context,  which  may  differ  significantly  between  Member  States.  That  is  why  the 
exemption  thresholds  today  range  from  slightly  above  EUR 3 000  to  almost  EUR 98 000  (see 
Annex 9).  

For  these  reasons,  the  option  including  full  harmonisation  of  the  SME  exemption  threshold 
would have a very different impact on Member States and not necessarily bring a better result in 
terms of more level playing field.  

146   In particular, during the Fiscalis 2020 Workshop in Wroclaw (see Annex 2).  
147  COM(2004) 728, Proposal for Council Directive amending Directive 77/388/EEC with a view to simplifying 

value added tax obligations.  

48 

 
                                                 
5.3.2.  Option 6: Removing the SME exemption from the VAT Directive 

Removing the SME exemption from the VAT Directive was not considered a desirable solution 
as it was not in line with the objectives of this initiative, in particular, with the need to reduce 
SMEs’ burden related to the application of normal VAT rules.  

Despite  its  optional  nature,  the  SME  exemption  is  the  measure  most  widely  implemented  by 
Member  States,  and  it is  also  used  by  a  large  number  of  small  businesses,  which  represent  an 
average take-up rate of 63% of eligible businesses148. Moreover, the SME exemption has been 
assessed  as  beneficial  by  both  businesses  and  tax  administrations  during  the  stakeholder 
consultation, given that it eliminates the burden of small businesses of collecting and managing 
VAT  and  also  allows  tax  administrations  to  focus  on  monitoring  of  larger  businesses  which 
generate a higher percentage of the revenues. In addition, the exemption lowers the compliance 
and administrative burden for businesses and tax authorities when combined with simplification 
measures.  

The  current  Impact  Assessment  will  therefore  focus  only  on  the  first  four  options  described 
above.  

5.4.  Key features of the proposed policy options 

Table 4: Overview of the key features of different policy options 

Features 

Option 1 

Option 2 

Option 3 

Option 4 

Territoriality 
of the 
exemption 

Only established 
businesses  

Exemption 
thresholds  

SME exemption 
thresholds set in the 
VAT Directive or 
through derogations 

Open to businesses 
established in other 
Member States, as 
long as they remain 
below a maximum 
EU turnover thres-
hold 

Maximum EU-wide 
exemption threshold 
in the VAT Directive, 
Member States free 
to adopt lower 
thresholds 

Like in Option 2 

Like in Option 2 

Like in Option 2 

Like in Option 2 

Optionality  
of the 
exemption 

Optional for both 
Member States and 
businesses 

Like in Option 1 

Like in Option 1 

Optionality not 
applicable to occa-
sional traders (obli-
gatory treatment) 

Simplified 
VAT 
obligations 

Some simplification 
measures linked to 
the use of the SME 
exemption (through 
Article 272) + some 
generally available 

Common minimum 
set of simplified VAT 
obligations (for 
exempt businesses)  

+ 

Like in Option 2 

Like in Option 2 

148  Based on the 2017 Deloitte SME study, Volume I, p. 128. The estimation of 63% is made on the basis of the 
data  provided  by  some  Member  States  only:  Bulgaria,  Croatia,  Czech  Republic,  Estonia,  France,  Hungary, 
Lithuania,  Luxembourg,  Malta,  Portugal,  Slovakia,  Slovenia,  and  UK.  According  to  the  study  (Volume II, 
tables 29, 30, 75, and 76), it is nonetheless estimated that approximately 11 million businesses are exempt from 
VAT under the SME exemption in the EU generating a turnover of approximately EUR 109 billion per year.  

49 

 
 
 
                                                 
Features 

Option 1 

Option 2 

Option 3 

Option 4 

simplified obli-
gations – not all 
targeted at SMEs   

Common minimum 
set of simplified VAT 
obligations (for non-
exempt businesses) 

Additional 
measures 

Common EU thres-
hold (place of 
supply) for cross-
border B2C supplies 

Source: Commission services  

Like in Option 1 

+ 

Like in Option 3 

Like in Option 1 

+ 

Flexibility for transi-
tional period 

Mandatory common 
treatment of 
occasional traders 
as exempt or non-
taxable persons  

6.  WHAT  ARE  THE  IMPACTS  OF  THE  DIFFERENT  POLICY  OPTIONS  AND  WHO  WILL  BE 

AFFECTED?  

6.1.  Methodology 

The  analysis  of  the  policy  options  includes  both  qualitative  and  quantitative  elements,  which 
complement  each  other.  For  this  analysis,  it  was  necessary  to  collect  information  from  the 
perspective  of  business  and  of  Member  States  through  desk  research,  surveys,  interviews  and 
workshops.  

A  range  of  methodological  tools  and  different  studies  are  used  to  assess  the  various  impacts. 
Particularly,  this  analysis  relies  on  the  2017  Deloitte  SME  study.  Two  tools  of  economic 
analysis  were  used:  the  standard  cost  model  (SCM)  and  the  computable  general  equilibrium 
(CGE) model.  

The analysis of each option covers the following impacts:  

  Impact on businesses, which includes the analysis of the number of businesses impacted 

and of their compliance costs;  

  Impact  on  Member  States,  which  includes  the  impact  on  VAT  revenues,  compliance 

and fraud, legislative framework and administrative costs;  

  Impact  on  the  wider  economy,  which  includes  the  impact  on  GDP,  aggregate  output, 

output of impacted businesses, labour productivity, prices and consumer demand;  

  Other impacts which include analysis of impact on consumers and households, as well 

as social impacts. 

Given their target and the technical nature, the policy options are not expected to generate any 
direct or indirect environmental impacts. Therefore, impacts on the environment are not covered 
in the below analysis. 

The  overall  analysis  refers  to  businesses  with  annual  turnover  not  exceeding  EUR 2 000 000 
(micro-businesses,  according  to  the  EU  definition).  However,  the  quantitative  analysis  (e.g. 
compliance  costs)  focuses  on  the  specific  sub-set  of  small  enterprises  with  turnover  below 
EUR 100 000,  which  represent  approximately  32  million  businesses.  These  businesses  are  the 
ones  that  are  most  likely  to  be  eligible  for  the  SME  exemption  under  the  current  VAT 
legislation.  

50 

 
 
Although Options 2-4 include simplified VAT obligations for both exempt and not exempt small 
businesses with turnover of up to EUR 2 000 000, the impacts of these options  on compliance 
costs take into account only the above mentioned sub-set of small enterprises.  

A  detailed  description  of  the  overall  methodology  used,  the  key  assumptions  and  of  the  CGE 
model applied is included in Annex 4. 

Table 5: Summary of methodology used 

Impact 

Approach used 

Data analysis 
methods 

Key assumptions 

Data collection 
methods 

Quantitative 
analysis 

Qualitative analysis 

SCM 

Quantitative 
analysis 

SCM 

Qualitative analysis 

Quantitative 
analysis 

CGE model 

Elements from e-
Commerce proposal  

Number of SMEs  

Scenarios with 
different levels of 
simplification for 
SMEs 

Business behaviour 
when engaged in 
cross-border B2C 
supplies  

Sensitivity 
parameters 

Elements from e-
Commerce proposal  

Effective VAT rate at 
EU level 

Weighted average 
exemption threshold  

Scenarios with 
different levels of 
simplification for 
SMEs  

Compliance 
monitoring based on 
risk profiling 

Group of SMEs  

Business behaviour 
when engaged in 
cross-border B2C 
supplies  

Sensitivity 
parameters 

Qualitative analysis 

Projections 

Number of SMEs  

Impacts on 
businesses 
(including 
analysis of the 
number of 
businesses 
impacted and 
their compliance 
costs) 

Impacts on 
Member States 
(including impact 
on VAT revenues, 
compliance, 
legislative 
framework and 
administrative 
costs) 

Impacts on wider 
economy (in-
cluding impact on 
GDP, aggregate 
output, output of 
impacted 
businesses, 
labour 
productivity, 
prices and 
consumer 
demand) 

Impacts on 
consumers and 
household 

Member State 
questionnaires 

SME panel 
consultation, open 
public consultation 
and Fiscalis 2020 
Workshop 

2017 Deloitte SME 
study, other existing 
studies and relevant 
literature 

Member State 
questionnaires 

SME panel 
consultation, open 
public consultation 
and Fiscalis 2020 
Workshop 

2017 Deloitte SME 
study, other existing 
studies and relevant 
literature 

2017 Deloitte SME 
study  

Existing studies and 
relevant economic 
literature  

Desk research 

51 

 
 
Social impacts 

Qualitative analysis 

Projections  

Number of SMEs  

Source: Commission services 

6.2.  Analysis of the impacts of each of the options 

6.2.1.  Option 1 – Status quo, including e-Commerce changes 

Existing studies and 
relevant economic 
literature  

Desk research 

Option 1  builds  on  the  current  legislative  framework  of  the  VAT  Directive  and  integrates  the 
changes included in the e-Commerce proposal. It represents the baseline, against which the other 
policy options are evaluated.  

Section 2  outlines  in  detail  the  problems  related  to  the  baseline  scenario.  Its  main  impacts  are 
summarised below. 

It should be noted that the quantitative impacts (e.g. compliance costs) of the policy options only 
cover  the  specific  sub-set  of  small  enterprises  with  turnover  below  EUR 100 000.  However, 
businesses  with  annual  turnover  above  EUR 100 000  and  up  to  EUR 2 000 000  will  be  also 
impacted  by  the  policy  options.  The  overall  analysis  therefore  covers  small  businesses  with 
turnover from zero to EUR 2 000 000.  

Compliance costs for SMEs 

The overall compliance costs that small businesses (with turnover below EUR 100 000) face to 
comply  with  VAT  obligations  are  estimated  at  a  total  of  EUR 68 billion  per  year.  This  figure 
does not take into account compliance costs currently faced by small businesses with turnover 
exceeding the turnover threshold of EUR 100 000 but remaining below EUR 2 000 000, which 
could not be estimated.  

Within  this  figure  are  included  three  main  groups  of  businesses:  businesses  using  the  SME 
exemption, businesses using domestic standard VAT regimes and businesses engaged in cross-
border  trade  irrespective  of  whether  or  not  they  use  the  SME  exemption  for  their  domestic 
transactions. 

As  regards  businesses  trading  domestically,  the  EU  average  compliance  costs  (including 
advisory costs) are estimated at: 

  EUR 550  (weighted  average)  per  year  for  a  business  benefitting  from  the  current  SME 
exemption.  Such  businesses  represent  around  11.2 million  across  the  EU  and  bear  an 
overall compliance cost of EUR 6.1 billion; 

  EUR 2 970149  (of  which  advisory  fees  are  about  EUR 1 023)  per  year  for  a  business 
outside the SME exemption, which is eligible for the exemption but decided to opt out. 
The  higher  costs  are  due  to  the  fact  that  businesses  operating  under  the  standard  VAT 
regime have to comply with the whole set of VAT obligations. These represent around 

149  However,  VAT  compliance  costs  range  from  EUR 870  to  EUR 2 970  depending  on  the  frequency  of  the 
obligations,  complexity  of  the  legislative  framework  in  Member  States,  advisory  costs  and  additional  costs, 
such as IT.  

52 

 
                                                 
5.7 million  businesses  across  the  EU  and  are  estimated  to  have  an  overall  compliance 
cost of EUR 16.9 billion. 

  Businesses  not  eligible  for  the  SME  exemption  which  operate  in  the  standard  VAT 
regime  are  estimated  to  represent  an  additional  15 million  businesses  facing  overall 
VAT compliance costs of EUR 44.5 billion.  

These figures underline the relevance of the SME exemption in reducing VAT compliance costs 
of small businesses in domestic trade. 

In the context of cross-border B2C trade SMEs are more than proportionally affected by VAT 
compliance  costs  compared  to  larger  businesses.  The  overall  costs  that  a  business  faces  when 
engaging in such trade amount on average to EUR 7 800 for each Member State in which it is 
VAT-registered, while the costs for SMEs are about EUR 5 000150. 

Under  this  option,  SMEs  engaged  in  intra-EU  B2C  trade,  have  the  following  options  for 
accounting and paying VAT: 

 

treat cross-border B2C sales as domestic supplies if total sales are below the common EU 
threshold of EUR 10 000 and possibly apply the domestic SME exemption; 

  declare and pay VAT using the extended One Stop Shop (OSS); 
 

register for VAT in the Member State of destination and apply the standard VAT regime. 

When total cross-border B2C sales exceed EUR 10 000, using the extended OSS is likely to be 
the  most  pragmatic  and  effective  option,  given  that  it  reduces  significantly  the  annual 
compliance costs, with significant economies of scale, compared to the possibility to apply the 
standard VAT regime. 

As regards businesses trading cross-border, it is therefore estimated that: 

 

 

if  the  extended  OSS  is  applied,  the  overall  VAT  compliance  costs  amount  to  about 
EUR 400 million per year (EUR 690 per business); 
if the standard VAT regime is applied, the annual cost of full VAT registration in another 
Member State is about EUR 4 700 per Member State with the possibility to recover input 
VAT directly.   

Because for cross-border B2B sales the reverse charge mechanism applies151, it is for all policy 
options assumed that the supplier would not have any VAT obligations in the Member State of 
destination.  Therefore,  the  compliance  costs  for  such  transactions  are  already  included  in  the 
analysis of the domestic compliance costs for businesses in Option 1. 

150  Deloitte (2016) ‘VAT Aspects of cross-border e-commerce – Options for modernisation’, Final report – Lots 1 

and 2. 

151   The  supplier  of  a  good  or  a  service  is  considered  for  VAT  purposes  to  be  the  person  liable  to  pay  the  VAT 
collected  to  the  Treasury  (Article 193  of  the  VAT  Directive).  However,  under  particular  circumstances 
(Articles 194  to  199b  of  the VAT Directive),  the  VAT Directive  provides  for  (or  allows Member  States)  the 
application of the so-called reverse charge mechanism that deviates from this rule. Under a reverse charge, the 
liability is moved to another person, in general the customer.   

53 

 
 
                                                 
It  should  be  noted  that  due  to  the  common  EU  threshold,  compliance  costs  for  intra-EU  B2C 
supplies  which  are  below  EUR 10 000  are  included  in  the  estimation  of  domestic  compliance 
costs.  

Competitiveness and growth obstacles for SMEs 

For SMEs the necessity to deal with different national VAT rules and administrative procedures 
constitutes a fixed-cost market-entry barrier. It discourages them from trading cross-border and 
prevents  their  growth.  Available  evidence  suggests  that  only  about  15%  of  SMEs  trade  cross-
border152. 

The  2015/2016  Deloitte  e-Commerce  study153  estimates  that,  with  the  elimination  of  the 
compliance  burden,  the  value  of  cross-border  B2C  e-Commerce  may  potentially  increase  by 
1.2%-2.6%.  This  change  represents  an  increase  in  the  value  of  e-Commerce  of  between 
EUR 2.5 billion and EUR 4.2 billion annually.  

This option, as a result of the e-Commerce changes, provides SMEs with some limited support 
to cross-border activity but it does not align the SME exemption with the destination principle 
and the distortions between domestic and non-established businesses remain unsolved154. 

Compliance levels and fraud in Member States 

The  main  concerns  for  tax  administrations  with  the  current  SME  exemption  relate  to  under-
declaration of  sales  by  businesses  in  order  to  stay  below  the  threshold  and  to  disproportionate 
input VAT claims by businesses opting out of the exemption. 

On  one  hand,  compliance  control  of  businesses  benefitting  from  the  SME  exemption  can  be 
difficult  due  to  the  full  or  extensive  relief  from  VAT  obligations  that  is  often  applied,  which 
generally  means  that  the  tax  authorities  have  very  limited  information  on  the  number  of  such 
businesses  and  their  turnover.  On  the  other  hand,  the  benefits  of  this  exemption  for  tax 
authorities, which enables better allocation of resources while keeping a large number of small 
businesses out of the VAT regime, outweigh the risk of non-compliance and abuse.  

The introduction under the e-Commerce proposal of the common EU threshold of EUR 10 000, 
under  which  cross-border  B2C  supplies  can  be  deemed  as  domestic  supplies,  is  likely  to  be 
positive for small businesses that have limited cross-border B2C sales. The threshold is expected 
to improve compliance among such businesses as they do not have to comply with rules of the 
Member  States  of  destination.  Also  the  removal  of  distance  selling  thresholds  is  expected  to 
facilitate compliance control by tax authorities, reducing VAT fraud on distance selling. 

152  2017 Deloitte SME study, Volume I, section 7.2.1. 
153  Deloitte (2016) ‘VAT Aspects of cross-border e-commerce – Options for modernisation’, Final report – Lot 2. 
154   For  more  information  about  the  interaction  between  the  e-Commerce  proposal,  the  definitive  VAT  system 

proposal and the SME VAT package, see Annex 6. 

54 

 
                                                 
6.2.2.  Option 2B  –  SME  exemption  extended  to  supplies  from  other  Member  States  with  EU 

turnover threshold and including streamlined simplification measures 

Summary – the extent to which the specific policy objectives will be met 

Overall – Objectives partially met  

1.  Reducing VAT compliance costs for SMEs – Met 
2.  Reducing distortions – Met 
3.  Reducing the negative impact of the threshold effect – Not met 
4.  Facilitating  compliance  and  monitoring  –  Met  to  a  large  extent  if  sufficient  control 

arrangements are put in place to monitor the SME turnover generated EU-wide 

5.  Reducing revenue losses caused by occasional traders – Not met 

Economic impacts and competitiveness 

Impact on businesses 

In comparison with the baseline scenario, Option 2B leads to a reduction of VAT compliance 
costs  of  between  8%  and  22%  depending  on  the  common  set  of  obligations  included  in  the 
SME  package.  These  estimates  refer  to  only  small  businesses  with  turnover  below 
EUR 100 000.  However,  given  that  also  non-exempt  small  businesses  with  turnover  of  up  to 
EUR 2 000 000  may  benefit  from  simplified  obligations,  the  compliance  cost  reduction  under 
this option is expected to be more significant.   

For  the  purpose  of  this  analysis  three  scenarios  with  different  levels  of  simplification  were 
considered,  under  which  the  number  of  obligations  to  be  complied  with  moves  from  a  very 
simple set of obligations (scenario 1) to the broadest set of obligations (scenario 3). It should be 
noted  that,  following  the  extension  of  the  scheme  to  non-established  businesses,  VAT 
registration is included as mandatory obligation in all scenarios for control reasons. However, 
Member  States  currently  relieving  exempt  businesses  from  all  VAT  related  obligations 
(included  VAT  registration)  could  continue  to  do  so  if  the  eligible  business  carries  out  only 
domestic  transactions.  In  that  case,  compliance  costs  for  the  exempt  domestic  businesses  are 
equal to zero155. 

Table 6  below  summarises  the  sets  of  obligations  included  in  each  of  the  scenarios  and  their 
projected impact on compliance costs. 

Table 6: Simplification scenarios linked to Option 2 and their impact on compliance costs  

Set of VAT 
obligations 

High level of 
simplification 
(scenario 1) 

Medium level of 
simplification 
(scenario 2) 

Minimal level of 
simplification 
(scenario 3) 

  VAT registration (only 

  VAT registration  

  VAT registration  

Using SME 
exemption  

in cross-border 

  VAT return  

 

Invoicing  

trade) 

  Bookkeeping 

  VAT return  

  Bookkeeping 

  Bookkeeping 

Opting out of SME 
exemption  

  VAT registration  

  VAT registration  

  VAT registration  

155   See Table 23 in Annex 8 showing compliance costs faced by small businesses in five selected Member States. 

55 

 
                                                 
  VAT return  

  VAT return  

 

Invoicing  

  VAT payment 

  VAT payment  

  VAT return  

  Bookkeeping 

  Bookkeeping 

  VAT payment  

  Bookkeeping 

53.2 billion 

58.6 billion 

62.7 billion 

-22% 

-14% 

-8% 

Overall 
compliance costs  
% compliance 
costs from 
option 1 
(=100%) 

Source: Commission services on the basis of the 2017 Deloitte SME study 

Businesses trading domestically 

This  option  is  estimated  to  reduce  on  aggregate  the  compliance  costs  of  SMEs  trading 
domestically. However, the impact differs significantly across Member States, depending on the 
measures  currently  applied  to  SMEs  and  on  the  different  scenarios  considered  for  the 
streamlined simplification package. 

As  regards  businesses  using  the  SME  exemption,  under  the  high  simplification  scenario, 
compliance  costs  are  expected  to  diminish  on  average  by  46%156.  Under  the  minimal 
simplification  scenario,  the  option  may  lead  to  an  increase  in  compliance  costs  for  domestic 
businesses benefitting from the SME exemption in other Member States, as they may become 
subject to additional obligations, such as registration.  

As  regards  businesses  opting  out  of  the  SME  exemption,  in  all  simplification  scenarios  the 
compliance costs are estimated to decrease by between 65% and 70% (EUR 975 per business, 
under the medium scenario, compared to the baseline cost of about EUR 3 000)157. 

Option 2B can be therefore said to support the growth of both exempt businesses and businesses 
for  which  the  exemption  is  less  suited  (e.g.  those  which  trade  mostly  B2B  or  have  a  high 
amount of input VAT which can be deducted only if outside the exemption scheme).   

Businesses trading cross-border 

Under this option, businesses trading cross-border may benefit from the SME exemption in the 
Member  State  of  destination.  It  is  assumed  that  only  businesses  making  cross-border  B2C 
supplies will be affected by the option as currently SMEs do not have to pay VAT on intra-EU 
B2B supplies. However, depending on the type of business, SMEs engaged in cross-border B2B 
trade could potentially benefit from the simplification package in other Member States. 

A  number  of  businesses  could  benefit  from  the  common  EU  threshold  introduced  by  the  e-
Commerce proposal and will be able to apply domestic VAT exemption to supplies below that 
threshold. That is why the number of businesses that could benefit from Option 2B is estimated 
at  only  about  580 000, representing  1.4%  of  all  businesses158.  Among  these,  the cost of  VAT 
compliance  will  depend  on  whether  they  opt  to  use  the  extended  OSS  or  to  register  in  the 
Member State of destination (either within or outside the SME exemption). The results of the 
SCM  analysis  indicate  that  use  of  the  extended  OSS  costs  on  average  EUR 690  whereas  the 

156   2017 Deloitte SME study, Volume I, p. 169. 
157   Ibid. 
158   Ibid. 

56 

 
                                                 
cost  of  VAT  registration  in  another  Member  State  may  vary  between  close  to  EUR 300  and 
EUR 1 040, depending on the level of simplification adopted by Member States159. 

An overview on the number of businesses impacted  by the option and their compliance costs 
under different scenarios is outlined in section 4 of Annex 4. 

Impact on Member States 

VAT revenues 

The  extension  of  the  SME  exemption  to  non-established  businesses  has  potentially  negative 
impacts  on  VAT  revenues,  as  SMEs  currently  pay  VAT  on  their  cross-border  B2C  sales 
whereas  according  to  this  option  they  may  use  the  SME  exemption  in  the  Member  States  of 
destination. However, it is estimated that the value of sales that would no longer be subjected to 
VAT is only about 0.02% of the overall EU turnover160. 

With  Option 2B,  VAT  revenues  are  expected  to  decrease  up  to  EUR 665 million  or  0.06%, 
compared to the current level of net VAT revenue collected by Member States in the EU. 

Any potential negative revenue impact could be mitigated by adjusting the national exemption 
thresholds,  so  that  the  policy  changes  are  potentially  revenue  neutral.  Such  downward 
adjustments could impact domestic businesses currently benefitting from the SME scheme. 

Compliance and fraud 

This  option  is  expected  to  increase  the  complexity  of  the  SME  exemption  and  change  the 
compliance,  abuse  and  fraud  risks  associated  with  the  scheme.  As  a  result,  it  may  increase 
compliance  control  costs  for  tax  authorities.  The  option  will  also  increase  the  need  for 
administrative  cooperation  between  the  tax  authorities  of  different  Member  States  in  order  to 
ensure compliance control of foreign businesses. 

The impact on avoidance or abuse/fraud relating to the SME exemption will largely depend on 
the national design, on which simplification measures are included in the scheme and how they 
are applied. 

The  option  should  not  have  a  significant  impact  on  the  compliance  of  domestic  businesses, 
unless current simplification measures are significantly changed. At the same time the extension 
of  simplification  measures  to  SMEs  that  have  opted  out  of  the  SME  exemption  is  likely  to 
improve voluntary compliance. 

Legislative and administrative impact 

As  a  result  of  this  option,  the  tax  authorities  will  need  to  make  legislative  changes  to  their 
current SME exemption, unless they have decided not to apply it. They may also need to review 
simplification measures currently applied.  

The impact on the administrative costs for the Member States will depend on the simplification 
measures applied as part of the SME exemption. The set of simplification measures will need to 

159   2017 Deloitte SME study, Volume I, p. 170. 
160   Ibid. 

57 

 
                                                 
be  balanced  against  the  interests  of  the  tax  authorities  in  controlling  compliance  with  the 
scheme and tackling any risks of abuse. 

Compared  with  the  current  VAT  framework,  the  administrative  costs  of  tax  authorities  are 
expected to increase, at least in the short term.  

Impact on the wider economy 

The  effects  of  Option 2B  on  the  wider  economy  were  tested  with  the  use  of  the  CGE  model. 
Overall, the analysis shows that the policy change should have a positive impact on the wider 
economy.  

Table 7: Summary table of the wider economic impact of Option 2 

High level of 
simplification 
(scenario 1) 

Medium level of 
simplification 
(scenario 2) 

Minimal level of 
simplification 
(scenario 3) 

Impact on GDP 

Impact on aggregate output 

0.11% 

0.13% 

Impact on output of impacted SMEs 

14.0% 

Impact on SMEs’ cross-border 
trading activity (percentage change 
in total value of cross-border trade) 

Impact on labour productivity 

Impact on prices 

Impact on consumer demand 

Source: 2017 Deloitte SME study 

SMEs’ output 

13.5% 

0.14% 

-0.10% 

0.14% 

0.07% 

0.08% 

9.0% 

13.5% 

0.09% 

-0.08% 

0.09% 

0.04% 

0.05% 

5.0% 

13.1% 

0.05% 

-0.05% 

0.05% 

Under this option, the activity of domestic SMEs is estimated to increase by up to 14% due to 
the  significant  reduction  in  compliance  costs  and  the  associated  increase  in  their  productivity 
and  competitiveness.  For  businesses  that  trade  cross-border,  the  policy  change  can  lead  to  a 
reduction of VAT costs by over 12% and a reduction of the compliance burden associated with 
such trade by up to 30%. Together, these impacts may enable increases in cross-border activity 
by affected SMEs of up to 13.5%, as they are better able to compete with SMEs in the Member 
States with which they trade161. 

Consumption and labour productivity 

The reduction in compliance burden and the extension of the SME exemption can reduce prices 
and increase consumption. Given that the businesses affected only account for a small fraction 
of EU turnover, the impact on the overall price level will however not be significant.  

By reducing the time spent in unproductive tasks, the reform also has the potential to increase 
labour productivity, which in turn can increase real wages and reduce working hours.  

161   2017 Deloitte SME study, Volume I, p. 175.  

58 

 
 
                                                 
Consumers and households 

The impact on consumers is likely to be positive overall as more businesses are likely to engage 
in  intra-EU  trade.  The  improvement  of  competitiveness  for  SMEs  will  allow  them  to  charge 
lower  prices  and  bring  other  benefits  for  consumers,  such  as  better  quality,  wider  choice  and 
innovative goods and services. 

Social impacts 

A positive impact on employment may be expected due to an increase in cross-border trade and 
the  improvement  in  the  conditions  for  competition  for  both  domestic  SMEs  and  SMEs 
established in other Member States.  

No figures are available for this impact although it is likely to be relatively small. 

6.2.3.  Option 3  –  Option 2B  plus  measures  to  reduce  the  negative  impact  of  transition  from 

exemption to taxation 

Summary – Impact on the policy objectives 

Overall – Meets the objectives to a large extent (Positive overall) 

1.  Reducing VAT compliance costs for SMEs – Met  
2.  Reducing distortions – Met 
3.  Reducing the negative impact of the threshold effect – Met 
4.  Facilitating compliance and monitoring – Met to a large extent  
5.  Reducing revenue losses caused by occasional traders – Not met 

Economic impacts and competitiveness 

Impact on businesses 

The  overall  compliance  costs  for  businesses  under  Option 3  amount  to  approximately 
EUR 56.1 billion (or an 18% reduction compared to the baseline scenario). The estimation takes 
into account the set of VAT obligations under the medium simplification scenario of Option 2 
compared to which Option 3 leads to an additional reduction in compliance costs for businesses 
of 4%.  

It  should  be  noted  that  these  impacts  refer  to  only  small  businesses  with  turnover  below 
EUR 100 000. The compliance cost reduction  under this option is  expected to  be  higher  given 
that also non-exempt small businesses with turnover of up to EUR 2 000 000 will be effected.   

Table 8: Overview of the impacts on compliance costs for businesses under Option 3 

Cost per 1 business  
(1 MS) EUR 

No of 
businesses 

Compliance cost  
(EUR billion) 

Businesses trading domestically 

Businesses exempt from VAT  

[716 – 1 043] 

7 400 000 

Businesses in simplified regime 

[975 – 1 208] 

4 200 00 

Businesses in transitional period 

1 325 

260 000 

Businesses in standard VAT regime 

[2 964 – 3 104] 

13 700 000 

7.7 

5.0 

0.34 

42.6 

59 

 
 
Businesses trading cross-border 

Businesses using extended OSS 

Businesses in cross-border 
exemption scheme 

690 

716 

290 000 

290 000 

0.20 

0.21 

Overall compliance costs                                                                                                                    56.1 

% change from baseline scenario   

Source: 2017 Deloitte SME study 

-18% 

The  number  of  businesses  that  could  be  impacted  by  the  transition  period  is  estimated  on 
average at around 260 000 (0.6% of all EU businesses) in a given year.  

Option 3  is  expected  to  have  a  general  positive  impact  on  SMEs’  growth,  by  providing  a 
transition period for businesses in order for them to prepare for the standard VAT regime and the 
larger set of VAT obligations, which includes at least some of the following:  

-  understanding of the VAT system (use of advisors/accountants);  
-  changing from annual to quarterly (or even monthly) accounting;  
-  providing information to the tax authorities; and  
- 

re-calculating of sales prices (and possible setting of new pricing policy).  

During the transition period, impacted businesses will face higher costs compared to those under 
Option 2, given that they will prepare to comply with the full set of VAT obligations and for the 
full  taxation  in  the  following  period.  It  is  therefore  estimated  that,  during  this  period,  their 
compliance costs will increase by up to EUR 1 325 (36% higher than the estimated costs for a 
business using only the streamlined simplification package). This way, the subsequent increase 
to the full set of VAT obligations (quantified at approximately EUR 2 964 per year) is expected 
to be less significant.  

Impact on Member States 

VAT revenues 

Option 3  is  expected  to  have  a  temporary  negative  impact  on  the  VAT  revenue  of  Member 
States,  as  it extends  for  a  limited  period  the  application  of  the  exemption  for  those  businesses 
that exceed the threshold. However, in the longer term the revenue impact has the potential to be 
positive, due to the general positive effect on the SMEs’ output and as a result of reduction in the 
‘threshold effect’ (more declared sales). 

This  option  alone  is  expected  to  lead  to  a  reduction  in  VAT  revenue  at  EU  level  of  0.18%. 
Combined  with  the  impacts  of  Option 2,  the  overall  effect  on  VAT  revenue  is  a  decrease  of 
0.24%.  

Estimates  show  differences  in  revenue  impact  across  Member  States  and  in  the  number  of 
businesses  impacted  that  can  be  explained  by  the  different  levels  of  thresholds  (the  higher  the 
threshold, the higher the impact). The impact on the revenue of each Member State is outlined in 
section 4 of Annex 4.  

Compliance and fraud 

This option is expected to have a positive impact on voluntary compliance by reducing under-
declaration  of  sales  by  SMEs  done  in  an  attempt  to  avoid  exceeding  the  SME  exemption 
threshold.  The  risk  of  abuse  is  considered  limited  due  to  the  scope  of  the  option  and  Member 
States’  ability  to  take  measures  to  control  compliance,  for  example  by  requiring  businesses  to 

60 

 
notify application of the transition period.  

The option may increase the complexity of the SME exemption and related compliance control 
costs for tax authorities. 

Legislative and administrative impact 

Member States wishing to provide for a transition period would need to make limited additional 
legislative changes. There may be also a need for transitional measures whenever such change is 
implemented. 

The option should not have significant impacts on the administrative cost of the tax authorities, 
although there may be a limited one-off cost for the implementation of this measure. 

Impact on the wider economy  

Option 3  can  have  further  positive  impact  on  the  wider  economy.  In  particular,  the  option  is 
expected to have the greatest impact on prices and output compared to the other policy options 
considered, since it extends the benefits of the SME exemption to fast-growing SMEs.  

While  the  overall  impact  on  output  is  small,  the  measure  may  enable  businesses  affected  to 
increase their economic activity by over 16%. This is due both to the fact that these businesses 
do  not  need  to  charge  VAT  on  supplies  (potentially  reducing  prices  by  0.11%)  and  to  a 
significant reduction in compliance costs, albeit limited in time, from an estimated EUR 3 000 to 
EUR 1 300. Given that these SMEs would be able to smooth the fixed costs associated with full 
VAT registration over a longer period, it can also make it easier for these businesses to compete 
with larger businesses that are more accustomed to dealing with VAT obligations.  

Table 9: Impact of Option 3 on the wider economy 

Option 3: Option 2 plus measures for transition period 

Impact on GDP 

Impact on aggregate (see Option 2) output 

Impact on output of impacted SMEs (i.e. businesses in the transitional period) 

Impact on SMEs’ cross-border trading activity (percentage change in total value of 
cross-border trade) 

Impact on labour productivity 

Impact on prices 

Impact on consumer demand 

Source: 2017 Deloitte SME study 

Consumers and households 

0.09% 

0.10% 

16.1% 

13.5% 

0.11% 

-0.11% 

0.12% 

Similar  to  Option 2,  the  impact  on  consumers  is  likely  to  be  positive  as  the  improvement  of 
business  competitiveness  will  allow  SMEs  to  charge  lower  prices  and  bring  other  benefits  for 
consumers, such as better quality, wider choice and innovative goods and services.  

61 

 
Social impacts 

Similar  to  Option 2B,  improvement  in  competitiveness  should  stimulate  productivity  and 
employment growth in the long-term. 

6.2.4.  Option 4 – Option 3 plus mandatory common treatment of occasional traders  

Summary – Impact on the policy objectives 

Overall – Meets all the objectives (More positive overall) 

1.  Reducing VAT compliance costs for SMEs – Met  
2.  Reducing distortions – Met  
3.  Reducing the negative impact of the threshold effect – Met 
4.  Facilitating compliance and monitoring – Met to a large extent 
5.  Reducing revenue losses caused by occasional traders – Met 

Economic impacts and competitiveness 

Impact on businesses 

Under  Option 4,  the  overall  compliance  costs  for  businesses  are  estimated  at  approximately 
EUR 56.5 billion162 (or a 17% reduction compared to the EUR 68.0 billion estimated under the 
baseline scenario). This reduction is essentially due to the decrease in the number of businesses 
subject to VAT-related obligations. 

Table 10  below  provides  an  overview  of  the  compliance  costs  for  businesses  with  less  than 
EUR 100 000  of  turnover,  excluding  occasional  traders,  under  the  medium  simplification 
scenario of Optionv2 and on standard VAT regime where no exemption is offered. 

Table 10: Businesses’ compliance costs under Option 4 

Cost per  
1 business 
(1 MS) EUR 

Previous 
compliance cost 
of an occasional 
trader 

No of businesses 

Compliance cost 
(EUR billion) 

Businesses trading domestically 

Businesses exempt 
from VAT  
Businesses in 
simplified regime 
Businesses in 
standard VAT 
regime 

[716 – 1 043] 

[975 – 1 208] 

83 

342 

7 400 000 

4 200 000 

7.7 

5.0 

[2 964 – 3 104] 

1 114 

14 000 000 

43.4 

Businesses trading cross-border 

Businesses using 
the extended OSS 

690 

290 000 

0.20 

162  The estimates refer only to the treatment of occasional traders as non-taxable persons. However, the reported 
impacts can be indicative impacts also for the mandatory application of the SME exemption, due to the very 
similar implications resulting from the two VAT treatments proposed for the occasional traders in the present 
Impact Assessment. See the 2017 Deloitte SME study, Volume I, p. 176. 

. 

62 

 
 
 
                                                 
Businesses in cross-
border exemption 
scheme 

716 

290 000 

0.21 

Overall compliance costs 

                                                                                          56.5 

% change from baseline scenario 

Source: 2017 Deloitte SME study 

17% 

Based  on  the  information  collected  from  some  Member  States,  it  is  expected  that  40%  of 
businesses with less than EUR 5 000 turnover could be classified as occasional traders (15.1% of 
all EU businesses). As a consequence, the number of businesses directly impacted by this option 
is estimated at about 6.4 million, out of which 3.8 million (or about 60%) are businesses already 
exempt from VAT under domestic schemes.  

The  impact  on  occasional  traders  will  vary  depending  on  their  current  VAT  status  and  the 
simplification measures currently applied by Member States. Compliance costs are estimated at 
around  EUR 80  for  traders  exempted  from  VAT,  about  EUR 340  for  those  eligible  to  the 
exemption scheme but opting out and using the simplification package, and about EUR 1 110 for 
those where no exemption is on offer. 

Impact on Member States 

VAT revenues 

The  data  from  tax  authorities  revealed  that  small  businesses  with  less  than  EUR 5 000  in 
turnover  on  average  contribute  negatively  to  the  net  VAT  revenue  collected  at  EU  level. 
Therefore, by preventing these businesses from opting out so as to be able to recover VAT on 
their inputs Option 4 may increase governments’ revenue by up to 0.52%. However, the overall 
direction of the impact on revenues is uncertain. For the purposes of this Impact Assessment it is 
cautiously estimated at a decrease of 0.24%.  

Compliance and fraud 

This  option  is  expected  to  have  a  positive  impact  on  compliance,  as  the  impacted  occasional 
traders, who currently may be non-compliant, can legally stay out of the VAT system or be VAT 
exempted  and  will  be  relieved  from  all  or  some  of  the  VAT-related  obligations.  However,  in 
terms of those established outside the Member State of taxation, it could be very challenging for 
Member States to determine who occasional traders are. 

The  risk  of  businesses  abusing  the  measure  is  considered  low,  as  in  the  majority  of  Member 
States such businesses could in any case benefit from the optional SME exemption scheme. 

The  option  is  expected  to  reduce  voluntary  VAT  registrations  and  related  risks  of  input  VAT 
fraud. Keeping occasional traders out of the VAT system would allow tax authorities to reduce 
compliance control costs and better target their resources. 

Legislative and administrative impact 

Member  States  would  have  the  option  to  legislate  for  the  mandatory  common  treatment  of 
occasional  traders  as  non-taxable  persons.  If  the  option  is  implemented,  the  main  challenge 
would be to define ‘occasional traders’ (or the scope of the measure) for national purposes and 
provide relevant guidance to potentially impacted traders. In such a case, Member States would 
also need to deal with the transition from the current VAT treatment of occasional traders to the 
treatment as non-taxable persons, especially where the trader is already registered for VAT. For 

63 

 
 
example, they could require traders who are VAT registered voluntarily to provide evidence that 
they are not ‘occasional traders’. 

This  option  is  expected  to  have  a  mixed  but  overall  positive  impact  on  tax  authorities’ 
administrative  costs.  The  tax  authorities  would  have  a  one-off  administrative  cost  from 
introducing and managing the transition to the new regime, e.g. reviewing a number of existing 
VAT registrations that may be impacted by the option. Ongoing administrative costs would be 
reduced,  as  the  number  of  voluntary  registrations  is  expected  to  reduce,  and  therefore  the  tax 
authorities would need to manage and control smaller numbers of taxpayers. 

Impact on the wider economy 

The  impacts  on  the  wider  economy  are  generally  greater  than  those  estimated  under  Option 3. 
The fact that occasional traders are relieved of the VAT-related obligations will lead to a further 
reduction in the overall compliance cost. Also the overall impact on output will be positive and 
occasional traders may increase their activity by up to 11%.  

Table 11: Impacts of Option 4 on the wider economy 

Option 4: Treatment of occasional traders as exempt or non-taxable persons 

Impact on GDP 

Impact on aggregate output 

Impact on output of impacted SMEs (i.e. occasional traders) 

Impact on SMEs’ cross-border trading activity (percentage change in total 
value of cross-border trade) 

Impact on labour productivity 

Impact on prices 

Impact on consumer demand 

Source: 2017 Deloitte SME study 

Consumers and households 

0.09% 

0.10% 

10.9% 

13.5% 

0.11% 

-0.09% 

0.11% 

The  change  will  further  contribute  to  the  improvement  of  business  competitiveness  which 
stimulates  productivity  and  brings  positive  benefits  for  consumers  (e.g.  better  quality,  wider 
choice of goods and services at affordable prices). However, given that the businesses affected 
in  particular  by  Option 4  contribute  a  very  small  amount  to  EU-wide  turnover,  the  impact  on 
consumers is not significant. 

Social impacts 

By establishing a common VAT legal framework for occasional traders Option 4 will bring legal 
certainty  for  both  businesses  and  citizens,  encouraging  a  more  confident  participation  in  the 
collaborative  economy.  Greater  competitive  conditions  should  boost  productivity  and  lead  to 
long-term employment growth. 

64 

 
 
7.  HOW DO THE OPTIONS COMPARE?  

7.1. 

Summary assessment of the impacts  

Results from the Impact Assessment show that the most important impact of the policy options 
is  the  reduction  of  VAT  compliance  costs  for  SMEs.  Compared  to  the  baseline  scenario,  all 
options  reduce  compliance  costs  for  businesses,  though  to  a  different  extent.  The  overall 
compliance costs of EUR 68 billion that approximately 32 million businesses163 (with an annual 
turnover  below  EUR 100 000)  face  under  the  baseline  scenario  are  reduced  to  between 
EUR 58.6 billion and EUR 56.1 billion depending on the option. To this one should be added the 
impact  on  businesses  with  turnover  above  the  SME  exemption  threshold  and  up  till 
EUR 2 000 000,  for  which  some  simplification  of  obligations  will  be  also  offered.  These 
businesses,  similarly  to  those  with  a  turnover  below  the  SME  exemption  threshold,  but  opting 
out of the exemption164, may benefit from simplification measures that would reduce their costs 
by between 8 and 22%, depending on the simplification scenario. 

As a consequence, the options should contribute to increasing SMEs’ cross-border trading and 
impact  positively  on  GDP,  aggregate  output,  output  of  impacted  SMEs,  labour  productivity, 
consumer demand and prices. 

This being said, one should also keep in mind the impact, difficult to quantify, on legal certainty 
and on efficiency of the VAT rules in general. The review, whichever option is chosen, would 
result  in  updating  the  VAT  system,  making  it  better  adapted  to  the  economic  reality165  and 
making  it  sustainable  in  the  future  system  of  VAT  with  taxation  based  on  the  destination 
principle. 

All  the  options  have  a  minimal  negative  effect  on  VAT  revenues,  given  that  the  overall  VAT 
revenue contributed by SMEs at EU level is quite small. It should be noted, however, that due to 
the  general  positive  effect  on  the  SMEs’  growth,  the  revenue  impact  has  the  potential  to  be 
positive in the longer term.  

Option 2. Through the simplified VAT obligations and the extension of the SME exemption to 
non-established  EU  businesses,  this  option  impacts  directly  the  compliance  costs  of  all 
businesses,  trading  domestically  as  well  as  cross-border.  The  reduction  in  compliance  costs 
ranges  from  8%  to  22%  (-14%  under  the  medium  simplification  scenario),  depending  on  the 
extent  to  which  Member  States  simplify  or  increase  the  VAT-related  obligations  of  SMEs.  In 
terms of compliance and fraud, this option is less positive, as it brings some complexity into the 
scheme for SMEs which would make it more difficult for tax authorities to monitor. The option 
meets to a large extent the orientations resulting from all stakeholder consultation activities.  

Option 3.  The  transitional  period  offered  under  this  option  allows  SMEs  to  remain  within  the 
SME  exemption  for  a  limited  additional  period  of  time.  This  should  lead  to  a  reduction  in 
compliance  costs  of  18%  compared  to  the  baseline  (additional  reduction  of  EUR 2.5 billion  in 
respect of compliance costs under the medium simplification scenario of Option 2), reduce the 
threshold effect and provide SMEs an incentive to grow. The impact on compliance and fraud is 
expected to  be  positive due  to  the  fact  that the policy  change  will reduce  under-declaration  of 

163   2017 Deloitte SME study, Volume I, p. 161. 
164   See section 6.2.2 on the assessment of the impacts of Option 2. 
165  See,  for  example,  the  issue  of  the  update  of  the  thresholds  as  set  out  originally  in  1977  at  the  level  of 

EUR 5 000. 

65 

 
                                                 
sales. Compared to the other options, this option has the greatest impacts on the wider economy 
and  revenues,  since  it  extends  the  benefits  of  the  SME  exemption  to  fast-growing  SMEs.  The 
option meets almost all the policy objectives and is fully compatible with the general results of 
the stakeholder consultations. 

Option 4.  The  proposed  VAT  treatment  for  occasional traders leads  to  an  overall  reduction in 
compliance costs for businesses of 17% compared to the baseline166 and a positive impact on the 
administrative burden of tax authorities, due to a reduced number of small taxpayers to control. 
The option is also expected to have a positive impact on compliance by reducing voluntary VAT 
registrations and related input VAT fraud risk. About 6.4 million businesses are estimated to be 
impacted  by  this  option,  60%  of  which  are  already  exempt  from  VAT  under  the  SME 
exemption. Consequently, the impact on revenues is expected to be very small and even positive 
as  the  option  eliminates  the  risk  of  excessive  VAT  input  deductions.  Although  all  the  policy 
objectives are met under Option 4, this option is not favoured, as explained in section 7.3 below, 
due to the fact that it would require legislative changes which could not be encompassed in this 
exercise,  and  also  given  the  negative  feedback  from  stakeholders  received  during  the  Fiscalis 
2020 Workshop in March 2017. It should be mentioned that Option 4 was not discarded from the 
very  beginning  of  the  impact  assessment  process,  but  was  given  serious  consideration.  The 
conclusion  that  this  option  cannot  be  the  preferred  one  was  reached  only  after  a  thorough 
assessment of its legal and economic implications. 

The table below analyses and evaluates the various impacts across the 4 options.  

Table 12: Summary analysis of impacts 

Key impacts 

Option 1 

Option 2 

Option 3 

Option 4 

A – Efficiency 

- 

= 

= 

= 

= 

++ 

++ 

= 
= 

- 
- - 

Impact on Member States 
Member States’ revenu-
es from intra-EU trade 
Administrative burden 
Compliance and fraud  
Impact on businesses 
VAT compliance costs 
Impact on wider economy 
Effects on output of 
impacted SMEs 
Effects on SMEs intra-
EU trade  
Effects on prices and 
consumers demand 
B – Effectiveness of options vs policy objectives  
Reducing VAT 
compliance costs for 
SMEs 
Reducing distortions for 
SMEs 
Facilitate compliance 
and monitoring 
Reducing the negative 
impact of the threshold 
effect 
Reducing revenue 
losses caused by 
occasional traders 

++ 

++ 

+++ 

= 

+ 

= 

= 

= 

= 

= 

+ 

+ 

-/+ 

++ 
++ 

+++ 

+++ 

+++ 

+ 

+++ 

+++ 

+++ 

+++ 

-/+ 

+++ 
+++ 

+++ 

+++ 

+++ 

++ 

+++ 

+++ 

+++ 

+++ 

+++ 

166  Option 4  leads  to  an  additional  reduction  in  compliance  costs  of  EUR 2.1 billion  compared  of  the  medium 

simplification scenario of Option 2). 

66 

 
 
 
                                                 
Key impacts 

Option 1 

Option 2 

Option 3 

Option 4 

C – Coherence 
e-commerce proposal 
Future initiatives 
(rates, definitive VAT 
system, administrative 
cooperation) 
D – Key indicators 
VAT Revenues (EUR) 
VAT Revenues (%) 

Business Compliance 
Costs (EUR) 

Business Compliance167 
Costs (%) 

Overall assessment 

= 

= 

68 bn 

+++ 

+ 

+++ 

+++ 

+++ 

+++ 

-665 mn 
-0.06% 
58.6 bn  
(decrease of  
9.4 bn) 

-2 660 mn 
-0.24% 
56.1 bn 
(decrease of  
11.9 bn) 

-2 660 mn 
-0.24% 
56.5 bn 
(decrease of  
11.5 bn) 

-14%  

-18% 

-17% 

Does not meet 
objectives 

Partially 
meets 
objectives 

Meets objectives to 
a large extent  

Fully meets 
objectives 

Legend 
+++ much better suited                       ++ better suited                          + slightly better suited 
= no difference 
- less suited                                        - - slightly less suited                - - - much less suited 

Source: Commission services   

7.2. 

Identification of the preferred option 

Options 2 to 4 respond to the general objectives identified in this Impact Assessment based on 
the  EU  policy  priorities  and  in  particular,  they  fulfil,  although  to  a  different  level,  the  key 
objective of reducing the compliance costs for SMEs.  

Overall, due to the gradual construction, Option 4 is the only option that meets all the specific 
objectives,  representing  the  full  package  of  measures.  However,  this  option  is  not  favoured 
because it would require legislative changes touching upon complex VAT issues that need a 
distinct  evaluation  exercise.  Moreover,  this  option  was  not  supported  by  Member  States 
and other stakeholders (see section 7.3).  

Regarding the reduction of distortions between domestic SMEs and SMEs trading cross-border, 
Options 2  to  4  have  an  equally  positive  impact,  as  they  allow  suppliers  from  other  Member 
States to benefit from the SME exemption available in other Member States. 

For the reduction of VAT compliance costs for businesses, Option 3 is expected to achieve the 
highest positive impact compared  to  the baseline  scenario. This  is due to  the introduction  of a 
transitional  period  for  SMEs  exceeding  the  VAT  exemption  threshold.  Option 4  also  meets 
positively  this  objective,  but  with  a  slightly  minor  effect.  Also  Option 3  includes  the  positive 
impact  on  compliance  costs  resulting  from  the  simplification  measures  introduced  under 
Option 2. 

The  combined  objective  of  facilitating  compliance  and  monitoring  is  most  positively  met  by 
Option 3 as the transitional period gives businesses time to become acquainted with the normal 
VAT  scheme,  and  this  encourages  voluntary  compliance.  Option 4  also  meets  this  objective 
since  occasional  traders  do  not  need  to  register  or  account  for  VAT.  Option 2,  as  such,  is 
expected  to  have  a  limited  positive  impact  on  compliance  control  by  tax  authorities,  since 
opening  up  the  SME  exemption  to  businesses  from  other  Member  States  will  increase  the 
complexity of the scheme. 

167   The estimations are based on the set of VAT obligations under the medium simplification scenario of Option 2. 

67 

 
 
 
 
 
 
                                                 
Regarding the objective of reducing the negative impact of the threshold effect Option 3 has the 
most positive impact since it is specifically designed to facilitate SMEs in their transition from 
being VAT exempt to having to comply with the full set of VAT obligations. Option 2 does not 
meet this objective. Option 4 does so because it builds on Option 3.  

Option 4 is the only option that meets the specific objective to reduce revenue losses caused by 
occasional traders by taking them out of the VAT system. However, this option was considered 
untenable for several reasons explained in the following section 7.3.  

The  analysis  above  indicates  that  Option 3  is  the  most  effective  in  meeting  the  policy 
objectives as well as in following the overall orientation expressed by the stakeholders. For 
that reason it is the preferred option.  

7.3.  VAT treatment of occasional traders: option not favoured 

Although Option 4 (earlier identified in the Inception Impact Assessment) is the only option that 
meets  all  the  specific  objectives  of  the  initiative,  this  option  is  not  the  favoured  one  in  the 
context of this exercise. The choice is justified by several reasons.  

Firstly,  the  implementation  of  this  option  would  require  legislative  changes  touching  upon 
complex  VAT  issues  such  as  the  scope  of  VAT.  Notably,  it  would  be  necessary  to  define  the 
concept of occasional traders and its relationship with Articles 9 and 12 of the VAT Directive, 
which currently determine the notion of taxable person.  

Secondly, even though the proposal to treat the occasional traders as non-taxable persons were 
beneficial  in  terms  of  revenues  saving  and  reduction  of  administrative  burden,  Option 4  could 
bring  a  potential  negative  impact  on  the  level  playing  field  towards  businesses  (including  the 
small ones) providing the same services as the occasional traders168. 

Finally,  given  the  dynamic  character  of  new  business  models  and  the  rapid  growth  of  digital 
technologies, it is difficult to foresee the developments of the economic activities and the impact 
that these developments might have on traders' and consumers' behaviour. Further policy issues 
may  then  emerge  that  need  to  be  addressed.  The  option  was  considered  untenable  as  further 
analysis is indeed necessary to have a comprehensive understanding of the matter. 

In  addition,  it  must  be  noted  that  Option 4  did  not  receive  support  from  Member  States  and 
businesses  during  the  public  consultation169.  In  particular,  a  legislative  intervention  was  not 
considered  the  best  way  forward  by  the  stakeholders,  who  rather  recommended  to  tackle  the 
subject in the VAT Committee before assessing the need for further action in this sensitive area. 
The choice to take out Option 4 is actually broadly compatible with the results of the open public 
consultation,  in  which  57%  of  respondents  concluded  that  occasional  traders  should  remain 
subject  to  the  VAT  system.  In  this  regard,  the  estimates  confirm  that  60%  of  the  identified 
occasional traders are businesses already exempt from VAT under domestic schemes for small 
businesses. 

168  However, to estimate the impacts of Option 4, it has been assumed that the economic activity carried out by the 
occasional  traders  does  not  create  distortions  of  competition  and  the  amount  of  VAT  potentially  collected  is 
negligible.  
169   See Annex 2.  

68 

 
                                                 
It is important to note that the treatment of occasional traders will be taken up by other initiatives 
on  the  digital  economy  with  a  wider  scope.  As  regards  the  sharing  economy,  the  VAT 
Committee has agreed on some guidelines, according to which individuals supplying goods and 
services through collaborative platforms may qualify as taxable persons for VAT purposes. Such 
individuals can therefore benefit from the SME exemption or opt for the application of normal 
VAT  rules.  Therefore,  under  the  current  legal  framework,  the  assessment  as  to  whether 
occasional traders act as taxable persons for VAT purposes is remitted to a case-by-case analysis 
by Member States.   

7.4. 

Subsidiarity of the preferred option 

The  preferred  Option 3  is  considered  to  be  consistent  with  the  principle  of  subsidiarity  as  the 
main  problems  which  have  been  identified  (high  compliance  costs,  distortive  effects,  etc.)  are 
triggered  by  the  rules  of  the  existing  VAT  Directive.  Given  that  VAT  is  an  EU  tax,  Member 
States are currently not allowed to set different rules by themselves and therefore any initiative 
to simplify VAT rules and reduce the compliance burden for SMEs requires a proposal by the 
Commission to amend the VAT Directive. Therefore Option 3 will clearly offer value over and 
above what can be achieved at Member State level. 

7.5. 

Proportionality of the preferred option 

The preferred Option 3 is considered to be consistent with the principle of proportionality, i.e. it 
does  not  go  beyond  what  is  necessary  to  meet  the  objectives  of  the  Treaties,  in  particular  the 
smooth functioning of the Single Market. As follows from the subsidiarity test, it is not possible 
for Member States to address the problems and problem drivers without a proposal to amend the 
VAT Directive.  

The following aspects have been taken into account in assessing the proportionality:  

  There is an overall reduction in the compliance costs businesses face when trading in 

the Single Market, with Option 3 providing the highest reduction in costs. 

  SMEs  will  benefit  from  a  more  level  playing  field  since  businesses  will  be  able  to 

benefit from the SME exemption available in other Member States.  

  There  is  an  alignment  between  different  national  practises,  by  introducing  a 
common  minimum  set  of  simplification  measures  for  both  exempt  and  non-exempt 
SMEs. 

  The  proposed  SME  exemption  will  be  optional  for  businesses  and  Member  States. 
Further,  a  level  of  flexibility  is  given  to  Member  States  to  adapt  the  scheme  and  the 
simplification measures to the characteristics of their domestic markets. 

  The introduction of an SME turnover threshold generated EU-wide keeps the new SME 

exemption targeted at SMEs and limits the risk of reverse distortions. 

  The negative impact on VAT revenue is very low given the small proportion of VAT 
revenue generated by SMEs. Further, in the longer term the revenue impact is expected 
to be positive, due to the general positive effect on the SMEs’ outputs.  

  The preferred option is coherent with the destination principle. 

7.6. 

Impact on SMEs 

To assess the impact of the various options on SMEs as compared to the status quo has been a 
central objective of this Impact Assessment.  

69 

 
 
Hence,  specific  measures  have  been  undertaken  to  involve  small  enterprises  during  the  work 
leading to the adoption of this proposal. In particular, we have sought feedback (in quantitative 
and qualitative terms) from SMEs in order to understand the issues that they face, and we have 
also  got  their  views  on  possible  changes  as  regards  such  provisions.  In  particular,  the 
consultation activities targeting SMEs were170: 

1)  The  2017  Deloitte  SME  study,  which  involved  gathering  the  views  of  SMEs  on  the 
current VAT provisions for SMEs and their application, as well as on possible changes as 
regards these provisions. 

2)  An  SME  panel  consultation  was  specifically  directed  at  SMEs  in  coordination  with 

representative groups. 

3)  In evaluating the current system and considering the options for review, the Commission 

ensured that SMEs were represented at the Fiscalis 2020 Wroclaw Workshop.  

The analysis of the impacts of the preferred policy option on SMEs relies, in particular, on the 
2017 Deloitte SME study. This study was focused on SMEs with annual turnover not exceeding 
EUR 2 000 000. For the impact analysis a specific sub-set of SMEs that are likely to be directly 
impacted  by  the  policy  options  was  identified.  These  businesses  are  those  with  an  annual 
turnover  below  the  threshold  of  EUR 100 000.  However,  also  SMEs  with  the  annual  turnover 
exceeding the exemption threshold and not exceeding EUR 2 000 000 will be impacted through 
aligned  simplified  VAT  obligations.  The  latter  impact  is,  however,  difficult  to  quantify  as  it 
depends on the very details of the simplification package proposed which is being defined on the 
basis of the 2017 Deloitte SME study itself, public consultation, consultation with the Member 
States and the Commission’s experience relating to VAT obligations. 

The benefits of the preferred Option 3 for SMEs can be summarised as follows: 

  The  overall  compliance  costs  that  SMEs  face  to  comply  with  VAT  obligations  are 

reduced by 18% (or EUR 56.1 billion) per year. 

  SMEs engaged in cross-border trade could benefit from the SME exemption available 

in the Member States of destination. 

  The  improvement  of  competitiveness  for  SMEs  will  allow  them  to  increase  their 

economic activity by over 16% per year171. 

  Fast growing SMEs that exceed the exemption threshold will continue to benefit for a 
transitional  period  from  the  SME  exemption  in  order  to  be  prepared  for  the  standard 
VAT regime, thus limiting the negative threshold effect. 

  Aligned  simplification  measures  among  Member  States  (streamlined  simplification 

package) will reduce the costs of cross-border activities. 

  The  review  will  bring  more  clarity  overall  and  legal  certainty  for  both  small 

enterprises and national administrations. 

7.7. 

Impact from the REFIT perspective 

This  initiative  is  part  of  the  REFIT172  programme.  Such  programme  is  devoted  to  making  EU 
law simple and less costly, in  particular  for small enterprises, which can be disproportionately 
affected by the burden of implementing EU rules.  

170   For more information on the consultation strategy, see Annex 2. 
171  2017 Deloitte SME study, Volume I, p. 187. 
172   For more general information on the REFIT programme, see section 1.2.  

70 

 
 
                                                 
According  to  the  Commission  Work  Programme173  laying  down  the  new  initiatives  to  be 
adopted  under  the  REFIT  programme  during  2017,  the  SME  review  will  be  adopted  in  the 
framework  of  the  Commission’s  priority174  ‘A  Deeper  and  Fairer  Internal  Market  with  a 
Strengthened  Industrial  Base’.  As  laid  down  in  this  2017  Programme,  the  Commission  is 
cognisant of the fact that the compliance burden for small businesses derived from VAT is high 
and  that  technical  innovations  pose  new  challenges  for  effective  tax  collection;  hence,  it 
committed to bring forward measures to implement the VAT Action Plan and, in particular, to 
simplify  VAT  for  smaller  companies  and  set  the  foundations  for  a  modern,  more  efficient, 
business-friendly and fraud-proof definitive VAT regime across Europe.  

Therefore, the REFIT-related objectives of this proposal are: (i) to reduce the VAT burdens for 
small businesses and tax administrations, and (ii) to reduce distortions at EU level, with a view 
to encourage SMEs to fully profit from the Single Market.   

The preferred Option 3 delivers on both of the REFIT objectives. Its benefits are summarised in 
the  above  section 7.5.  See  Annex 2  for  a  summary  of  the  main  contributions  received  via  the 
REFIT platform.  

8.  HOW WOULD ACTUAL IMPACTS BE MONITORED AND EVALUATED?  

The Commission and Member States shall monitor and evaluate the functioning of this initiative 
and the extent to which its objectives175 have been attained.  

To  that  end,  Member  States  shall  communicate  to  the  Commission  any  relevant  information 
necessary for the evaluation of the effectiveness, efficiency, coherence with other interventions 
with  similar  objectives,  and  continued  relevance  of  the  Directive  that  this  Impact  Assessment 
accompanies. Moreover, a set of indicators must be established in respect of each of the policy 
objectives  of  the  preferred  option,  as  presented  below.  On  the  basis  of  such  information,  the 
Commission  will  prepare  a  retrospective  evaluation  of  the  functioning  of  that  Directive  five 
years after its entry into force. 

The implementation of the proposal as such (i.e. transposition of the legal provisions foreseen in 
the preferred option into the national laws of Member States) will be monitored as part  of the 
responsibilities of the Commission for ensuring that EU VAT legislation is correctly applied. 

  Objective 1: Reduction of compliance costs 

The  objectives  of  the  initiative  linked  to  reducing  VAT  compliance  costs  for  SMEs,  both 
domestically  and  at  EU  level,  will  be  monitored  by  reference  to  compliance  costs  for  SMEs 
trading domestically only and for SMEs trading cross-border.  

173   Annex 1 to the Communication from the Commission to the European Parliament, the Council, the European 
Economic  and  Social  Committee  and  the  Committee  of  the  Regions  –  Commission  Work  Programme  2017 
(COM(2016) 710 final), p. 3.  

174   Communication  from  the  Commission  to  the  European  Parliament,  the Council,  the  European  Economic  and 
Social  Committee  and 
the  Regions  –  Commission  Work  Programme  2017  
(COM(2016)  710  final),  p. 8-9  (priority  number  4).  The  Commission’s  priorities  are  outlined  in  the  Political 
Guidelines presented at the start of the Commission’s mandate. 

the  Committee  of 

175   Although reference is made to objectives in general, this section sets out how to monitor the specific objectives 

(set out in section 4.2) which are linked to the preferred policy option (Option 3).  

71 

 
                                                 
Such compliance costs will have to be estimated176 after the implementation of the proposal, but 
it  is  difficult  to  determine  at  this  point  which data  sources  could  be  used.  Although  it  may  be 
necessary  to  carry  out  an  ad-hoc  exercise,  given  that  updated  data  on  compliance  costs  is  not 
easily available, less costly alternatives  will be considered. For instance, it may be possible to 
combine  the  monitoring  of  similar  policy  objectives  (i.e.  reduction  of  compliance  costs)  of 
different  VAT-related  proposals,  which  would  minimise  the  data-collection  burden  and  the 
overlap of available evidence. In this respect, the e-Commerce proposal envisages to monitor the 
cost savings for businesses trading cross-border via a standard cost model exercise which should 
be carried out 3 years after the implementation of that proposal177.  

Data  on  compliance  costs  will  also  rely  on  the  Annual  Burden  Survey  carried  out  by  the 
European  Commission,  although  the  level  of  detail  may  not  be  specific  for  small  enterprises; 
data provided by Member States; as well as feedback received from the EUROFISC network178, 
the Standing Committee on Administrative Cooperation (SCAC)179, and relevant stakeholders.  

  Objective 2: Reduction of distortions (more level playing field for SMEs) 

The  reduction  of  distortions  at  domestic  level  aims  at  treating  equally  SMEs  under  the  SME 
exemption  and  businesses  which  are  not  under  the  exemption  but  still  qualify  as  small 
enterprises, by means of reducing the compliance burden of the latter. Therefore, this objective 
will  be  monitored  via  the  compliance  costs180  of  SMEs  trading  domestically  only  under  the 
exemption, and those of SMEs trading domestically only but not covered by the exemption.   

Another objective of the proposal is to reduce obstacles to cross-border trade. This objective will 
be  monitored  by  reference  to  three  indicators:  (i)  compliance  costs181  for  SMEs  trading 
domestically  only  and  for  SMEs  trading  cross-border;  (ii)  number  of  non-established  small 
enterprises registered in a Member State for VAT purposes; and (iii) number of non-established 
small  enterprises  benefitting  from  the  SME  exemption  in  a  Member  State.  Data  about  non-
established businesses will be obtained from Member States.  

The  latter  indicator,  linked  to  the  opening  up  of  the  SME  exemption,  is  a  direct  result  of  the 
implementation of the proposal. As regards the number of non-established SMEs registered in a 
Member  State,  a  comparison  will  have  to  be  made  between  the  figures  before  and  after  the 
implementation of the new rules, and its assessment will have to take into account the possibility 
of data being dependent on other factors (e.g. the economic context).   

176   E.g. based on the Standard Cost Model (SCM) method, also used in the 2017 Deloitte SME study. 
177   See  Commission  Staff  Working  Document:  Impact  Assessment,  accompanying  the  Proposals  for  a  Council 
Directive, a Council Implementing Regulation and a Council Regulation on Modernising VAT for cross-border 
B2C  e-Commerce  (SWD(2016)  379  final),  p. 52.  It  will  also  be  considered  whether  the  estimation  of 
compliance costs can be inferred from other available studies or reports (e.g. the Annual Burden Survey, to be 
published by the Commission). 

178   EUROFISC  is  a  mechanism  provided  for  Member  States  to  enhance  their  administrative  cooperation  in 
combating  organised  VAT  fraud.  For  more  information,  see  here  and  Council  Regulation  904/2010  on 
administrative cooperation and combating VAT fraud (OJ L 268 of 12.10.2010, p. 1) 

179   SCAC  is  an  expert  group  in  the  field  of  VAT  –  administrative  cooperation,  which  brings  together  TAXUD 

officials and representatives of all Member States. For more information, see here.  

180   Estimated, as outlined under ‘Objective 1: Reduction of compliance costs’.  
181   Ibid.   

72 

 
                                                 
  Objective 3: Reduce the negative impact of the threshold effect (more level playing field 

for SMEs) 

The attenuation of the threshold effect will be monitored by reference to the number of SMEs 
making  use  of  the  transitional  measures  available  under certain  circumstances  where  the  SME 
exemption threshold is exceeded. Such information will have to be reported by Member States.  

  Objective 4: Facilitate compliance for businesses and monitoring by tax administrations 

(fight against the VAT fraud)  

The objective to reduce VAT revenue losses derived from non-compliance will be monitored via 
the following indicators: (i) the VAT gap, which measures how much VAT Member States are 
losing182; and (ii) compliance costs for SMEs183. The VAT gap will be based on the VAT gap 
study carried out periodically by the Commission in close collaboration with Member States. 

It must be acknowledged that the VAT gap can be influenced by several factors (e.g. fraud or tax 
avoidance, or bankruptcies) other than non-compliance or miscalculations due to the complexity 
of the VAT System. However, the VAT gap is an indicator commonly accepted as a proxy for 
measuring  the  effectiveness  of  VAT  enforcement  and  compliance,  which  will  also  be  put  into 
perspective thanks to the estimation of compliance costs for SMEs.  

The table below summarises the indicators that will be used for monitoring whether the policy 
objectives  of  the  preferred  option  (Option 3)  have  been  attained,  how  such  indicators  will  be 
measured, as well as the operational objectives.  

Table 13: Monitoring and evaluation framework 

Objectives preferred option 

Indicators 

Measurement of the 
indicators 

Operational 
objectives 

1)  To reduce VAT compliance 
costs for SMEs at two 
levels, domestically and 
within the EU: 

  Compliance costs for 

  Compliance costs for 

  Estimation of 

  Reduction of 

domestic SMEs, derived 
from complex national 
VAT rules 

SMEs trading 
domestically only, and 
for SMEs trading 
cross-border 

compliance costs to be 
carried out after 
implementation 

  Compliance costs for 
SMEs trading cross-
border, derived from the 
diversity of VAT rules 
across the EU 

2)  To reduce distortions at 
two levels, domestically 
and within the EU: 

compliance costs of 
SMEs trading 
domestically only 
(target: reduction by 
3%) 

  Reduction of 

compliance costs of 
SMEs trading cross-
border (target: 
reduction by 5%) 

182   The VAT gap is based on the actual VAT receipts compared to the theoretical amount of VAT that should be 

collected based on domestic consumption. For more information, see here.  
183   Estimated, as outlined under ‘Objective 1: Reduction of compliance costs’.  

73 

 
 
 
 
 
 
 
                                                 
  Distortions between 

  Compliance costs for 

  Estimation of 

  Reduction of 

domestic SMEs under the 
exemption and domestic 
SMEs that do not qualify 
for the exemption 

SMEs trading 
domestically only 
covered by the 
exemption, and for 
SMEs trading 
domestically only 
under normal VAT 
rules   

compliance costs to be 
carried out after 
implementation 

compliance costs of 
SMEs trading 
domestically only 
under normal VAT 
rules (target: 
reduction by 3%) 

  Distortions between 

domestic suppliers and 
suppliers established in 
other Member States 

  Cross-border activity 
of SMEs (percentage 
of the total value of 
cross-border trade). 

  Reporting from 
Member States  

  Feedback provided by 

businesses 

  Increase in the cross-
border activity of 
SMEs (target: 
increase by 13%)  

  Reporting from 
Member States 

  Number of SMEs 

benefitting from the 
SME exemption in a 
Member State other 
than the one where 
they are established 

  Use of the SME 

exemption by SMEs in 
a Member State other 
than the one where 
they are established 
(target: 500 000 
businesses per year 
at EU level)   

  Compliance costs for 

  Estimation of 

  Reduction of 

SMEs trading 
domestically only, and 
for SMEs trading 
cross-border 

compliance costs to be 
carried out after 
implementation 

3)  To reduce the negative 
impact of the threshold 
effect 

  Number of businesses 

making use of 
transitional measures  

  Reporting from 
Member States  

4)  To facilitate compliance by 

  Evolution of VAT gap 

SMEs and the monitoring 
by tax administrations 

  Periodic VAT gap study 
by the Commission 

compliance costs of 
SMEs trading 
domestically only 
(target: reduction by 
3%); and reduction of 
compliance costs of 
SMEs trading cross-
border (target: 
reduction by 5%) 

  Use of the transitional 
measures by SMEs 
(target: 260 000 
businesses per year 
at EU level)  

  Positive trend in the 
VAT gap (target: EU 
average lower than 
14%)  

  Evolution of 

  Estimation of 

  Reduction of 

compliance costs for 
SMEs 

compliance costs to be 
carried out after 
implementation 

compliance costs for 
SMEs (target: 
reduction by 3%)  

Source: Commission services 

74 

 
 
 
 
 
9.  ANNEXES 

In addition to the obligatory Annexes, eight further Annexes are attached. 

|Obligatory Annexes: 

1.  Procedural information 

2.  Stakeholder consultation 

3.  Who is affected by the initiative and how 

4.  Analytical models used in preparing the impact assessment 

Additional Annexes: 

5.  Measures for SMEs available in the VAT Directive 

6.  Interplay among the proposals on the destination principle 

7.  Functioning of Option 2 in an intra-EU context 

8.  Evaluation of the current VAT system for SMEs 

9.  SME exemption thresholds in the EU 

10. Special VAT SME measures applied in Member States 

11. VAT obligations linked to the SME exemption per Member State 

12. Enterprise Europe Network – SME feedback database 

75 

 
 
 
 
ANNEX 1:  

PROCEDURAL INFORMATION 

1.  AGENDA PLANNING AND WORK PROGRAMME REFERENCES 

The  Commission  announced  the  preparation  of  the  comprehensive  simplification  package  for 
SMEs  in  the  2015  Single  Market  Communication  and  confirmed  it  in  the  2016  VAT  Action 
Plan. The review was also mentioned in the 2016 Start-Up Communication.  

Prior to that, the Commission had already pledged to the ‘think small first’ principle in the 2008 
SBA Communication, and had also advocated for simplifying the regulatory and administrative 
environment in which SMEs operate in the 2011 Communication on the Future of VAT. 

DG TAXUD is the lead Directorate-general for the initiative. The Agenda Planning Reference is 
2017/TAXUD/008. The Inception Impact Assessment was published in December 2016.  

2.  INTER-SERVICE STEERING GROUP 

An  Inter-Service  Steering  Group  was  set  up  in  2015.  In  total,  six  meetings  were  organised  on 
7 December 2015, 22 January 2016, 8 June 2016, 5 December 2016, 7 April 2017 and 30 June 
2017. The meetings were chaired by the SG. 

The  following  directorates  and  services  were  consulted:  DG  AGRI,  DG  BUDG,  DG 
CONNECT, DG COMP, DG ENER, DG ENV, DG FISMA, DG GROW, DG JUST, OLAF, SG 
and SJ. The feedback received from these directorates and services has been taken into account 
in the Impact Assessment.  

3.  CONSULTATION OF THE REGULATORY SCRUTINY BOARD 

The Regulatory Scrutiny Board was consulted on 13 September 2017. On 15 September 2017, 
the  Board  gave  a  positive  opinion  on  the  report.  The  recommendations  made  by  the  Board  to 
further  improve  the  report  were  taken  into  account.  The  main  changes  introduced  concern  the 
following aspects: 

  Clarification of how the definitive VAT regime changes the context compared to earlier 

attempts to simplify the SME regime, and how this affects SMEs (section 1.2); 

  Further  explanations  regarding  the  contents  of  policy  options  and  explanation  why  the 

full harmonisation option is discarded (section 5); 

  Clarification  of  why  the  objective  and  the  option  relating  to  occasional  traders  are 

ultimately discarded (sections 7.1 and 7.3). 

Further specific changes were also made in the report in order to take account of more technical 
recommendations made by the Board. These relate, in particular, to: 

  Developed setting of the context for the proposal ( section 1.2); 
  Clarification of the scope of the review and options (section 5); 
  Clarification of the elements taken up in the proposal (in particular – section 5.2.2.); 
  Further explanation of simplification elements (section 5.2.2.); 
  Monitoring (section 8); 
  Stakeholder views, including the elements  raised in the REFIT Platform opinion (section 

2.5, section 5.2.2., Annex 2). 

76 

 
 
4.  STUDIES TO SUPPORT THE IMPACT ASSESSMENT 

The Commission engaged Deloitte as consultants to: 

1)  Assess the functioning of the SME scheme(s) at the level of the Member States and at the 

level of the EU as a whole, 

2)  Develop  options  for  the  review  of  the  provisions  of  the  VAT  Directive  on  the  SME 

scheme, 

3)  Prepare an analysis of benefits and costs, opportunities and risks in respect of the options 
considered  for  this  review,  with  the  expectation  that  the  analysis  will  feed  into 
preparations for a future legislative proposal on the SME scheme. 

In addition, the impact assessment benefitted from: 

 

Institute  for  Fiscal  Studies  (IFS)  and  others,  A  retrospective  evaluation  of  elements  of 
the EU VAT system, 2011. Available here.   

  Deloitte,  VAT  Aspects  of  cross-border  e-commerce  –  Options  for  modernisation,  Final 

report, 2015-2016. Available here.  

 

the on-going studies on: 

o  Literature  review  on  taxation,  entrepreneurship  and  collaborative  economy 

carried out by Dondena and  

o  Tax compliance costs for SMEs carried out by KPMG. 

  OECD, Taxation of SMEs in OECD and G20 Countries, 2015. Available here. 

77 

 
 
 
 
 
 
 
 
ANNEX 2:  

STAKEHOLDER CONSULTATION 

1.  CONSULTATION STRATEGY 

The  consultation  strategy  of  this  legislative  initiative  had  two  main  purposes.  The  first  was  to 
receive feedback from stakeholders on the application of the current VAT provisions for SMEs, 
and  the  second  was  to  get  their  views  on  possible  changes  as  regards  such  provisions.  The 
strategy consisted of five main consultation activities, whose characteristics are outlined below.  

Table 14: Overview of the consultation activities 

Consultation 
activity 

Type  

When 

Stakeholders consulted 

Businesses 
(SMEs in 
particular) 

Business 
associations
184 

Member 
States 

Academics 

Members of 
the public 

1)  Consultation 

Targeted 

undertaken by 
Deloitte as part 
of the SME study 

January – 
August 
2016 

 

 

 

2)  SME panel 

Targeted  May – June 

consultation 
(Enterprise 
Europe Network) 

2016 

 

 

3)  Open public 
consultation 

Open 

December 
2016 – 
March 
2017 

4)  Fiscalis 2020 
workshop 
(Wroclaw, 
Poland)  

Targeted  March 
2017 

5)  Contributions 

Targeted  Since 2015 

received via the 
REFIT platform 

Source: Commission services 

 

 

 

 

 

 

 

 

 

 

 

In  designing  the  consultation  strategy,  the  Commission  was  conscious  of  the  need  to  gather 
direct feedback from SMEs and Member States, the most relevant stakeholders of this initiative, 
in addition to dialogues with other stakeholders such as business associations, tax practitioners 
and academics; and also of the fact that it may be difficult to engage SMEs due to their limited 
time and human resources. Hence, several efforts have been made in particular to reach out to 
and invite SMEs to participate in the public consultation activities carried out, and to ensure that 
their views are duly reflected in the outcome of such consultations.  

Firstly, the Commission requested the consultation undertaken by Deloitte as part of the study to 
specifically  target  small  enterprises.  This  is  why  the  data  sources  include,  among  others,  a 
survey carried out with 500 SMEs in four representative markets; in-depth interviews with small 
enterprises to gather qualitative information on the functioning of the SME scheme; and also a 
workshop with, among others, SME organisations. Secondly, the consultation strategy included 
an SME panel consultation conducted through Enterprise Europe Network, an organisation only 
targeting SMEs. Thirdly, the open public consultation, which was foreseen as an opportunity to 

184   Including tax practitioners. 

78 

 
 
 
 
 
 
 
 
 
 
                                                 
get  direct  feedback  from  small  enterprises  which  are  not  members  of  any  representative 
organisation, was available in all 23 official EU languages to avoid linguistic barriers precluding 
SMEs from participating. And fourthly, the workshop held within the Fiscalis 2020 Programme, 
which usually involves Member States only, was organised in the form of a joint meeting of the 
Group  on  the  Future  of  VAT  (‘GFV’)  and  the  VAT  Expert  Group  (‘VEG’)  to  allow  business 
organisations which are VEG members to participate.  

Finally, it should be pointed out that outside the framework of the above consultation activities, 
several  valuable  spontaneous  contributions  have  been  delivered,  in  particular  the  one  of 
UEAPME  –  the  European  SME  umbrella  organisation,  representing  about  12 million 
enterprises185, reflected also in its position paper on the SME scheme, published in June 2017186.  

2.  SUMMARY OF THE CONSULTATION ACTIVITIES AND THEIR RESULTS 

A summary of the consultation activities and their results is presented below.  

2.1. Consultation undertaken by Deloitte as part of the SME study 

A  targeted  consultation  of  stakeholders  took  place  as  part  of  the  2017  Deloitte  SME  study 
between  January  and  August  2016.  This  process,  which  aimed  at  gathering  the  views  of 
stakeholders  on  the  current  VAT  provisions  for  SMEs  and  their  application,  as  well  as  on 
possible changes as regards these provisions, mainly involved: 

1)  A  survey  sent  to  all  28  Member  States’  tax  authorities  to  collect  quantitative  data  on, 
among others, the number of SMEs within each turnover bracket as defined in the study 
in their Member State, as well as data related to the application of the special schemes 
applied.  

2)  A  survey  also  completed  by  VAT  experts  (Deloitte  Network)  in  all  28  Member  States 
with regard to more qualitative elements of the measures for SMEs provided for in the 
VAT Directive, including their functioning. 

3)  Surveys carried out by the company ‘Ipsos Mori’ in four markets, Austria, Italy, Poland 
and the UK. Interviews were made with 500 SMEs in each country, and businesses were 
asked about their turnover, their VAT obligations and cross-border trading behaviours.  
4)  In-depth  interviews  with  SMEs  and  accountants  in  eight  selected  Member  States: 

Belgium, Estonia, France, Italy, Poland, Romania, Spain and the UK.  

5)  Finally,  a  workshop  was  held  on  15 March  2016  with  Commission  representatives  and 
several  business  organisations  for  defining  the  current  problems  and  potential  policy 
objectives. Some of such organisations were SME-specific, such as the European Small 
Business  Alliance  (‘ESBA’),  the  European  Association  of  Craft,  Small  and  Medium-
sized  Enterprises  (‘UEAPME’),  and  the  European  Confederation  of  Junior  Enterprises 
(‘JADE’). 

185  See UEAPME’s website at http://www.ueapme.com/. 
186  See http://www.ueapme.com/IMG/pdf/UEAPME_position_paper_on_VAT_SME_Scheme.pdf. 

79 

 
                                                 
Results of the consultation undertaken by Deloitte 

The  findings  derived  from  the  activities  above  have  been  integrated  into  the  Deloitte  study187, 
which  will  be  publicly  available  on  the  DG  TAXUD  website  by  the  end  of  2017.  Some  key 
elements are presented below. 

  SMEs represent a majority of active businesses in the EU, and this is consistent across 
Member  States.  However,  despite  representing  around  98%  of  businesses,  they  only 
generate 15% of turnover and 25% of net VAT revenues. This difference is even more 
striking  for  the  smallest  businesses:  those  with  less  than  EUR 50 000  of  turnover 
represent  about  69%  of  all  businesses,  but  generate  less  than  1%  of  the  EU-wide 
turnover.  

  VAT reporting is perceived as one of the most burdensome VAT obligations in general, 
and  particularly  so  for  SMEs.  VAT  registration  was  also  highlighted  as  a  burdensome 
obligation, especially for non-established businesses.  

  The  SME  flat  rate  scheme  is  not  implemented  broadly:  only  eight  Member  States 
currently make use of this scheme. The flat rate scheme is perceived as prone to fraud in 
some  Member  States  and  the  tendency  with  tax  authorities  is  to  move  away  from  this 
kind of scheme. 

  The SME exemption has the highest implementation rate among Member States and also 
a very high participation rate among eligible businesses (based on Deloitte estimations, 
the average EU take-up rate is of 63%).  

  The SME graduated relief scheme is not widely implemented across the EU and indeed 
only three Member States currently apply this. Also, it does not seem to be largely used 
by eligible businesses in the Member States where it is available188.  

  SMEs (whether they benefit  or not from VAT special  schemes) depend  to a very large 
extent on the support of accountants and business organisations providing fiscal services 
to comply with fiscal obligations on VAT. 

  Tax  authorities  are  moving  towards  automating  administrative  tasks  (including  VAT-

related obligations), as a way to streamline and simplify compliance.  

2.2. SME panel consultation 

An SME panel consultation was conducted through the Enterprise Europe Network189 (‘EEN’) 
during  9  weeks,  from  2 May  to  30 June  2016,  using  the  EU  survey  tool.  That  network  is 
managed by DG GROW and enables the Commission services to reach SMEs in a targeted way, 
as network partners in Member States are well placed in their regions to identify companies that 

187   See in particular 2017 Deloitte SME study, Volume I, sections 3 and 4 and the corresponding Annexes.  
188   In  Spain  for  example,  the  scheme  is  generally  considered  to  be  an  effective  measure,  although  it  may  not 
provide the same full effect as the SME exemption. In contrast, in Finland the scheme has complicated rules 
and therefore is not widely used. 

189  The  Enterprise  Europe  Network  helps  businesses  innovate  and  grow  on  an  international  scale,  and  it  is  the 

world’s largest support network for SMEs.  

80 

 
 
 
 
  
                                                 
will be most affected by the subject of consultation. The consultation mainly aimed at gathering 
the views of SMEs on the current VAT provisions for SMEs and their application. 

Results of the SME panel consultation 

Some key findings of the consultation are presented below. 

a)  Profile of participants 

  The Commission received 1 704 replies to the survey. As regards the countries of origin 
of  the  enterprises  participating  in  the  survey,  most  replies were  received  from  Portugal 
(almost 20% of all respondents). Companies from Poland and Germany represented, as 
regards both groups, above 10% of the respondents (respectively 17.2% and 10.2%). No 
replies  to  the  questionnaire  were  transmitted  from  Croatia,  Ireland,  Malta,  the 
Netherlands, Slovenia and Sweden. The only country outside the EU from which over 40 
enterprises took part in the survey was the former Yugoslav Republic of Macedonia.  

  Of the 1 704 replies received over 70% came from enterprises with a stated turnover up 
to  EUR 2 000 000. One-third  of all  respondents were  enterprises  with  a stated  turnover 
not exceeding EUR 100 000. 

b)  Application of the current VAT provisions for SMEs  

  More  than  half  of  respondents  carry  out  sales  to  other  Member  States  and  almost  40% 
engage in supplies to markets outside the EU. Out of companies that do not sell goods or 
services outside their national markets only 9% indicated that the reason for this is linked 
to too complicated VAT obligations and only 7% referred to too high costs of complying 
with VAT obligations as to the reason for not carrying out supplies outside their national 
markets190.  

  Close to 90% of enterprises that replied to the survey register for VAT domestically, file 
VAT returns and pay VAT. Above half of the respondents indicated that if it was not for 
VAT obligations, they would not keep records or would keep them in a simplified form. 
Close to half of the respondents said the same about invoicing. 

  Almost one-third of the respondents consider complexity of VAT legislation as the main 
problem in ensuring compliance with VAT obligations. Above one-fifth indicate frequent 
changes  in  VAT  legislation  as  problematic.  As  the  most  problematic  VAT  obligations 
almost 15% of respondents indicate filing VAT returns and over 12% deadlines for VAT 
payments. 

190  It should be noted that the outcome of the open public consultation closed in 2017 was quite different in this 

respect. See section 2.3. 

81 

 
 
   
 
 
 
 
                                                 
Figure 6: SME Panel results – most burdensome VAT obligations  

Source: Commission services 

  Only  about  9%  of  respondents  benefit  from  the  SME  exemption  or  a  graduated  relief. 
The simplification measures used the most by the respondents are standard deduction191 
(22%  of  respondents),  annual  recapitulative  statements  (EU  sales  lists  –  14%  of 
respondents),  longer  periods  for  paying  VAT  (14%  of  respondents),  and  simplified 
reporting (14% of respondents). Only a small  group of respondents (7%)  benefits from 
an SME flat-rate scheme.  

  Respondents generally indicated the following as useful simplification measures: further 
simplified  reporting  (67%  of  respondents),  simplified  record  keeping  (65%),  simplified 
invoicing  (61%)  and  longer  periods  for  paying  VAT  (56%).  As  the  three  most  useful 
ones 27% of them ranked simplified record keeping, 23% still longer periods for paying 
VAT and 19% further simplified reporting. 

2.3. Open public consultation 

An Internet-based Open Public Consultation (‘OPC’) was held for 12 weeks from 20 December 
2016  until  20 March  2017  using  the  EU  survey  tool.  The  consultation  was  available  on  DG 
TAXUD’s website in all 23 official languages to ensure that outreach was as broad as possible, 
and aimed at gathering the views of stakeholders on the current VAT provisions for SMEs and 
their application, as well as on possible changes as regards these provisions.  

191   Deduction of VAT based on a flat-rate. For more information on flat-rate schemes, see Annex 5. 

82 

VAT obligationRankingComplexity of VAT legislation1(most burdensome)Changes in VAT legislation2VAT returns3Deadlines for VAT payments4Keeping records5Handling of VAT payments6Length of period keeping records7Invoicing8VAT recapitulative statements9Domestic VAT registration10Purchase lists11VAT registration in other EU countries12MOSS registration13(least burdensome)Q12: Most burdensome VAT obligations for enterprises 
 
 
 
                                                 
Results of the open public consultation 

The  input  received  from  participants,  as  well  as  the  full  report  on  the  results,  is  publicly 
available on DG TAXUD’s website. Some key findings of the OPC are presented below. 

a)  Profile of participants 

  The Commission received 113 submissions. The geographic coverage of the consultation 
was broad within the EU. The greatest number of submissions originated from Germany 
(35), followed by those from Belgium (18), the United Kingdom (8) and Portugal (6). It 
should  be  noted  that  the  number  for  Belgium  includes  also  submissions  from  the 
European business federations and associations which are based in Brussels. 

  The majority of the respondents were businesses (46%), while business organisations and 
citizens represented respectively 30% and 7% of the participants. Moreover, three public 
authorities,  four  academics  and  a  number  of  tax  consultants  responded  to  the  public 
consultation.  

Figure 7: OPC results – distribution of respondents (by category)  

Source: Commission services 

  Small  enterprises  were  responsive  to  the  consultation:  the  large  majority  of  all  the 
businesses which participated in the open public consultation had an annual turnover of 
below  EUR 2 000 000  (80%);  and,  in  particular,  about  64%  of  them  had  an  annual 
turnover not exceeding EUR 100 000.   

b)  Application of the current VAT provisions for SMEs (by business respondents only) 

  The SME exemption, applied by 27% of business respondents, is the provision laid down 
in the VAT Directive for SMEs used the most. However 57% of businesses participating 
in  the  consultation  affirmed  not  to  apply  the  SME  exemption,  mainly  because  their 
annual turnover exceeds the threshold. Some of these businesses also indicated that they 
are not interested in the SME exemption because they cannot deduct input VAT. Others 
simply replied that the scheme is not available in their Member State.  

83 

Business46%Business association30%Public authority3%Academic3%Member of the public7%Other11%Q3: Distribution of respondents (by category) 
 
 
 
 
 
 
Figure 8: OPC results – VAT provisions for SMEs currently applied 

Source: Commission services 

  The  majority  of  participants  in  the  consultation  (54%)  stated  that  the  SME  exemption 
could or should be improved. The main reasons for improvements were related to the fact 
that the exemption: (i) may have a distortive effect on competition, because it is currently 
only  available  to  domestic  SMEs;  or  (ii)  can  be  detrimental  to  domestic  SMEs  not 
benefitting from the exemption compared to those who are exempted.   

  Concerning the cross-border context, the vast majority of businesses (73%) and a number 
of  other  respondents  affirmed  that  VAT  obligations  are  important  or  very  important  in 
deciding whether to sell in other Member States.  

Figure 9: OPC results – weight of VAT obligations in deciding to sell cross-border 

Source: Commission services 

c)  Possible changes and improvements of the VAT provisions for SMEs 

  The  large  majority  of  all  stakeholders  (78%)  indicated  that  there  is  still  a  need  for  an 
SME  scheme  in  the  VAT  Directive  aimed  at  alleviating  the  effects  that  SMEs  are 
confronted with in dealing with VAT; and, particularly, an SME exemption (80%). The 
main  argument  in  favour  of  an  SME  scheme  resulting  from  the  consultation  was  that 

84 

26.92%25.00%21.15%19.23%11.54%7.69%5.77%5.77%3.85%0.00%0.00%5.00%10.00%15.00%20.00%25.00%30.00%SME exemptionNoneOther simplification measuresCash accountingAnnual EU Sales listFlat-rate scheme for SMEsSME graduated reliefOtherN/AFlat-rate scheme for farmersQ17: Which of the special provisions listed below do you apply? (% of businesses)3.85%17.31%36.54%36.54%5.77%0.00%5.00%10.00%15.00%20.00%25.00%30.00%35.00%40.00%Not importantat allNot veryimportantImportantVeryimportantN/AQ16: To what extent are VAT obligations important in deciding to sell in other Member States? (% of businesses) 
 
 
 
 
SMEs, particularly small and micro businesses, incur disproportionate compliance costs 
compared to large companies.  

  When  asked  if  the  SME  scheme  should  remain  optional  for  both  Member  States  and 
businesses,  the  majority  of  stakeholders,  mainly  self-employed  and  micro  businesses, 
replied that the SME scheme should be mandatory for Member States (58%) but optional 
for businesses (65%). 

  As regards the SME exemption, a majority of stakeholders (58%), mainly self-employed 
and micro businesses, but also a number of business associations, indicated that it should 
be mandatory for Member States to put in place instead of being optional. 

  Moreover, a large majority of all stakeholders (71%) agreed or strongly agreed that the 
SME  exemption,  currently  applied  in  different  ways  across  the  EU  and  with  different 
thresholds,  should  be  harmonised.  However,  some  respondents  advocated  for  some 
flexibility for Member States to set the threshold, given the different economic situation 
among Member States. 

  A large majority of all stakeholders (79%) advocated that the SME exemption should be, 
fully  or  partially,  available  to  all  eligible  enterprises  within  the  EU.  The  most  cited 
advantages of this change were the needs to encourage SMEs to fully seize the potential 
of  the  Single  Market  as  well  as  to  reduce  the  compliance  costs  of  SMEs  selling  cross-
border.  On  the  other  hand,  a  limited  number  of  respondents  indicated  as  main  reason 
against  the  opening  up  of  the  SME  exemption  the  increase  of  compliance  and 
administrative  costs  for  both  SMEs  and  Member  States,  derived  from  increased  audits 
and  controls.  They  also  mentioned  a  possible  negative  effect  on  Member  States’ 
revenues. 

Figure 10: OPC results – opening up of the SME exemption 

Source: Commission services 

  Concerning  the  possibility  to  introduce  a  transitional  measure  to  support  SMEs  to 
facilitate  the  transfer  from  exemption  to  full  taxation,  the  vast  majority  of  respondents 
(71%)  agreed  or  strongly  agreed  that  SMEs  should  be  able  to  continue  using  the  SME 
exemption for a short period, if their turnover exceeds the threshold temporarily. 

85 

Yes, fully67%Yes, partially13%No7%N/A13%Q32: Should the SME exemption in a Member State be made available to suppliers from other Member States (% or respondents) 
 
 
 
 
 
 
  As regards the simplification measures, it results from the public consultation that there 
is a broad support (86% of respondents) for further simplification of VAT obligations for 
SMEs. 

Figure 11: OPC results – need to further simplify VAT obligations 

Source: Commission services 

  The large majority of respondents (82%) agreed or strongly agreed that simplified VAT 
obligations should be available for all SMEs, irrespective of whether they use the SME 
exemption. It was also indicated by the majority (67%) that simplified VAT obligations 
should be mandatory for Member States instead of remaining optional. 

2.4. Fiscalis 2020 Workshop 

The Fiscalis 2020 Workshop was held in Wroclaw, Poland, during 3 days (20-22 March 2017) 
and brought together more than 90 participants, mainly representatives of the Member States in 
the Group on the Future of  VAT (GFV)192 and  members of the  VAT Expert  Group (VEG)193, 
which  are  business  organisations,  VAT  practitioners,  and  academics;  and  also  Commission 
representatives. The Workshop included plenary sessions and work group discussions, the work 
groups being formed by a mix of participants from Member States and businesses. It aimed at 
gathering  the  views  of  stakeholders  on  the  current  VAT  provisions  for  SMEs  and  their 
application, as well as on possible changes as regards these provisions.  

Results of the Fiscalis 2020 Workshop 

Some key findings of the workshop are presented below. 

  The original reasons for having in place a special VAT SME scheme – the reduction of 
compliance  burden  (from  the  point  of  view  of  businesses)  and  reduction  of 
administrative costs (from the point of view of tax administrations) – were found valid.  

  As  regards  registration,  invoicing  and  filing  of  returns,  there  was  little  support  for  the 
introduction  of  measures  specifically  targeted  at  SMEs,  and  stakeholders  stated  that 
simplified  VAT  obligations  should  be  available  irrespective  of  the  size  of  a  company. 

192   For more information on the GFV, see here.  
193   For more information on the VEG, see here.  

86 

Strongly agree49%Agree37%Disagree3%N/A11%Q42: Should VAT obligations for SMEs be further simplified? (% of respondents) 
 
 
                                                 
Businesses  supported  the  idea  of  making  some  simplifications  mandatory  for  Member 
States. 

  The flat-rate scheme was considered to be a rather outdated measure. It could possibly be 
useful as a part of a more extensive package for businesses with specific characteristics. 
Harmonisation in this area was not necessarily found desirable. 

  The  SME  exemption  was  in  general  perceived  as  a  useful  measure  as  it  allows  the 
reduction  of  the  compliance  burden  for  small  enterprises  and  facilitates  the  business 
activities  of  start-ups.  From  the  Member  States’  perspective,  it  was  found  to  allow 
administrations to focus monitoring on larger businesses and to avoid a possible increase 
of the shadow economy. 

  The  current  domestic  application  of  the  SME  exemption  was  pointed  out  as  causing 
problems  from  the  perspective  of  the  Single  Market.  There  seems  to  be  a  general 
agreement  that  the  SME  exemption  in  a  Member  State  should  be  made  available  to 
eligible businesses from other Member States. The participants warned, however, against 
possible  distortions  that  might  result  from  Member  States  handling  the  exemption  in  a 
different manner. Some degree of alignment is therefore needed, and some limitation to 
the opening of the exemption should be foreseen. 

  Graduated relief was not found to be a useful measure. It is too complex and expensive in 

application for both business and the tax administrations.  

  Measures to tackle the threshold effect, such as a transitional period before entering the 
normal VAT regime, could be useful. Safeguards against abuses should be foreseen.  

  A  special  treatment  of  occasional  traders  was  not  recommended  since  it  could  cause  a 
new  range  of  issues  relating  to  definition  and  treatment  of  occasional  traders,  and 
because future developments in economic activities are difficult to foresee. 

2.5. Contributions received via the REFIT platform 

To some extent stakeholders also disclosed their position through the REFIT platform194, where 
it is possible to participate actively in the law making process by providing an overview with the 
aim  to  evaluate  and  improve  existing  laws.  Some  stakeholders  submitted  their  contributions 
during  2015  and  2016  regarding  specific  VAT-related  issues  they  are  facing  and  the  way  to 
tackle  them.  All  the  submissions  on  taxation  provided  up  to  date  can  be  found  under  the 
following  link195.  While  the  contributions  received  via  the  REFIT  platform  are  not  targeted 
specifically at SMEs, the issues raised which are relevant for the purposes of the SME review 
have been taken into account.  

In this respect, for instance, it is worth referring to the submission XVIII.10.a by the Board of 
Swedish  Industry  and  Commerce  (NNR),  which  tabled  the  higher  complexity  for  businesses 
triggered  by the modification  of the place  of supply  rules (principle of destination),  given that 
they  need  to  account  for  VAT  in  the  Member  State  of  consumption  and  "businesses  need  to 
register for VAT from a first relevant cross-border transaction".  

194   For more information on the REFIT programme, see here. 
195   https://ec.europa.eu/info/sites/info/files/taxation_and_customs_union.pdf  

87 

 
 
 
 
 
 
 
                                                 
We must also highlight the submission XVIII.3.a by the Danish Business Forum (DBF), which 
stressed the complexity of the VAT legislation that businesses operating at EU level must face, 
which goes against the Single Market: ‘In the Internal Market it should in principle be just as 
easy to  do business  with a customer in  Poland and Germany as with a customer in Denmark. 
However, because VAT rules are not harmonised the consequence is that companies that begin 
to  trade  within  the  internal  market  often  encounter  difficulties.  Not  only  are  there  major 
differences  between  the  documentation  requirements,  requirements  of  signatures,  invoice 
requirements and texts on the invoices, but the challenges are growing with the introduction of rules 
on reverse liability, various distinctions and definitions of delivery point and different rates of VAT. 
An  older  study  from  the  Confederation  of  Danish  Industry  that  focused  on  SMEs  showed  that 
approximately  9  out  of  10  companies  had  little  or  no  knowledge  of  VAT  regulation  in  other  EU 
countries’. 

3.  OVERVIEW OF THE CONSULTATION RESULTS  

Table 15: Overview of the consultation results (by stakeholder category) 

Stakeholders196 

Overview of results 

  SMEs found the current rules for SMEs in the VAT Directive to be complex and costly to 

apply, and were in general supportive of their review.  

  They stressed the need for an SME scheme and, in particular, an SME exemption. A clear 
majority was in favour of the SME scheme (and the SME exemption) being mandatory for 
Member  States,  and  optional  for  businesses.  They  also  supported  opening  up  the  SME 
exemption to suppliers from other Member States (fully or partially). The graduated relief 
and flat-rate schemes were not considered to be very useful measures. 

Businesses 
(SMEs in 
particular) 

  There  was  a  general  agreement  for  the  need  to  further  simplify  VAT  obligations  among 
SMEs.  A  majority  of  them  also  indicated  that  such  simplified  VAT  obligations  should  be 
mandatory  for  Member  States,  aligned  at  EU  level,  and  made  available  to  all  SMEs 
irrespective of whether they use the SME exemption. 

  SMEs  strongly  agreed  that  small  enterprises  should  be  able  to  benefit  from  the  SME 

exemption if their turnover temporarily exceeds the threshold.  

  The  views  of  SMEs  on  the  VAT  treatment  of  occasional  traders  were  diverse.  While  the 
majority  of  SMEs  indicated  that  occasional  traders  should  be  covered  by  VAT,  a 
significant portion of them were of the opinion that they should not fall within the scope 
of VAT. 

  Business  associations  agreed  with  SMEs  that  the  current  rules  for  SMEs  in  the  VAT 
Directive are complex and costly to apply, and were in general supportive of their review.  

  They  stressed  the  need  for  an  SME  scheme  and,  in  particular,  an  SME  exemption. 
Business associations had divided opinions as to whether the SME scheme (and the SME 
exemption) should be optional for Member States, but a clear majority said that it should 
remain optional for businesses. They were in favour of opening up the SME exemption to 
suppliers  from  other  Member  States  (fully  or  partially),  while  acknowledging  that  some 
limitations  may  be  necessary.  The  graduated  relief  and  flat-rate  schemes  were  not 
considered to be very useful measures. 

  They  also  highlighted  the  need  to  further  simplify  VAT  obligations.  A  majority  also 
indicated  that  such  simplified  VAT  obligations  should  be  mandatory  for  Member  States, 
aligned at EU level, and made available to all SMEs irrespective of whether they use the 
SME exemption.   

  Business  associations  showed  more  discreet  support  than  SMEs  to  allowing  small 
enterprises to benefit from the SME exemption if their turnover temporarily exceeds the 
threshold. They indicated that some anti-abuse measures should be foreseen.  

Business 
associations197 

196   Feedback  from  academics  (received  via  the  open  public  consultation  and  the  Fiscalis  2020  Workshop)  and 

members of the public (received via the open public consultation) cannot be treated as significant.    

197   Including tax practitioners. 

88 

 
                                                 
  There  was  mixed  feedback  as  regards  the  VAT  treatment  of  occasional  traders.  While  a 
majority indicated that occasional traders should be covered by VAT, a significant portion 
believed they should not fall within the scope of VAT. However, business associations in 
general  agreed  with  Member  States  that  it  is  preferable  to  clarify  how  the  current  rules 
apply to occasional traders, rather than laying out new provisions.  

  Member  States  were  conscious  of  the  VAT  compliance  burden  faced  by  SMEs,  but  in 

general remained more prudent as regards the review of the current rules.  

  Member States were supportive of the SME scheme and the SME exemption in particular, 
which  allow  them  to  focus  on  monitoring  larger  businesses  and  also  avoid  shadow 
economy. Contrary to businesses and business associations, Member States would prefer 
to retain discretion as regards the use of the SME scheme (and the SME exemption) and 
also said that it should remain optional for businesses. While in favour of making the SME 
exemption  available  to  suppliers  from  other  Member  States,  they  warned  that  some 
limitation should be foreseen to avoid possible abuse. The graduated relief and flat-rate 
schemes were not considered to be very useful measures. 

Member States 

  Unlike  SMEs  and  business  associations,  Member  States  preferred  simplified  VAT 
obligations to remain optional for them and were sceptical as regards their alignment at 
EU level, given that they depend on the national context.  

  Some  Member  States  already  allow  small  enterprises  to  continue  benefitting  from  the 
SME exemption if their turnover temporarily exceeds the threshold. As regards a general 
implementation  of  such  measure,  it  was  positively  perceived  as  a  way  to  tackle  the 
‘threshold effect’, provided that some anti-abuse provisions are foreseen.   

  Member  States  found  in  general  no  need  to  set  out  new  rules  for  clarifying  the  VAT 
treatment of occasional traders. They believed that such cases should be dealt with on a 
case-by-case  basis  and  that  the  existing  provisions  in  the  VAT  Directive  (Articles 9  and 
12)  suffice.  It  would  be  complicated  to  define  ‘occasional  traders’,  also  in  view  of  how 
quick economic activities develop.   

Source: Commission services 

89 

 
 
 
ANNEX 3:   WHO IS AFFECTED BY THE INITIATIVE AND HOW 

1)  Businesses 

This  initiative  is  targeted  at  micro  enterprises  with  turnover  up  to  EUR 2 000 000  (98%  of 
businesses  across  the  EU)  as  a  simplification  package  will  be  available  for  these  businesses, 
irrespective  of  whether  they  use  the  SME  exemption.  However,  the  review  will  affect  in 
particular a much smaller group of enterprises (those with less than EUR 100 000 turnover), the 
ones that are most likely eligible for the SME exemption both at domestic and intra-EU level198.  

As regards exempt enterprises, SMEs that currently benefit from the VAT exemption for small 
enterprises will continue to  be exempt.  In  addition,  they will be  able to benefit from the SME 
exemption in Member States other than their own, to which they deliver supplies, provided that 
such Member States adopt the SME exemption. 

All small enterprises, either exempt or non-exempt with turnover of up to EUR 2 000 000 (that 
do not benefit from the exemption because they opt for being taxed on the basis of the general 
principles  or  because  their  turnover  exceeds  the  exemption  threshold)  will  be  able  to  benefit 
from a common minimum set of simplified VAT obligations. Such simplified VAT obligations 
would slightly vary, depending on whether an SME is exempt or not199.  

In  this  respect,  exempt  SMEs  could  be  released  from  the  obligation  to  register  (optional  for 
Member  States),  and  would  not  have  to  issue  invoices  (obligatory  for  Member  States). 
Simplified VAT record keeping, as well as simplified and less frequent filing of VAT returns, 
would also be available.  

Non-exempt SMEs (SMEs with turnover below the exemption threshold, but opting for taxation 
on the basis of general principles + SMEs with turnover above the exemption threshold and up 
to  EUR 2 000 000),  for instance, would  have  access  to  simplified registration,  simplified VAT 
record keeping obligations, and less frequent filing of VAT returns.  

2)  Member States 

Member States applying the SME exemption will be directly impacted by the changes proposed. 
They will need to implement the new rules and ensure their correct application by businesses. In 
addition, Member States not using the SME exemption may be impacted by the proposal if they 
decide to provide simplified VAT obligations for small enterprises outside the SME exemption. 
It  should  be  kept  in  mind  that  the  proposal  will  provide  for  the  measures  optional  for  both 
Member States and enterprises.  

The estimated impact on VAT revenues is negligible. It ranges between a decrease of 0.48% and 
an increase of 0.28%200. The proposal should, however, encourage voluntary compliance.  

198   For further information about the number of impacted businesses, see Annex 4. 
199   It has been taken into account that some of such enterprises will not have to collect and pay VAT (exempt), and 
others will have to do so (non-exempt). This has an impact on the minimum set of obligations which could be 
required in order to ensure correct functioning of the VAT system and that control by tax authorities is possible.  

200   More details on the revenue impacts can be found in section 6 and Annex 4. 

90 

 
                                                 
3)  Consumers 

The initiative may bring also positive effects on consumers, because of the improvement of the 
small  businesses’  competitiveness,  which  are  notably  lower  prices  and  other  benefits,  such  as 
better quality, wider choice and innovative goods and services.  

91 

 
 
 
ANNEX 4.  

ANALYTICAL MODELS USED IN PREPARING THE IMPACT ASSESSMENT 

1.  OVERVIEW OF THE METHODOLOGY 

For  the  analysis  of  the  policy  option  is  was  necessary  to  collect  qualitative  and  quantitative 
information  from  both  businesses  and  Member  States.  The  assessment  of  the  impacts  was 
carried  out  through  two  tools:  the  standard  cost  model  (SCM)  and  computable  general 
equilibrium (CGE) model. 

Data  from  tax  authorities  has  been  the  main  source  to  obtain  the  estimates.  Other  two  data 
sources  were  used  to  integrate  information  collected  by  Member  States:  Eurostat’s  data  and 
Mints  Global’s  database.  Further,  desk  research  was  conducted  to  obtain  more  comprehensive 
information at the level of granularity required. 

The  approach  to  this  study  is  tailored  to  best  respond  to  the  requirements  of  the  European 
Commission Better Regulation Guidelines. 

Please  note  that  the  compliance  costs  of  businesses  include  costs  incurred  in  meeting  legal 
obligations and also other additional costs that are not strictly due to the legal obligations (e.g. 
the monitoring of the VAT exemption threshold). 

2.  GENERAL ASSUMPTIONS 

  Common VAT rate.  To assess the impact on the VAT revenue  an effective VAT rate 
was calculated at the EU level and applied to the turnover at stake in every option. Based 
on  the  ratio  of  total  VAT  revenue  collected  relative  to  final  consumption,  the  effective 
VAT rate in the EU is calculated to be 12.3%. 

  Exemption thresholds. For all of the options, it is assumed that national thresholds do 
not change. Furthermore, to assess the impact of the extension of the SME exemption to 
non-established businesses a weighted average threshold of EUR 26 000 was used. 

  B2B  transactions.  For  all  options,  it  is  assumed  that  the  reverse  charge  mechanism 
would  continue  to  apply  for  B2B  transactions  and  the  supplier  would  not  have  VAT 
obligations  in  the  Member  State  of  destination.  Therefore,  businesses  engaged  in  B2B 
transactions  are  considered  out  of  scope  for  the  purposes  of  the  analysis.  As  such,  the 
compliance costs for B2B cross-border transactions are already included in the analysis 
of the compliance costs for businesses in Option 1.  

  Number of SMEs in the EU. The data obtained from tax authorities is used to estimate 
the number of businesses and their average annual turnover within size classes201. For the 
purpose  of  the  study,  a  specific  definition  of  SME  is  adopted,  which  refers  only  to 
businesses  with  annual  turnover  not  exceeding  EUR 2 000 000  (micro-businesses, 
according to the EU definition). 

  Number  of  SMEs  trading  cross-border.  It  is  assumed  that  Options 2-4  will  impact 
businesses whose value of cross-border sales in an individual Member State falls below 
the  weighted  average  threshold  of  EUR 26 000.  Further,  to  determine  the  number  of 
eligible  businesses,  the  following  assumptions  are  made  (using  data  from  a  Flash 

201  Defined  as  less  than  EUR 5 000,  EUR 5 000  to  EUR 50 000,  EUR 50 000  to  EUR 100 000,  EUR 100 000  to 

EUR 500 000, EUR 500 000 to EUR 2 000 000, over EUR 2 000 000. 

92 

 
                                                 
Eurobarometer): the proportion of SMEs’ turnover which comes from cross-border sales 
is  27%;  the  proportion  of  SMEs  trading  B2C  supplies  cross-border  is  33%.  Given  the 
inherent uncertainty, sensitivities were carried out around these assumptions. 

3.  TOOLS FOR THE ANALYSIS 

Standard Cost Model 

According  to  the  European  Commission  guidelines  on  Impact  assessment,  the  Standard  Cost 
Model was used to estimate the compliance burden for businesses in order to comply with the 
VAT-related obligations translated into Information Obligations (IOs). 

Our  objective  was  to  identify  and  quantify  the  VAT  compliance  costs  that  SMEs  engaged  in 
domestic and cross-border transactions face, within and outside the SME exemption, under the 
current VAT legislation (status quo) and how such costs are likely to change under the different 
policy options considered.   

Standard Cost Model:  

Compliance burden = Time*Price*Quantity (amount x frequency) 

Time:  The  time  spent  by  the  citizen  or  the  employee  in  the  enterprises  to  comply  with  an  IO  (Information 
Obligation) 

Price: The standard cost to  apply to the time spent according to the level of the employee who performs the 
IO. 
Quantity: The number of IOs to perform per year and their frequency (e.g. monthly, yearly) 

Data for the exercise came from a variety of sources:  

• 

• 

• 

• 

Real data from business and accountant interviews;  

Commission’s official guidelines and standardised data (for hourly costs);  

Expert assessments; 

Third party sources. 

A set of basic assumptions was used  in  order  to enhance the comparability of the  results. The 
assumptions concern the following issues: 

• 

• 

• 

Frequency  of  VAT  registration:  the  frequency  with  which  businesses  apply  for  VAT 
registration in other Member States was assumed to be 10 years on average. It is based on 
the observation that generally companies register for VAT in a Member State only once, 
and this action therefore represents a one-off cost.  

Frequency  of  changes  or  cancelling  of  VAT  registration:  similarly  to  the  above,  it  was 
assumed  to  be  10 years  on  average.  It  is  based  on  the  observation  that  this  is  a  very 
infrequent event in the lifespan of a company.  

Number  of  invoices:  the  number  of  invoices  and  fiscal  receipts  businesses  issue  on  a 
yearly  basis (when they are obliged to  issue them)  vary greatly  across sectors.  Based on 
the  information  collected  during  fieldwork,  an  average  of  20  invoices/fiscal  receipts  per 
month  was  considered  in  the  analysis.  However,  in  order  to  account  for  such  variance, 
sensitivity  analysis  was  carried  out  using  a  larger  amount  of  average  invoices/fiscal 

93 

 
receipts  per  year  (30  per  month,  360  per  year),  in  order  to  assess  the  relevance  of  such 
costs for the overall compliance costs for businesses.  

• 

Advisory costs:  data collected via the  fieldwork  did  not  allow us to  identify the costs of 
advisory  fees  for  each  of  the  IOs  to  which  they  apply.  Both  businesses  and  accountants 
provided  us  with  the  lump-sum  fees  they  normally  pay  (or  charge,  in  the  case  of  the 
accountants)  for  the  set  of  obligations  relevant  to  the  analysis.  Therefore,  we  decided  to 
add such costs as a lump-sum to the internal costs of businesses.  

Computable general equilibrium model 

In  order  to  estimate  the  wider  economic  impacts  of  each  policy  option  at  European  level,  a 
Computable general equilibrium (CGE) model has been developed.  

The  model  is  based  on  a  set  of  equations  describing  the  behaviours  of  key  actors  in  the  EU 
economy  –  firms,  households,  the  government  and  the  foreign  sector  –  and  how  their 
interactions shape the markets (equilibrium output, investment, consumption and prices). For the 
purpose of this analysis, the standard model was adapted to specifically focus on the contribution 
of SMEs to the EU economy and on the potential impacts of the policy options. A distinction is 
made between domestic, intra-EU and non-EU transactions in order to reflect the fact that these 
transactions  may  differ  in  their  VAT  treatment  and  hence  in  the  effective  VAT  rate  faced  by 
consumers.  

The inputs to the model are based on the policy options and vary in terms of changes in the VAT 
revenues, changes in the compliance burden faced by SMEs, changes in the economic activity of 
SMEs, changes in cross-border trade by SMEs. 

The CGE model draws on three main sources of data: 

  Macro-economic data for the EU-28: The majority of the data required for the baseline 
CGE model can be found in a social accounting matrix for the EU; this is a square matrix 
that  represents  the  various  transactions  made  between  commodities,  factors  and 
institutions taking place in an economy. This matrix is constructed using supply and use 
tables and national accounts data from Eurostat. 

  Data on the contribution of SMEs: data was collected on the contribution of SMEs to 
the EU economy. This was used to assess the extent to which the policy options affect 
the size of the market and employment.  

  Data  on  the  compliance  burden:  The  information  required  for  the  scenario  analysis 
comes from the outputs of the Standard Cost Model. This data includes the compliance 
burden  associated  with  the  different  policy  options  and  estimates  of  the  impact  of 
changing the VAT threshold.   

Some of the key economic outputs estimated by the CGE model at the EU aggregate level are: 
the  output  and  growth  of  the  different  sectors,  investment,  employment  by  different  types  of 
labour, demand and consumer prices, government revenues. 

94 

 
4.  QUANTIFICATION OF IMPACTS 

Impact on business compliance costs 

Table 16 below shows the resulting impact of Option 2 on the compliance costs, depending on 
the simplification measures used and the number of businesses impacted for all possible choices. 

Table 16: Impacts on compliance costs under Option 2 

Option 2 

High level of simplification 

Medium level of 
simplification 

Minimal level of 
simplification 

Scenario 1 

Scenario 2 

Scenario 3 

Cost 
per 1 
busi-
ness 
(1 
MS) 
EUR 

No of 
busi-
nesses  

Com-
pliance 
cost 
(EUR 
billion) 

Cost 
per 1 
busi-
ness 
(1 MS) 
EUR 

No of 
busines
ses  

Com-
pliance 
cost 
(EUR 
billion) 

Cost 
per 1 
busi-
ness 
(1 MS) 
EUR 

No of 
busi-
nesses  

Com-
pliance 
cost 
(EUR 
billion) 

Businesses trading domestically 

Businesses 
exempt 
VAT  

from 

Businesses  in 
simplified 
regime 

Businesses  in 
standard  VAT 
regime 

297 

11 200 
000 

3.3 

716 

11 200 
000 

8.0 

1 044 

11 200 
000 

11.7 

887 

5 700 
000 

5.1 

975 

2 964 

15 000 
000 

44.6 

2 964 

5 700 
000 

15 000 
000 

5.6 

1 047 

5 700 
000 

6.0 

44.6 

2 964 

15 000 
000 

44.6 

Businesses trading cross-border 

Businesses 
using 
the 
extended OSS 

Businesses  in 
cross-border 
exemption 
scheme 

Overall 
compliance 
costs 

change 

% 
scenario 

690  120 000 

0.08 

690  290 000 

0.20 

690 

297  460 000 

0.14 

716  290 000 

0.21 

1 044 

53.2 

58.6 

from 

baseline 

-22% 

-14% 

460 
000 

120 
000 

0.32 

0.12 

62.7 

-8% 

Source: 2017 Deloitte SME study 

Tables 17  and  18  provide  an  overview  of  the  impacts  of  number  of  businesses  and  their 
compliance costs under Options 3 and 4202. 

202  It should be noted that the calculations presented in this Annex are based on the 2017 Deloitte SME study. For 
the purposes of this Impact Assessment the elements of Options 3 and 4 have been modified as compared to the 
study. The differences between the impacts of both options are, nevertheless, of limited magnitude. 

95 

 
 
 
 
 
 
 
 
 
                                                 
Table 17: Impacts on compliance costs under Option 3 

Option 3 

Cost per 1 business 
(1 MS) EUR 

No of 
businesses 

Compliance cost 
(EUR billion) 

Businesses trading domestically 

Businesses exempt from VAT  

[716 – 1 043] 

7 400 000 

Businesses in simplified regime 

[975 – 1 208] 

4 200 00 

Businesses in transitional period 

1 325 

260 000 

Businesses in standard VAT regime 

[2 964 – 3 104] 

13 700 000 

Businesses trading cross-border 

Businesses using MOSS 

690 

290 000 

Businesses 
in 
exemption scheme 

cross-border 

716 

290 000 

Overall compliance costs 

% change from baseline scenario 

7.7  

5.0  

0.34  

42.6  

0.20 

0.21 

56.1 

-18% 

Table 18: Impacts on compliance costs under Option 4 

Option 4 

Cost per 1 
business (1 MS) 
EUR 

Previous 
compliance cost of 
an occasional 
trader 

No of businesses 

Compliance cost 
(EUR billion) 

Businesses trading domestically 

Businesses  exempt 
from VAT  

Businesses  in  sim-
plified regime 

Businesses  in  stan-
dard VAT regime 

[716 – 1 043]203 

83 

7 400 000   

[975 – 1 208]204 

342 

4 200 000 

7.7 

5.0 

[2 964 – 3 104]205 

1 114 

14 000 000 

43.4 

Businesses trading cross-border 

Businesses 
MOSS 

using 

Businesses  in  cross-
border 
exemption 
scheme 

Overall compliance costs 

690 

716 

290 000 

290 000 

0.20 

0.21 

56.5 

203  Since the businesses falling out of the VAT system had lower than average VAT compliance costs, the average 
compliance  cost  of  businesses  remaining  may  be  higher  than  previously  estimated.  However,  it  is  uncertain 
where these businesses lie on the distribution so a range is reported.  

204   Ibid. 
205   Ibid. 

96 

 
 
 
                                                 
Option 4 

Cost per 1 
business (1 MS) 
EUR 

Previous 
compliance cost of 
an occasional 
trader 

No of businesses 

Compliance cost 
(EUR billion) 

% change from baseline scenario 

Source: 2017 Deloitte SME study 

Impact on Member States’ VAT revenues 

-17% 

Table 19 shows the impact of Option 2 on VAT revenue at Member State level. The overall EU 
decrease in revenue was allocated to individual Member States based on their share of inbound 
trade  from  other  Member  States  (called  ‘EU  imports’  hereafter),  as  Member  States  most 
impacted  by  extending  their  domestic  threshold to  non-established  businesses  will  be  the  ones 
with higher imports. 

Table 19: Impacts on Member States’ VAT revenues under Option 2 

Member State 

Absolute change in net 
VAT revenue collected in 
EUR million 

Percentage change in net 
VAT revenue collected  

EU-28 

Austria 

Belgium 

Bulgaria 

Croatia 

Cyprus 

Czech Republic 

Denmark 

Estonia 

Finland 

France 

Germany 

Greece 

Hungary 

Ireland 

Italy 

Latvia 

Lithuania 

Luxembourg 

Malta 

Netherlands 

Poland 

Portugal 

Romania 

Slovakia 

Slovenia 

-664.9 

-0.06% 

-24.0 

-47.5 

-3.8 

-3.2 

-0.8 

-21.8 

-11.9 

-2.4 

-8.8 

-78.7 

-138.7 

-5.1 

-14.2 

-9.9 

-48.1 

-2.3 

-3.8 

-3.4 

-0.8 

-46.4 

-27.5 

-10.3 

-10.8 

-11.6 

-4.2 

-0.02% 

-0.18% 

-0.10% 

-0.07% 

-0.05% 

-0.34% 

-0.05% 

-0.16% 

-0.06% 

-0.04% 

-0.07% 

-0.04% 

-0.09% 

-0.14% 

-0.06% 

-0.15% 

-0.08% 

-0.09% 

-0.15% 

-0.10% 

-0.10% 

-0.07% 

-0.09% 

-0.68% 

-0.17% 

97 

 
Member State 

Spain 

Sweden 

United Kingdom 

Absolute change in net 
VAT revenue collected in 
EUR million 

Percentage change in net 
VAT revenue collected  

-38.0 

-19.4 

-67.5 

-0.07% 

-0.06% 

-0.04% 

Source: 2017 Deloitte SME study 

The  table  above  shows  that  the  impact  on  Member  States  varies  from  a  decrease  in  VAT 
revenues  of  0.02%  in  Austria  to  0.68%  in  Slovakia.  The  differences  observed  across  Member 
States are impacted by two factors: 

-  The share of EU imports of each country: the higher the share, the higher the impact; and 
-  The level of net VAT revenue collected before the impact: the higher the amount of VAT 

revenue collected, the lower the impact. 

The impact of Option 3 on VAT revenues per Member State is outlined in Table 20 below. It is 
calculated  by  estimating  the  average  turnover  generated  by  the  businesses  impacted  in  each 
Member State and applying an effective VAT rate. 

The differences observed on the revenue impact across Member States can be explained by the 
level  of  the  threshold  (the  higher  the  threshold,  the  higher  the  impact,  as  businesses  impacted 
will have higher turnover), and the number of businesses identified within the relevant turnover 
bracket.  While  the  precise  magnitude  differs,  the  overall  impact  on  revenues  is  limited  for 
Member States.  

Table 20: Impacts on Member States’ VAT revenues under Option 3 

Member State 

EU-28 

Austria 

Belgium 

Bulgaria 

Croatia 

Cyprus 

Absolute change in net 
VAT revenue collected in 
EUR million due to the 
implementation of the 
transition period only 
(percentage change) 

Absolute change in net 
VAT revenue collected in 
EUR million due to 
Option 3 (percentage 
change) – Lower bound 

Absolute change in net 
VAT revenue collected in 
EUR million due to 
Option 3 (percentage 
change) – Upper bound 

-1 853.5 (-0.18%) 

-5 014.7 (-0.48%) 

2 890.2 (0.28%) 

-24.9 (-0.03%) 

-82.4 (-0.08%) 

23.7 (0.02%) 

-24.5 (-0.09%) 

-102.2 (-0.39%) 

-6.6 (-0.03%) 

-7.5 (-0.19%) 

-9.9 (-0.23%) 

-0.8 (-0.05%) 

-23.2 (-0.59%) 

14.6 (0.37%) 

-22.2 (-0.51%) 

-5.3 (-0.35%) 

6.6 (0.15%) 

6.3 (0.42%) 

Czech Republic 

-14.2 (-0.22%) 

-125.6 (-1.96%) 

158.0 (2.47%) 

Denmark 

Estonia 

Finland 

France 

Germany 

Greece 

Hungary 

-2.3 (-0.01%) 

-1.9 (-0.13%) 

-3.7 (-0.02%) 

-76.8 (-0.31%) 

121.4 (0.49%) 

-13.1 (-0.87%) 

-59.3 (-0.39%) 

14.9 (0.99%) 

88.8 (0.58%) 

-379.3 (-0.21%) 

-1196.3 (-0.67%) 

1141.8 (0.64%) 

-59.9 (-0.03%) 

-372.4 (-0.18%) 

178.0 (0.09%) 

-6.5 (-0.05%) 

-69.3 (-0.55%) 

113.3 (0.89%) 

-21.2 (-0.13%) 

-95.0 (-0.59%) 

93.7 (0.58%) 

98 

 
Member State 

Ireland 

Italy 

Latvia 

Lithuania 

Luxembourg 

Malta 

Netherlands 

Poland 

Portugal 

Romania 

Slovakia 

Slovenia 

Spain 

Sweden 

Absolute change in net 
VAT revenue collected in 
EUR million due to the 
implementation of the 
transition period only 
(percentage change) 

Absolute change in net 
VAT revenue collected in 
EUR million due to 
Option 3 (percentage 
change) – Lower bound 

Absolute change in net 
VAT revenue collected in 
EUR million due to 
Option 3 (percentage 
change) – Upper bound 

-29.0 (-0.41%) 

-52.6 (-0.74%) 

-9.2 (-0.13%) 

-361.9 (-0.42%) 

-555.0 (-0.64%) 

-96.0 (-0.11%) 

-5.1 (-0.34%) 

-8.8 (-0.18%) 

-2.4 (-0.06%) 

-1.4 (-0.28%) 

-16.2 (-1.07%) 

-24.2 (-0.49%) 

-9.0 (-0.23%) 

-5.2 (-1.02%) 

11.7 (0.77%) 

12.5 (0.25%) 

1.3 (0.03%) 

4.4 (0.84%) 

0 (0%) 

-147.6 (-0.31%) 

172.7 (0.37%) 

-209.5 (-0.78%) 

-371.4 (-1.38%) 

54.2 (0.20%) 

-7.3 (-0.05%) 

-79.2 (-0.54%) 

116.0 (0.79%) 

-28.7 (-0.25%) 

-74.2 (-0.64%) 

-20.0 (-1.18%) 

-80.7 (-4.75%) 

35.5 (0.30%) 

74.6 (4.38%) 

-9.9 (-0.42%) 

-22.8 (-0.96%) 

4.8 (0.2%) 

0 (0%) 

0 (0%) 

-254.0 (-0.49%) 

429.9 (0.83%) 

-116.1 (-0.35%) 

190.1 (0.58%) 

United Kingdom 

-613 (-0.40%) 

-963.9 (-0.63%) 

-66.5 (-0.04%) 

Source: 2017 Deloitte SME study 

The impact of Option 4 on VAT revenues  for each Member State, incorporating the effects of 
Option 2, is presented in the table below. It was calculated by allocating the overall change in 
revenue at the EU-level from this additional measure to individual Member States based on the 
share of businesses impacted.   

Table 21: Impacts on Member States’ VAT revenues under Option 4 

Member State 

EU-28 

Austria 

Belgium 

Bulgaria 

Croatia 

Cyprus 

Czech Republic 

Denmark 

Estonia 

Finland 

France 

Germany 

Greece 

Absolute change in net VAT 
revenue collected in EUR million 
due to Option 4 (percentage 
change) – Lower bound 

Absolute change in net VAT 
revenue collected in EUR million 
due to Option 4 (percentage 
change) – Upper bound 

-3 161.2 (-0.30%) 

4 743.7 (0.46%) 

-57.5 (-0.06%) 

-77.7 (-0.29%) 

-15.7 (-0.40%) 

-12.3 (-0.28%) 

-4.5 (-0.30%) 

-111.4 (-1.74%) 

-74.5 (-0.30%) 

-11.2 (-0.74%) 

-55.6 (-0.36%) 

-817 (-0.46%) 

-312.5 (-0.15%) 

-62.8 (-0.50%) 

48.6 (0.05%) 

17.9 (0.07%) 

22.1 (0.56%) 

16.5 (0.38%) 

7.1 (0.47%) 

172.2 (2.69%) 

123.7 (0.49%) 

16.8 (1.11%) 

92.5 (0.61%) 

1521.1 (0.85%) 

237.9 (0.12%) 

119.8 (0.95%) 

99 

 
Member State 

Hungary 

Ireland 

Italy 

Latvia 

Lithuania 

Luxembourg 

Malta 

Netherlands 

Poland 

Portugal 

Romania 

Slovakia 

Slovenia 

Spain 

Sweden 

United Kingdom 

Source: 2017 Deloitte SME study 

Absolute change in net VAT 
revenue collected in EUR million 
due to Option 4 (percentage 
change) – Lower bound 

Absolute change in net VAT 
revenue collected in EUR million 
due to Option 4 (percentage 
change) – Upper bound 

-73.8 (-0.46%) 

-23.6 (-0.33%) 

-193.1 (-0.22%) 

-11.1 (-0.73%) 

-15.4 (-0.31%) 

-6.6 (-0.17%) 

-3.8 (-0.74%) 

-147.6 (-0.31%) 

-161.9 (-0.60%) 

-71.9 (-0.49%) 

-45.5 (-0.39%) 

-60.7 (-3.57%) 

-12.9 (-0.54%) 

-254 (-0.49%) 

-116.1 (-0.35%) 

-350.9 (-0.23%) 

114.9 (0.71%) 

19.8 (0.28%) 

265.9 (0.31%) 

16.8 (1.11%) 

21.3 (0.43%) 

3.7 (0.09%) 

5.8 (1.12%) 

172.7 (0.37%) 

263.7 (0.98%) 

123.3 (0.84%) 

64.2 (0.55%) 

94.6 (5.56%) 

14.7 (0.62%) 

429.9 (0.83%) 

190.1 (0.58%) 

546.5 (0.35%) 

The discrepancies observed can be due to: 

-  The  share  of  businesses  impacted  in  a  given  Member  State  compared  to  the  overall 
number  of  businesses  impacted,  as  this  is  the  basis  on  which  the  EU  change  in  VAT 
revenue  is  allocated  to  Member  States.  Hence,  the  higher  the  share,  the  higher  the 
impact; and 

-  The level of net VAT revenue collected before the impact: the higher it is, the lower the 

impact will be in proportional terms.  

Number of businesses impacted 

Option 2.  Based  on  the  above  assumptions,  the  estimated  number  of  businesses  that  would 
potentially benefit from the extension of the SME exemption is around 1.64 million, or 33.9% of 
all  businesses  in  the  EU.  These  businesses  generate  only  0.11%  of  the  overall  turnover  in  the 
EU,  and  the  turnover  at  stake  (i.e.  generated  from  the  cross-border  sales  and  subject  to 
exemption under this policy option) represents only 0.03% of EU turnover. 

Option 3.  Mint  Global  data  was  used  to  estimate  the  number  of  businesses  with  turnover 
between the VAT exemption threshold and 150% of the threshold in a given Member State. This 
was done by taking the number of businesses in each relevant bracket estimated as part of the 
status-quo  analysis,  and  using  Mint  Global  data  to  estimate  the  proportion  lying  between  the 
lower/upper bound of this bracket and the relevant thresholds. Based on the above methodology, 
the  estimated  proportion  of  businesses  impacted  by  this  option  at  EU-level  is  0.6%  (or 
260 000 businesses). 

100 

 
Option 4.  Using  data  from  tax  authorities,  it  is  expected  that  only  the  smallest  businesses 
(turnover  below  EUR 5 000)  will  potentially  classify  as  occasional  traders.  These  traders 
represent  about  38%  of  all  businesses  in  the  EU,  but  only  0.04%  of  the  generated  turnover. 
Furthermore,  it  was  observed  that  occasional  traders  are  more  likely  to  be  single  individuals 
without  employees  rather  than  legal  entities.  Based  on  the  information  received  from  some 
Member  States  on  the  number  of  sole  traders,  it  was  finally  estimated  that  around  40%  of 
businesses with less than EUR 5 000 turnover could classify as occasional traders (15.1% of all 
EU businesses or 6.4 million businesses). 

101 

 
 
 
 
ANNEX 5:   MEASURES FOR SMES AVAILABLE IN THE VAT DIRECTIVE 

The VAT Directive sets out several provisions, optional for Member States to apply, designed to 
alleviate  the  burden  that  small  enterprises  have  in  dealing  with  VAT.  While  some  of  those 
provisions  are  part  of  a  special  scheme  for  small  enterprises  (‘SME  scheme’),  there  are  other 
simplification  measures  available  for  small  enterprises  outside  of  the  SME  scheme.  The 
measures can, broadly speaking, be grouped in the following categories: 

1)  Simplified VAT obligations  
2)  Simplified procedures for charging and collecting VAT  
3)  SME exemption  

1)  Simplified VAT obligations (outside of the SME scheme) 

The  VAT  Directive  provides  for  simplified  procedures  in  relation  to  several  VAT  obligations; 
notably VAT registration, invoicing, accounting, reporting and payment of VAT. See below an 
outline  of  what  these  VAT  obligations  consist  in,  and  how  they  may  be  simplified  for  small 
enterprises.  

  VAT registration: Businesses are generally required to register for VAT purposes (i.e. to 
state when their activity as a business starts, changes or ceases) pursuant to Article 213 of 
the  VAT  Directive.  Many  Member  States  release  exempt  small  enterprises  which  benefit 
from the SME exemption from the obligation to register for VAT purposes on the basis of 
Article 272(1)(d)  of  the  VAT  Directive.  However,  such  small  enterprises  may  still  be 
required  to  register  for  VAT  purposes  in  other  Member  States  where,  for  instance,  they 
trade cross-border within the EU according to Article 214. See here for more information.  

  VAT  invoicing:  In  general,  businesses  have  to  issue  invoices  for  every  supply  made  (the 
specific  cases  where  an  invoice  is  required  are  laid  down  in  Article 220  of  the  VAT 
Directive). Although  not  specifically  targeted towards  small  enterprises,  Articles 220a  and 
238-240  of  the  VAT  Directive  allow  Member  States  to  permit  the  use  of  simplified 
invoicing  under  certain  circumstances.  Member  States  may  also,  pursuant 
to 
Article 272(1)(d) of the VAT Directive, release businesses covered by the SME exemption 
from the obligation to issue invoices. See here for more information. 

  VAT accounting (‘VAT record keeping’): Businesses are required to keep their accounts 
in sufficient detail for VAT to be collected and declared, and such procedure to be checked 
by the tax authorities, pursuant to Article 242 of the VAT Directive. No rules are set for the 
length of the period during which accounts must be kept. Member States may release small 
enterprises  covered  by  the  SME  exemption  from  the  obligation  to  keep  VAT  accounts 
pursuant  to  Article 272(1)(d)  of  the  VAT  Directive.  Article 272(3)  of  the  VAT  Directive 
also allows Member States to release taxable persons other than those covered by the SME 
exemption  from  certain  of  the  accounting  obligations  referred  to  in  Article 242  of  that 
Directive.  

  VAT  reporting  (VAT  returns  and  recapitulative  statements):  Under  normal  VAT 
arrangements, businesses are required to prepare and submit periodical VAT returns (mostly 
either  monthly  or  quarterly)  and  recapitulative  statements  (‘EU  Sales  Lists’)  pursuant  to 
Articles 250 and 262 of the VAT Directive respectively.  

102 

 
 
 
 
 
 
o  VAT returns: Businesses submit VAT returns to their tax administrations, where they 
indicate  which  are  the  transactions  made,  the  VAT  that  they  have  charged  to  their 
customers (output VAT), the VAT that they have paid to their suppliers (input VAT), 
and the amount  of VAT payable or refundable (difference between output  VAT and 
input VAT). How often VAT returns have to be submitted depends on each Member 
State. While the VAT Directive only requires VAT returns to be made at least once a 
year  (Article 252  of  the  VAT  Directive),  in  practice  many  Member  States  require 
VAT returns to be submitted monthly or quarterly. In addition to these periodic VAT 
returns,  Member  States  may  also  require  an  annual  VAT  return,  as  set  out  in 
Article 261 of the VAT Directive, summarising for the year the periodic information 
already submitted. 

Such obligations may be simplified for small enterprises. For instance, some Member 
States have set up longer periods for the filing of VAT returns (e.g. every six months, 
instead  of  monthly  or  quarterly)  for  small  enterprises;  and  Member  States  can  also 
release small enterprises covered by the SME exemption from the obligation to submit 
periodical  and/or  annual  VAT  returns  on  the  basis  of  Article 272(1)(d)  of  the  VAT 
Directive. As regards the content of VAT returns, certain minimum requirements are 
set  out  in  Articles 250  and  251  of  the  VAT  Directive,  but  there  are  no  common 
standards at EU level. See here for more information.  

o  Recapitulative  statements  (‘EU  sales  lists’):  Businesses  making  intra-EU  supplies 
submit recapitulative statements to their tax administrations, usually on a monthly or 
quarterly basis, indicating the enterprises in other Member States to whom they have 
supplied  goods  and  services.  Member  States  may  also  permit  businesses  to  submit 
them annually rather than monthly or quarterly, provided that the conditions laid down 
in  Article 270  of  the  VAT  Directive  are  met.  Member  States  may  also  align  the 
periodicity  of  their  filing  with  a  longer  periodicity  for  the  filing  of  the  VAT  return 
pursuant to Article 271 of the VAT Directive.  

  VAT payment: Obligation to pay the VAT due on a transaction to the taxable authorities. 
The person liable to pay is usually the supplier, but it may also be the customer (e.g. where 
the  customer  is  a  business  making  an  intra-EU  acquisition  of  goods),  pursuant  to 
Articles 192a-205 of the VAT Directive. Some Member States offer small enterprises some 
flexibility  on  their  VAT  payments,  such  as  the  cash  accounting  scheme,  with  a  view  to 
support their cash flow. See here for more information.  

o  Cash  accounting  scheme:  Member  States  may  apply  the  cash-accounting  scheme 
pursuant  to  Articles 66(b)  and  167a  of  the  VAT  Directive,  in  order  to  support  the 
cash-flow  of  businesses  having  to  collect  and  pay  VAT.  According  to  this  scheme, 
businesses account for the VAT charged (output VAT) only when they have received 
payment from their customers, and deduct the VAT paid (input VAT) only once the 
purchases have been paid to their suppliers. The legislation sets out that the full cash 
accounting scheme (applied to both output and input VAT) is available to businesses 
whose turnover does not exceed EUR 500 000, although there is the possibility to use 
a higher threshold up to a maximum of EUR 2 000 000 following a consultation of the 
VAT Committee. It is worth noting that some Member States restrict the application 
of  the  cash  accounting  scheme  to  the  output  VAT  only  (and  not  input  VAT).  Cash 
accounting  usually  entails  an  additional  compliance  burden  for  the  businesses 
applying it, due to the need to account for the financial movements of the transactions.  

103 

 
 
 
 
 
2)  Simplified procedures for charging and collecting VAT (part of the SME scheme) 

Member  States  may,  according  to  Article 281  of  the  VAT  Directive  and  after  consulting  the 
VAT  Committee,  apply  simplified  procedures  such  as  flat-rate  schemes  for  charging  and 
collecting VAT, provided that they do not lead to a reduction thereof.  

  Flat-rate  scheme:  Member  States  may  apply  a  flat-rate  scheme,  which  simplifies  the 
calculation of the VAT due by SMEs. The design of such schemes may vary depending on 
the  Member  State  having  introduced  it,  but  three  main  models  can  be  identified:  (i)  some 
apply a flat-rate on the amount of sales directly and allow businesses no right to deduct the 
VAT paid on their purchases; (ii) others apply a normal VAT rate on the amount of sales, 
and allow businesses to deduct a fixed amount of the VAT paid on their purchases; and (iii) 
a  combination  of  both  models.  In  most  of  the  cases,  such  flat-rate  schemes  are  applied 
domestically. Some Member States base the eligibility for the scheme on businesses being 
below  certain  turnover  thresholds,  while  others  apply  the  scheme  only  to  certain  business 
sectors, or apply it in general to all the sectors but have sector specific flat-rates.  

See below an example of the application of the flat-rate scheme according to the first model 
above, that is, only applied on the amount of sales (scenario 2); compared to the application 
of the normal provisions in the VAT Directive (scenario 1). In the example, we assume an 
applicable VAT rate of 20% and a flat-rate of 10%; that an SME buys raw materials from a 
supplier for EUR 100 (adding 20% VAT, results in EUR 120 paid); and that this same SME 
sells the manufactured goods for a price of EUR 200 (adding 20% VAT, results in EUR 240 
charged). While in scenario 1 the VAT due to be paid by the SME to the tax authorities is of 
EUR 20 (EUR 40 in output VAT – EUR 20 of input VAT), in scenario 2 the SME calculates 
the VAT due by multiplying a flat-rate of 10% to the total price of outputs (EUR 200).  

Figure 12: Example of the application of the flat-rate scheme 

104 

Sells finished goodsEUR 200 + 40(output VAT)Supplier raw materialManufacturer (SME)Sells finished goodsEUR 200 + 40 (output VAT)RetailerSells raw materialEUR 100 + 20(input VAT)Tax authorityPayment of VAT 20Payment of VAT 20(40 output VAT – 20 input VAT)Scenario 1: VAT balance under normal VAT rulesSupplier raw materialManufacturer (SME)RetailerSells raw materialEUR 100 + 20(input VAT)Tax authorityPayment of VAT 20Payment of VAT 20(flat-rate of 10% of 200)Right of deduction of input VATScenario 2: VAT balance under the flat-rate scheme (on outputs)Flat-rate×  
 
 
 
Source: Commission services based on the 2017 Deloitte SME study 

3)  SME exemption (part of the SME scheme) 

Member States may, pursuant to  Articles 281-294 of the VAT Directive,  introduce VAT relief 
measures under which a business established in a particular Member State, whose turnover does 
not exceed the specified threshold, may be exempted from VAT. Such VAT relief measures are 
the SME exemption and the graduated relief.  

  SME  exemption:  The  SME  scheme  allows  Member  States  to  exempt  small  enterprises 
from VAT provided that their annual turnover does not exceed a certain threshold. Such an 
exemption is optional for Member States to apply. If available in their Member State, it is 
also optional for SMEs to apply. In this respect, eligible businesses may decide to opt out of 
the exemption and apply normal VAT rules in cases where taxation, which entails deduction 
of  VAT  paid  on  their  purchases  (input  VAT),  is  more  favourable  than  being  under  the 
exemption without the right of deduction.  

The  SME  exemption,  if  available  in  a  Member  State,  is  subject  to  a  strict  territorial 
application (i.e. it is available to small enterprises established in the territory of that Member 
State only for their domestic supplies) pursuant to Article 283(1)(c) of the VAT Directive. 
Moreover, the exemption does not apply to certain transactions laid down in Article 283 of 
the  VAT  Directive  (e.g.  supplies  of  new  means  of  transport),  and  Member  States  may 
exclude other transactions from the exemption. The thresholds under which the exemption 
applies  are  determined  in  relation  to  the  annual  turnover  of  the  businesses  as  set  out  in 
Article 288  of  the  VAT  Directive.  As  regards  VAT  obligations,  Article 272(1)(d)  of  the 
VAT Directive allows Member States to release businesses covered by the SME exemption 
from  certain  or  all  VAT  obligations.  Exceeding  the  exemption  threshold  implies  in  most 
Member  States  having  to  comply  right  away  will  all  VAT  obligations  under  the  normal 
rules.  

See below an example of the application of the SME exemption (scenario 2); compared to 
the  application  of  the  normal  provisions  in  the  VAT  Directive  (scenario 1),  where  we 
assume  an  applicable  VAT  rate  of  20%.  Scenario 1  is  as  explained  in  previous  Figure 12 
(flat-rate).  As  regards  scenario 2,  the  SME  acquires  raw  materials  at  the  same  price  of 
EUR 100  (adding  20%  VAT,  results  in  EUR 120  paid).  However,  given  that  the  SME  is 
exempt and pays no VAT to the tax authorities, it cannot deduct the VAT paid. Therefore, 
the  EUR 20  of  input  VAT  constitutes  a  cost  for  the  business.  If  we  assume  that  the  SME 
wishes to retain the same margin, the sales price must increase to EUR 220. 

105 

 
 
 
 
 
 
Figure 13: Example of the application of the SME exemption  

Source: Commission services based on the 2017 Deloitte SME study 

  Graduated  relief:  The  SME  scheme  also  allows  Member  States  to  apply  the  graduated 
relief,  according  to  which  the  amount  of  VAT  to  be  collected  by  a  business  under  the 
measure is reduced depending on its turnover, with the relief gradually decreasing with the 
increase of turnover. It is a variation of the SME exemption in the sense that it also relieves 
small enterprises of the burden of collecting tax, although this is done gradually by means of 
multiple  thresholds.  Like  the  SME  exemption,  the  graduated  relief  is  available  only  to 
domestic businesses, and the thresholds under which the exemption applies are determined 
in relation to the annual turnover of the business. 

As regards VAT obligations, it is worth noting that Article 272(1)(d) of the VAT Directive, 
which  allows  Member  States  to  release  businesses  covered  by  the  SME  exemption  from 
certain VAT obligations, cannot be applied to taxable persons benefiting from a graduated 
relief. This is confirmed by Article 291 of the VAT Directive, according to which taxable 
persons  enjoying  graduated  relief  are  regarded  as  businesses  subject  to  normal  VAT 
arrangements.   

106 

Sells finished goodsEUR 220 + VATSupplier raw materialManufacturer (SME)Sells finished goodsEUR 200 + 40 (output VAT)RetailerSells raw materialEUR 100 + 20(input VAT)Tax authorityPayment of VAT 20Payment of VAT 20(40 output VAT – 20 input VAT)Scenario 1: VAT balance under normal VAT rulesSupplier raw materialManufacturer (SME)RetailerSells raw materialEUR 100 + 20(input VAT)Tax authorityPayment of VAT 20Payment of VATRight of deduction of input VATScenario 2: VAT balance under the SME exemptionExempt× ×  
 
 
 
 
 
 
 
Figure 14: Example of the functioning of the graduated relief in the Netherlands 

VAT due  

(output VAT - input VAT) 

≥ EUR 1 883 

• No relief 

EUR 1 345 < EUR 1883  

• Relief = 2,5 x [EUR 1 883 - (VAT due)] 

≤ EUR 1 345 

• Relief = VAT amount 

EUR 0 

• No relief 

Source: 2017 Deloitte SME study 

107 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
ANNEX 6:  

INTERPLAY  AMONG  THE  LEGISLATIVE  PROPOSALS  ON  THE  DESTINATION 
PRINCIPLE AND ADMINISTRATIVE COOPERATION 

1.  WHY ARE THE CURRENT RULES FOR SMALL BUSINESSES NOT SUSTAINABLE? 

The  functioning  of  the  rules  for  SMEs  currently  provided  for  in  the  VAT  Directive  has  been 
evaluated206 in accordance with the Better Regulation Guidelines. The assessment confirmed, in 
particular, that the SME scheme laid down in Articles 281-294 suffers from several drawbacks 
(e.g.  distortions,  threshold  effect,  etc.),    as  it  does  not  reflect  the  Single  Market  perspective. 
Namely, the current scheme offers a fragmented response in reducing SMEs’ burden related  to 
the application of normal VAT rules: it is targeted mostly at businesses trading domestically and 
in the B2C context. 

As  stated  in  section 2.2,  complying  with  VAT  rules  is  still  extremely  complex  and  costly  for 
small businesses, particularly for those that trade in other Member States. With the evolution of 
the VAT system towards taxation at destination, compliance costs related to intra-EU trade are 
likely to increase due to the fact that supplier will have to charge and account for VAT in the 
Member State of destination, as regards all type of transactions207. The heavy burden for small 
businesses will therefore increase if there is no action at EU level to simplify VAT obligations. 
Failure  to  act  will  consequently  lead  to  more  distortions  in  the  Single  Market  and  negative 
effects for SMEs’ growth. 

Figure 15: Impact of taxing at destination on the VAT rules for small businesses 

Source: Commission services 

206   The main findings of the assessment are presented in Annex 8. 
207   According to the existing place of supply rules governing services, the supplier has already to declare and pay 
VAT  in  the  Member  State  where  the  customer  is  located  (Article 44  of  the  VAT  Directive).  Intra-EU  B2B 
supplies of goods on the other hand are exempt in the Member State of origin (Article 138 of VAT Directive). 
For more information on the destination principle, see section 2.3.4.  

108 

SMEDomestic supply* Member State 1 (MS1)Member State 2 (MS2) VAT due in: MS1 Applicable VAT rules: MS1 SME exemption  VAT due in: MS1 Applicable VAT rules: MS1 SME exemption Cross-border supply* VAT due in: MS2 Applicable VAT rules: MS2 SME exemption VAT rules based on taxation at origin(until now)VAT rules based on the principle of taxation at destination× Increase of VAT compliance costs and unequal treatment of SMEs* The VAT treatment of a supply will depend on: (i) whether it is a supply of goods or services; and (ii) whether the recipient is a business or a private consumer. In this example, we assume a supply of services from a Business to a Consumer (B2C).  
 
                                                 
2.  INTERPLAY  AMONG  THE  LEGISLATIVE  PROPOSALS  ON  THE  DESTINATION  PRINCIPLE  AND 

ADMINISTRATIVE COOPERATION 

With  Directive  2008/8/EC  important  steps  have  been  taken  in  order  to  ensure  that  VAT  on 
services  accrues  to  the  Member  State  of  consumption.  The  place  of  supply  rules  for 
telecommunications, broadcasting and electronically supplied services, which entered into force 
in  2015  are  indeed  among  the  changes  adopted  in  2008208.  The  principle  of  taxation  at 
destination will be further implemented by the following proposals: 

1)  E-Commerce proposal (adopted in 2016);  
2)  Definitive VAT system proposal (to be adopted in 2017), and 
3)  Administrative cooperation and anti-fraud proposal (to be adopted in 2017).  

It is important to clarify how the proposals above complement each other, and how they interact 
with the SME VAT package.  

The  e-Commerce  proposal  stems  from  the  need  to  minimise  the  burden  attached  to  cross-
border e-Commerce arising from different B2C VAT regimes (e.g. distance selling, imports of 
goods,  exemption  for  small  consignments).  In  line  with  the  destination  principle,  the  proposal 
therefore removes the exemption on imports and the distance selling thresholds and in parallel 
introduces  significant  simplification  measures  through  the  extension  of  the  current  Mini  One 
Stop  Shop  (MOSS)  which  would  be  applicable  to  all  B2C  supply  of  goods  and  services.  The 
new  One  Stop  Shop  will  then  allow  businesses,  also  SMEs,  to  make  a  single  declaration  and 
payment  in  their  own  Member  State  in  respect  of  B2C  sales  in  other  Member  States. 
Additionally,  to  further  simplify  VAT  compliance  related  to  these  changes,  the  e-Commerce 
proposal  provides  for  a  common  EU  annual  threshold  of  EUR 10 000  for  cross-border  B2C 
supplies of goods and services, below which small enterprises will be able to treat their cross-
border  transactions  as  domestic. Businesses,  with a low value of intra-EU sales,  will therefore 
not have to register and account for VAT in other Member States.  

The  common  EU  threshold  is,  however,  independent  of  the  existing  exemption  thresholds  for 
small  businesses209.  If  the  EUR 10 000  threshold  is  exceeded,  a  business  will  have  to  tax  its 
transactions in the Member State where the customer is established210. In order to minimise the 
impact for such businesses of having to declare and pay VAT at the Member State of destination 
and  consequently  support  their  cross-border  activity,  the  SME  package  envisages  that  small 
businesses could benefit to a certain extent from the SME exemption in the destination Member 
State.  

The  definitive  VAT  system  proposal  attempts  to  replace  the  current  VAT  arrangements, 
according to which a B2B cross-border supply of goods within the EU is currently split into two 
different transactions for VAT purposes: 1) an intra-EU supply of goods exempt in the Member 

208   From 1 January 2015 these services are taxable at the place where the customer belongs. For an overview of the 
2015 place of supply rules, see here. Council Implementing Regulation (EU) No 1042/2013 of 7 October 2013 
amending  Implementing  Regulation  (EU)  No 282/2011  as  regards  the  place  of  supply  of  services  
(OJ  L  284,  26.10.2013,  p.  1);  and  Council  Regulation  (EU)  No 967/2012  of  9 October  2012  amending 
Implementing Regulation (EU) No 282/2011 as regards the special schemes for non-established taxable persons 
supplying  telecommunications  services,  broadcasting  services  or  electronic  services  to  non-taxable  persons  
(OJ L 290, 20.10.2012, p. 1).  

209   It  is  calculated  on  the  basis  of  the  turnover  derived  from  cross-border  supplies.  See  Article 59c  of  the  

e-Commerce proposal. 

210   It will, in such circumstances, be possible for businesses to make use of the MOSS to declare and pay VAT in 

their own Member State in respect of sales in other Member States.  

109 

 
 
                                                 
State of origin (made by the supplier); 2) an intra-EU acquisition of goods taxed in the Member 
State  of  destination  (made  by  the  customer).  With  the  new  rules,  the  exemption  for  the  B2B 
cross-border supply of goods will disappear and businesses making such supplies will be liable 
for declaring and paying VAT in the Member State of arrival of the goods. In order to minimise 
the burden for SMEs making intra-EU transactions on goods, the SME package will allow them 
to benefit from simplified VAT obligations irrespective of whether they make use of the SME 
exemption. 

It is important to note that both the e-commerce and the definitive VAT system proposals focus 
on  specific  types  of  transactions.  The  SME  proposal  on  the  other  hand  will  offer  a 
comprehensive  simplification  package  that  will  be  available  for  all  types  of  small  business 
activity: domestic, intra-EU, B2C and B2B supplies of goods and services.   

The Administrative cooperation and anti-fraud proposal plays an important role in securing 
the  success  of  the  above-mentioned  proposals,  as  it  will  provide  actions  to  improve 
administrative cooperation instruments in the field of VAT and combat cross-border VAT fraud by 
a swifter and more coordinated reaction capacity. Given that the proposal would mainly lead to the 
implementation of new exchanges or a better use of already existing information, businesses are not 
directly affected.  

The table below summarises the main legislative proposals and how they interact.  

Table 22: Interplay among the legislative proposals on the destination principle 

Supply of goods 

Supply of services 

Type of 
transaction 

Business to 
Business 
(B2B) 

  Definitive 

VAT system 
proposal 

  SME VAT 
package 

 

e-Commerce 
proposal 

Business to 
Consumer 
(B2C) 

  SME VAT 
package 

Exempt supply + taxed 
intra-EU acquisition to be 
replaced by a single 
transaction taxed at 
destination 
SME exemption to be 
opened up to small 
businesses from other 
Member States 
Supplies to be taxed at 
destination except if 
below an EU-wide 
threshold of EUR 10 000 
(if applied) 
SME exemption to be 
opened up to small 
businesses from other 
Member States above 
the EUR 10 000 
threshold (if applied) 

  SME VAT 
package 

 

e-Commerce 
proposal 

  SME VAT 
package 

Supplies already taxed at 
destination, in general. 
SME exemption to be 
opened up to small 
businesses from other 
Member States 

Supplies to be taxed at 
destination except if 
below an EU-wide 
threshold of EUR 10 000 
(if applied) 
SME exemption to be 
opened up to small 
businesses from other 
Member States above the 
EUR 10 000 threshold (if 
applied) 

 

Administrative cooperation and anti-fraud proposal: Improved administrative cooperation instruments 
and fight against VAT fraud 

Source: Commission services 

110 

 
 
 
 
 
 
ANNEX 7: 

FUNCTIONING OF OPTION 2 IN AN INTRA-EU CONTEXT 

According  to  Option 2,  as  outlined  in  section 5.2.2,  the  SME  exemption  in  a  Member  State 
(where the VAT is due) would be applicable to non-established EU businesses having to declare 
VAT  in  that  Member  State  (e.g.  because  their  cross-border  supplies  exceed  the  common  EU 
threshold, or because they have decided to opt out of that threshold). A non-established business 
would  be  eligible  for  applying  the  SME  exemption  in  the  Member  State  of  destination  whose 
VAT rules will apply.  

However, safeguards could be necessary in order to prevent distortions caused by the opening up 
of the SME exemption. Hence, several scenarios with different degrees of safeguards have been 
considered:  

  Option 2A – No safeguards: SME exemption fully applicable  
  Option 2B – Safeguards: EU turnover threshold 
  Option 2C – Safeguards: EU turnover threshold and limit in the application of the SME 

exemption  

See below an explanation of each option, and examples of how they would work in practice.  

  Option 2A – No safeguards: SME exemption fully applicable  

The  national  SME  exemption  would  open  to  non-established  EU  businesses  which  meet  the 
criteria  set  by  the  Member  State  of  destination.  The  threshold(s)  set  by  each  Member  State 
would apply in the same way to both domestic and non-established businesses. In this respect, 
the  annual  turnover  to  be  taken  into  account  would  be  that  generated  by  a  business  in  the 
Member State of destination only (with the exception of cross-border supplies which are deemed 
to  be  domestic,  if  the  common  EU  threshold  is  applied).  Use  of  the  SME  exemption  in  the 
Member State of destination would not preclude businesses from using the SME exemption in 
the  Member  State  where  they  are  established,  if  available.  They  may  also  use  the  optional 
common EU threshold of EUR 10 000 to treat as domestic supplies the B2C sales of goods and 
services in other Member States. 

This option has an advantage for the Member States of destination as it limits the control only to 
the turnover generated by supplies from non-established businesses in their territory. The main 
downside is that it will not prevent a situation of abuse where large companies with low turnover 
in each Member State could apply the SME exemption.  

111 

 
Figure 16: Example Option 2A 

Source: Commission services 

In  the  example  above,  we  have  assumed  a  business  established  in  Member  State 1  (MS1), 
making  domestic  supplies  for  EUR 200 000,  and  making  cross-border  supplies  to  Member 
State 2 (MS2)  and to  Member State 3 (MS3)  for EUR 6 000 and  EUR 3 000 respectively.  It is 
also  assumed  that  the  common  EU  threshold  of  EUR 10 000  applies  (as  explained  in 
section 5.2.1 and Figure 4), and that the SME exemption is available in all Member States, with 
different  SME  exemption  thresholds  (EUR 7 000  for  MS1,  EUR 10 000  for  MS2,  and 
EUR 20 000 for MS3).  

At  domestic  level,  the  business  has  a  revenue  of  EUR 200 000,  which  excludes  it  from  the 
possibility of applying the exemption in MS1 (the revenue exceeds the exemption threshold of 
EUR 7 000).  

At cross-border level, the business could decide to make use of the common EU threshold, since 
the  total  turnover  derived  from  cross-border  trade  is  EUR 9 000  (EUR 6 000  +  EUR 3 000), 
which is below the EUR 10 000 common EU threshold. It could then treat their supplies in MS2 
and MS3 as domestic supplies. In such circumstances, it would still not be possible to apply the 
SME exemption in MS1, since the total of domestic supplies is EUR 209 000 (EUR 200 000 + 
EUR 6 000  +  EUR 3 000),  which  is  higher  than  the  exemption  threshold  of  EUR 7 000. 
However,  the  business  could  make  use  of  the  SME  exemption  available  in  MS2  and  MS3 
cumulatively, because the turnover generated in each of such Member States is lower than their 
respective  SME  exemption  thresholds  (EUR 6 000  turnover,  below  the  SME  exemption 
threshold of EUR 10 000 in MS2; and EUR 3 000 turnover, below the SME exemption threshold 
of EUR 20 000 in MS2).  

  Option 2B – Safeguards: EU turnover threshold 

The national SME exemption would be open to non-established EU businesses which meet the 
criteria  set  by  the  Member  States  of  destination,  as  explained  in  Option 2A.  However,  for  a 
business to be able to apply the SME exemption, its overall EU turnover would have to be below 
a certain maximum threshold, set at EU level (e.g. EUR 100 000). This EU turnover threshold 
would be calculated on the basis of the turnover derived from all supplies made by businesses 
within the EU, both domestic and intra-EU. Its use would be compatible with the national SME 

112 

EUR 200 000 (domestic) Member State 1 (MS1) Common EU threshold = EUR 10 000 SME exemption threshold (MS1) = EUR 7 000 Member State 2 (MS2) Common EU threshold = EUR 10 000 SME exemption threshold (MS2) = EUR 10 000 Member State 3 (MS3) Common EU threshold = EUR 10 000 SME exemption threshold (MS3) = EUR 20 000EUR 6 000(cross-border)EUR 3 000(cross-border) 
 
exemption thresholds applicable in each Member State and the optional use of the common EU 
threshold.  

While  the  opening  up  of  the  SME  exemption  would  still  be  targeted  at  small  businesses,  this 
option  would  require  important  efforts  stemming  from  the  need  to  control  and  monitor  the 
turnover of companies generated at EU level.  

Figure 17: Example Option 2B 

Source: Commission services 

This  example  reproduces  the  scenario  already  described  for  Option 2A,  while  including  an 
overall EU turnover of EUR 100 000, in order to target the opening up of the SME exemption to 
small  businesses.  For  a  business  to  be  able  to  apply  the  SME  exemption  in  a  Member  State 
where it is not established, the overall EU turnover of such business would have to be lower than 
EUR 100 000.  

In the example, the business has a domestic revenue of EUR 200 000, which excludes it from the 
possibility of applying the exemption in MS1 (the revenue exceeds the exemption threshold of 
EUR 7 000).  

At intra-EU level, the business could decide to make use of the common EU threshold, since the 
total turnover derived from cross-border trade is EUR 9 000 (EUR 6 000 + EUR 3 000), which 
is below the EUR 10 000 common EU threshold. It could then treat their supplies in MS2 and 
MS3 as domestic supplies. In such circumstances, it would still not be possible to apply the SME 
exemption  in  MS1,  since  the  total  of  domestic  supplies  is  EUR 209 000  (EUR 200 000  + 
EUR 6 000 + EUR 3 000), which is higher than the exemption threshold of EUR 7 000.  

The  overall  EU  turnover  of  the  company,  which  includes  domestic  and  cross-border  trade,  is 
EUR 209 000 (EUR 200 000 + EUR 6 000 + EUR 3 000). Given that such turnover is above the 
EU turnover threshold of EUR 100 000, the company established in MS1 could not to apply the 
exemption  in  MS2  or  in  MS3.  However,  if  the  EU  turnover  of  the  company  was  below 
EUR 100 000,  it  could  make  use  of  the  SME  exemption  available  in  MS2  and  MS3 
cumulatively, because the turnover generated in each of such Member States is lower than their 

113 

EUR 200 000 (domestic) Member State 1 (MS1) Common EU threshold = EUR 10 000 EU turnover threshold = EUR 100 000 SME exemption threshold (MS1) = EUR 7 000 Member State 2 (MS2) Common EU threshold = EUR 10 000 EU turnover threshold = 100 000 SME exemption threshold (MS2) = EUR 10 000New safeguard(limitation based on EU turnover) Member State 3 (MS3) Common EU threshold = EUR 10 000 EU turnover threshold = EUR 100 000 SME exemption threshold (MS3) = EUR 20 000EUR 6 000(cross-border)EUR 3 000(cross-border)e-Commerce proposal (place of supply threshold) 
 
respective  SME  exemption  thresholds  (EUR 6 000  turnover,  below  the  SME  exemption 
threshold of EUR 10 000 in MS2; and EUR 3 000 turnover, below the SME exemption threshold 
of EUR 20 000 in MS2). 

  Option 2C – Safeguards: EU turnover threshold and limit in the application of the SME 

exemption  

The national SME exemption would be open to non-established EU businesses which meet the 
criteria  set  by  the  Member  States  of  destination,  as  long  as  the  EU  turnover  of  the  business 
remains  below  a  certain  maximum  threshold,  as  explained  in  Option 2B.  Moreover,  Member 
States  would  be  able  to  limit  the  extent  to  which  such  a  business  could  apply  the  SME 
exemption they provide for, by means of a lower threshold for non-established businesses which 
could be set by each Member State or determined at EU level.  

If that limited threshold was determined by each Member State, the use of multiple thresholds 
for  exemption  in  each  Member  State  (i.e.  that  for  domestic  businesses,  and  that  for  non-
established businesses), which would vary across the EU, is likely to increase the complexity of 
the system. If the limitation in the SME exemption threshold was nonetheless set out at EU level 
for  all  Member  States  (e.g.  EUR 5 000),  it  would  be  simple  for  businesses  to  apply  the  SME 
exemption  in  the  Member  State  of  destination,  given  that  the  same  threshold  would  apply 
irrespective of which Member State they are selling to.  

It is however difficult to see how this latter option would succeed, given the grounds on which it 
was  already  concluded  that  Member  States  should  retain  flexibility  in  order  to  tailor  the  SME 
exemption thresholds to the characteristics of their domestic markets and policy environment. It 
therefore seems that Option 2C would make the system more complex and bring results which 
are inconsistent with the objective of reducing distortions.   

114 

 
Figure 18: Example Option 2C 

Source: Commission services 

This  example  reproduces  the  scenario  already  described  for  Option 2B,  but  with  two  new 
elements: (i) the assumption that the business has a domestic turnover of EUR 90 000; and (ii) 
the  introduction  of  a  limitation  of  the  application  of  the  SME  exemption  by  non-established 
businesses, by setting a specific SME exemption threshold for such businesses (lower than the 
SME  exemption  threshold  applicable  by  domestic  businesses).  It  is  assumed  that  this  specific 
threshold for non-established SMEs is harmonised at EU level at EUR 5 000.  

In the example, the business has a domestic revenue of EUR 90 000, which excludes it from the 
possibility of applying the exemption in MS1 (the revenue exceeds the exemption threshold of 
EUR 7 000).  

At intra-EU level, the business could decide to make use of the common EU threshold, since the 
total turnover derived from cross-border trade is EUR 9 000 (EUR 6 000 + EUR 3 000), which 
is below the EUR 10 000 common EU threshold. It could then treat their supplies in MS2 and 
MS3 as domestic supplies. In such circumstances, it would still not be possible to apply the SME 
exemption  in  MS1,  since  the  total  of  domestic  supplies  is  EUR 99 000  (EUR 90 000  + 
EUR 6 000 + EUR 3 000), which is higher than the exemption threshold of EUR 7 000.  

The  overall  EU  turnover  of  the  company,  which  includes  domestic  and  cross-border  trade,  is 
EUR 99 000  (EUR 90 000  +  EUR 6 000  +  EUR 3 000).  Given  that  such  turnover  is  below  the 
EU turnover threshold of EUR 100 000, the company established in MS1 would be eligible for 
applying the exemption in MS2 or in MS3. However, the application of the exemption in such 
other Member States would be subject to the turnover of the company generated in each of them 
being  below  the  SME  exemption  threshold  (specific  for  non-established  businesses)  of 
EUR 5 000. Since the turnover generated by the SME in MS2 is EUR 6 000, which exceeds the 

115 

EUR 90 000 (domestic) Member State 1 (MS1) Common EU threshold = EUR 10 000 EU turnover threshold = EUR 100 000 SME exemption threshold (MS1) = EUR 5000* SME exemption threshold (MS1) = EUR 7 000 Member State 2 (MS2) Common EU threshold = EUR 10 000 EU turnover threshold = 100 000 SME exemption threshold (MS2) = 5 000* SME exemption threshold (MS2) = EUR 10 000New safeguard(limitation based on EU turnover) Member State 3 (MS3) Common EU threshold = EUR 10 000 EU turnover threshold = EUR 100 000 SME exemption threshold (MS3) = 5 000* SME exemption threshold (MS3) = EUR 20 000EUR 6 000(cross-border)EUR 3 000(cross-border)e-Commerce proposal (place of supply threshold)New safeguard(limitation based on turnover generated in each MS)* It is assumed that all Member States apply the same SME exemption threshold for non-established businesses, but in practice these thresholds could differ.  For non-established businessesFor established businesses 
 
exemption  threshold  (for  non-established  businesses)  of  EUR 5 000,  the  business  could  not 
apply  the  exemption  in  MS2.  The  turnover  stemming  from  sales  in  MS3  is  EUR 3 000,  thus 
below  the  EUR 5 000  threshold  (for  non-established  businesses),  which  would  allow  the 
business to apply the exemption in MS3. 

As indicated in section 5.2.2 and illustrated in the example above,  Option 2C is very  likely to 
increase  the  complexity  of  the  system  due  to  the  use  of  multiple  thresholds  for  exemption  in 
each Member State (i.e. that  for domestic businesses, and that for non-established businesses), 
and could be seen as running against the contribution to the smooth functioning of a deeper and 
fairer  Single  Market  due  to  that  differential  treatment  between  domestic  and  non-established 
businesses.  

116 

 
 
 
 
ANNEX 8: 

EVALUATION OF THE CURRENT VAT SYSTEM FOR SMES 

1.  Introduction 

As  part  of  the  preparation  of  this  initiative,  the  functioning  of  the  rules  for  SMEs  currently 
provided for in the VAT Directive has been evaluated. This evaluation also stems from the fact 
that  the  current  SME  scheme  is  temporary  and according  to  Article 292  of  the  VAT  Directive 
only applies until the definitive arrangements of the VAT system enter into force. Furthermore, 
in accordance with the Article 293 of the VAT Directive, the Commission should present to the 
Council,  where  appropriate  and  taking  into  account  the  need  to  ensure  the  long-term 
convergence  of  national  regulations,  proposals  to  improve  the  special  scheme  for  small 
businesses as well as adapt the national systems and the ceilings provided for in the Directive.  

The  assessment  covered  all  the  SME  measures  currently  provided  for  in  the  VAT  Directive, 
namely,  the  SME  scheme  as  laid  down  in  Articles 281-294  and  other  measures  outside  the 
scheme which allow to simplify different VAT obligations (e.g. registration and invoicing).  

This  annex  presents,  in  particular,  the  findings  of  the  assessment  of  the  simplified  VAT 
obligations combined with the SME exemption which is the most implemented measure in the 
EU211 and also the most used measure among the eligible businesses (with a participation rate of 
63% on average). 

It should be noted that, in VAT terms, only businesses qualifying as microenterprises according 
to the EU definition212 (those with a turnover below EUR 2 000 000) are generally referred to as 
SMEs. 

The analysis included in this evaluation draws in particular on the 2017 Deloitte Study213. The 
estimates are based primarily on data shared by tax authorities. 

It should be noted that an extensive retrospective evaluation of the key elements of the EU VAT 
system was conducted by an external consultant in 2011214 and its findings have been also used 
for the examination of the current SME scheme. 

In accordance with the main evaluation criteria defined by the Better Regulation Guidelines215, 
this assessment focuses on the following key evaluation questions: 

211  26 of 28 Member States have implemented it, with the Netherlands and Spain being the exceptions. For further 
information as regards the assessment of the other measures, see section 1.3 of this Impact Assessment and the 
2017 Deloitte Study, Volume I, section 4.  

212  SMEs  are  generally  defined  at  EU  level  according  to  the  Commission  Recommendation  of  6 May  2003 

concerning the definition of micro, small and medium-sized enterprises (OJ L 124, 20.5.2003, p. 36). 

213  Deloitte,  Special  scheme  for  small  enterprises  under  the  VAT  Directive  2006/112/EC  –  Options  for  review, 

Final Report. 

214  IFS et al., 2011, A retrospective evaluation of elements of the EU VAT system, see link: 

http://ec.europa.eu/taxation_customs/sites/taxation/files/resources/documents/common/publications/studies/rep
ort_evaluation_vat.pdf  

215  http://ec.europa.eu/smart-regulation/guidelines/toc_guide_en.htm  

117 

 
 
 
                                                 
 
1.   What is the current situation?  

2.   How effective has the EU intervention been?  

3.   How efficient has the EU intervention been?  

4.   How relevant is the EU intervention?  

5.   How coherent is the EU intervention internally and with other (EU) actions?  

6.   What is the EU added value of the intervention?  

2.  Overview of SMEs across the EU 

SMEs with a turnover below EUR 2 000 000 constitute the vast majority of businesses in the EU 
(98%) and provide two-thirds of private sector employment within the EU. These firms operate 
mainly in the wholesale and retail trade, construction and professional, scientific and technical 
activities sectors, with the smallest businesses active in real estate or the provision of financial or 
administrative support services. 

Most  Member  States  have  also  a  large  proportion  of  nano-businesses  (less  than  EUR 5 000  in 
turnover) which may generate negative net VAT revenue. These are often individuals carrying 
out economic activities outside of their main employment, for example occasional traders selling 
products online.  

Despite  representing  the dominant  form of business in  the EU, small  businesses only  generate 
15%  of  the  total  EU  turnover  and  25%  of  net  VAT  revenues  EU-wide.  The  large  firms 
contribute across all Member States over 75% of EU turnover. 

The  smallest  businesses  (those  with  less  than  EUR 50 000  turnover,  representing  69%  of  all 
businesses in the EU) generate only 1% of the total turnover in the EU and produce a negligible 
or even negative amount of VAT revenue. These businesses are also the ones that are most likely 
to be eligible for the SME exemption under the current VAT legislation. 

3.  Assessment of the measures for small businesses under the VAT Directive 

Question 1: What is the current situation? 

VAT compliance costs for SMEs 

Small businesses bear proportionally higher VAT compliance costs than large businesses since 
many  of  these  costs  are  fixed  rather  than  proportional  to  their  turnover,  while  the  revenue 
generated by them is very small. The study  has estimated that the overall compliance costs for a 
small  business  (with  turnover  below  EUR 100 000)  under  the  standard  VAT  regime  are 
approximately  EUR 2 970  per  year216  (of  which  EUR 1 023  are  advisory  costs).  These  costs 

216  Overall  compliance  costs  for  small  businesses  (with  turnover  up  to  EUR 100 000)  are  estimated  at 
EUR 68 billion  per  year.  This  figure  includes  businesses  using  the  SME  scheme,  businesses  opting  for  the 
standard  VAT  regime  (while  being  eligible  for  the  SME  scheme)  and  businesses  under  the  standard  VAT 
regime (as not eligible for the SME scheme). See 2017 Deloitte study on SMEs, Volume I, p. 114.  

118 

 
  
 
 
 
 
 
 
 
                                                 
stem  from  the  complexity  of  the  VAT  rules  (different  rates,  exemptions,  different  place  of 
supply rules), the extensive number of VAT obligations and their frequency.  

In addition, given the fragmentation of the VAT system217, compliance costs linked to intra-EU 
trade are much more significant for small and micro businesses, representing a real obstacle to 
cross-border trade218. In particular, national VAT regimes and administrative procedures can be 
quite complex in some Member States. Small businesses may often lack the knowledge required 
and have recourse to expensive tax advise.   

Measures for SMEs under the VAT Directive 

The VAT Directive sets out several provisions designed to alleviate the effects of SMEs having 
to  deal  with  VAT,  which  are  optional  for  both  Member  States  and  businesses.  The  special 
scheme  for  small  enterprises  (‘SME  scheme’)  provides,  in  particular,  measures  aimed  at 
reducing  the  burden  for  SMEs  of  charging  and  collecting  VAT,  such  as  the  flat-rate  scheme 
(Article 281)  and  others  eliminating  this  burden,  such  as  the  SME  exemption  and  graduated 
relief  (Articles 282-294).  Member  States  may  also  relieve  SMEs  covered  by  the  exemption  or 
graduated relief from certain or all VAT obligations (Article 271). Other simplification measures 
outside  the  SME  scheme  are  available  to  all  businesses  (e.g.  simplified  invoicing)  or  only  to 
SMEs (e.g. cash accounting scheme). 

The VAT Directive also provides Member States with significant flexibility to design their SME 
scheme  at  national  level.  As  a  result,  the  national  schemes  may  differ  considerably  among 
Member  States219  (e.g.  exemption  thresholds  and  number  of  simplified  VAT  obligations 
combined with the exemption).  

New trends in the economy 

E-commerce and technological developments have created new opportunities for consumers and 
entrepreneurs (e.g. through collaborative economy platforms) as well as new forms of business 
that may significantly change the concept of ‘economic activity’, hence making the application 
of VAT rules particularly challenging.  

Additionally, the increasing number of occasional traders resulting from these developments can 
be a burden for tax authorities and since compliance control costs are disproportionate compared 
to revenue collected there may be little benefit.  

For  SMEs,  the  current  VAT  system  is  not  targeted  to  properly  address  these  new  trends  and 
related issues. 

217  Since VAT is levied in the Member State  of the customer and in accordance with that Member State's  laws, 

different national VAT rules will apply and different tax authorities will be involved. 

218  The average cost for SMEs to account for VAT in another Member State is estimated to be EUR 4 100 annually 
per  Member  State  they  supply  to.  This  compares  to  the  average  of  EUR 8 000  for  larger  businesses.  The 
estimates reflect lower activity levels for SMEs. See Deloitte Study on ‘Modernising VAT for cross-border e-
commerce’, Lot 1, p. 44.   

219  See  Annexes 10  and  11  for  an  overview  of  the  VAT  obligations  linked  to  the  SME  exemption  and  other 

simplified measures per Member State. 

119 

 
                                                 
Question 2: How effective has the EU intervention been? 

The  SME  exemption  provides  a  significant  tax  benefit  for  SMEs  as  it  removes  entirely  the 
burden  of  collecting  VAT  related  to  domestic  supplies.  Additionally,  the  scheme  lowers 
substantially the administrative burden for businesses applying the scheme, due to the fact that 
Member  States  often  provide  together  with  the  exemption  for  simplified  VAT  obligations, 
according to Article 272(1)(d) of the VAT Directive.  

However, the current SME exemption presents some weaknesses that make the scheme unable 
to fully address the need of reducing the burden of small businesses related to the application of 
normal VAT rules. In particular: 

  simplified VAT obligations are optional for Member States (hence use and design is non-
harmonised)  and  only  applicable  together  with  the  exemption.  This  means  that  eligible 
small  businesses  opting  out  of  the  exemption  (e.g.  to  be  able  to  obtain  input  VAT 
deduction) cannot benefit from less burdensome obligations; 
the  scheme  is  only  applicable  to  established  businesses  (Article 283(1)(c)  of  the  VAT 
Directive).  Therefore  cross-border  supplies  are  not  covered  by  the  exemption.  SMEs 
wishing to trade in other Member States are required to register and account for VAT in 
those  Member  States220  and  indeed  are  confronted  with  a  more  complex  and  costly 
legislative framework.  

 

Cost-benefit analysis for businesses  

The inherent  consequence  of the exemption is  that  the business is  not allowed to deduct input 
VAT  (Article 289  of  the  VAT  Directive).  Therefore,  opting  for  the  exemption  will  depend  on 
whether, despite the cost of non-deductible input VAT, the exempted SME is able to offer lower 
prices to its customers (competitive advantage). Although, the scheme is applicable to both B2C 
and B2B transactions221, the study confirmed that it is more beneficial where most of the SME’ 
customers are final consumers or exempted businesses (with no right to deduct input VAT) and 
where the amount of input VAT is relatively lower than output VAT222.  

Moreover, it results from the study that one of the main reasons (hence one of the main benefits) 
in opting for the scheme is due, despite the tax benefit, to the possibility for exempted SMEs to 
be discharged from all or  some of the VAT obligations223. Therefore, the SME exemption has 
proved to be more effective where it is accompanied by a number of simplified VAT obligations 
(see Table 23). 

220  This is currently the case for B2C supplies of goods, where the distance sales threshold is reached (Article 34 of 
the  VAT  Directive)  and  B2C  supplies  of  services  other  than  ‘electronic  services’  to  which  the  simplified 
registration and payment system ‘the mini One Stop Shop’ (MOSS) is applicable. 

221  See Article 283 of the VAT Directive. 
222  In particular, it was observed that SMEs may prefer to charge VAT on their supplies and opt out of the scheme 
in order to enable their B2B customers to recover input VAT. See the 2017 Deloitte study on SMEs, Volume I, 
p. 80-82.  

223  While  the  obligations  within  the  national  schemes  vary  across  Member  States,  in  the  majority  of  the  cases 
SMEs applying the scheme do not have to file periodical VAT returns and issue VAT invoices. Additionally, 
about two thirds of Member States do not require the business covered by the SME scheme to register for VAT 
purposes, thus the exemption threshold may also be considered as VAT registration threshold. 

120 

 
                                                 
Threshold effect 

Another  drawback  of  the  exemption  is  due  to  the  fact  that  in  most  Member  States  once  the 
exemption threshold is reached the business has to comply with the full set of VAT obligations 
all  at  once,  losing  both  tax  and  administrative  incentives.  As  a  result  of  this,  businesses  limit 
their sales to remain below the threshold so as to avoid the sudden change in compliance costs. 
Such  adverse  behaviour  appears  to  be  relatively  permanent,  implying  a  decrease  in  SMEs’ 
growth in the medium-long term224.   

Question 3: How efficient has the EU intervention been? 

Impacts on compliance costs for SMEs 

Overall,  it  was  estimated  that  the  SME  exemption  reduces  compliance  costs  for  small 
businesses  by  approximately  60%  compared  to  businesses  using  the  standard  VAT  regime225 
(saving  on  average  around  EUR 1 500  per  business  per  year).  However,  the  reduction  of  the 
compliance  burden  for  SMEs  applying  the  scheme  varies  substantially  across  Member  States, 
depending  on  the  simplified  VAT  obligations  attached  to  the  scheme.  As  shown  in  the  table 
below,  compliance  costs  for  businesses  within  the  scheme  range  from  zero,  as  in  the  case  of 
Estonia, Romania and the UK (where businesses are released from all VAT-related obligations) 
to EUR 1 381 per business annually, as in the case of Italy (where businesses are still required to 
register for VAT and issue invoices).  

It is important to note that the SME exemption can be linked to other additional simplification 
measures  not  VAT-related  which  can  further  support  the  business’  decision  to  opt  for  the 
scheme226.  

Table 23:  Compliance  costs  for  SMEs  within  and  outside  the  SME  exemption  in  selected 
Member States 

Member 
State 

Within the SME exemption 

Outside of the SME exemption 

Relevant IOs 

Overall costs 
(annual basis) 

Relevant IOs 

Overall costs 
(annual basis) 

Estonia 

No VAT-related 
obligations 

No VAT-related 
compliance costs 

France 

 

 

Applying for 
exemption 
Bookkeeping 

EUR 960 

 
 

 

 

 

 
 
 

 

VAT registration 
Invoicing (re 
domestic)  
VAT declara-
tions/returns 
VAT payment 
(domestic) 
Bookkeeping 

VAT registration 
VAT input 
Invoicing (re 
domestic)  
VAT declara-
tions/returns 

EUR 872 

(of which advisory 
fees: EUR 183) 

EUR 1 981 

(of which advisory 
fees: EUR 265) 

224  See the 2017 Deloitte study on SMEs, Volume I, section 5.4.3. 
225  The  assessment  of  the  compliance  costs  under  the  SME  exemption  was  carried  out  for  five  Member  States 

(Estonia, France, Italy, Romania and the UK).  

226  In Italy, for instance, the SME exemption is combined with a substitute tax of 15% or 5% for both income and 

regional taxation.  

121 

 
                                                 
Within the SME exemption 

Outside of the SME exemption 

Relevant IOs 

Overall costs 
(annual basis) 

Relevant IOs 

Overall costs 
(annual basis) 

Member 
State 

Italy 

 

 

 

VAT registra-
tion 
Invoicing (re 
domestic)  
VAT return 
(‘Unico’, annual 
statement) 

EUR 1 371  

(of which advisory 
fees: EUR 500) 

Romania 

No 
obligations 

VAT-related 

No 
compliance costs 

VAT-related 

UK 

No VAT-related 
obligations 

No VAT-related 
compliance costs 

EU average 

costs 

EUR  550  of  which 
for 
hidden 
the 
monitoring 
threshold 
are 
EUR 193 

Source: 2017 Deloitte SME study  

Impacts on Member States 

 

 

 
 

 

 

 

 
 

 

 

 

 
 

 

 

 

VAT payment 
(domestic) 
Bookkeeping 

VAT registration 
Invoicing (re 
domestic)  
VAT declara-
tions/returns 
VAT payment 
(domestic) 
Bookkeeping 

VAT registration 
Invoicing (re 
domestic)  
VAT declarations/ 
returns 
VAT payment 
(domestic) 
Bookkeeping 

VAT registration 
Invoicing (re 
domestic)  
VAT declara-
tions/returns 
VAT payment 
(domestic) 
Bookkeeping 

EUR 2 907 

(of which advisory 
fees: EUR 1 015)  

EUR 2 500  

(of which are advisory 
fees: EUR 2 215) 

EUR 2 492  

(of which are advisory 
fees: EUR 1 100) 

EUR  2  964  of  which 
are 
advisory 
EUR 1 023 

fees 

The  SME  exemption  does  generally  reduce  also  administrative  costs  of  tax  collection  and 
control  for  tax  authorities,  as  in  most  of  the  Member  States  it  lowers  the  number  of  VAT 
registered taxable persons227.  

However,  the  scheme  leads  to  loss  of  VAT  revenues  for  Member  States  which  is  to  a  certain 
extent  intentional  for  them  (cost-benefit  analysis).  In  this  regard,  it  should  be  noted  that  the 
proportion  of  small  businesses  exempted  from  VAT  is  estimated  to  be  around  27%  of  all  EU 
businesses,  representing  0.3%  of  the  total  turnover  generated  in  the  EU228.  Consequently  the 
foregone VAT revenue for tax authorities is estimated to be negligible (EUR 3.8 billion or 0.4% 
of net VAT revenues collected in the EU229). 

227  Tax authorities interviewed could not provide any specific data to quantify such reduction. 
228  Businesses  covered  by  the  SME  exemption  are  approximately  11 million  in  the  EU.  See  2017  Deloitte, 

Volume II, tables 29, 30 and 75. 
229  See 2017 Deloitte, Volume I, p. 120. 

122 

 
 
 
                                                 
Cross-border implications of the SME exemption 

The territoral application of the exemption creates distortions in the internal market due to the 
unequal  treatment  between  suppliers  from  other  Member  States  that  do  not  have  access  to  the 
SME  exemption  in  the  Member  State  of  destination  and  suppliers  established  in  that  Member 
State that can benefit from the exemption.  

The  territorial  scope  of  the  scheme  may  also  discourage  domestic  businesses  from  trading  in 
other Member States and fully seizing the opportunities of the Single Market230.   

Little  evidence  is  available,  however,  on  the  cross-border  trading  behaviours  of  SMEs  within 
and outside of the exemption. Estimates from the 2017 Deloitte Study indicate that on average 
30%  of  businesses  in  the  EU  sell  to  other  EU  Member  States.  While  the  proportion  of  small 
businesses exempted under the current SME exemption (likely those with a turnover of less than 
EUR 50 000) which are involved in intra-EU trade is about 12%231.  

It  is  important  to  note  that  also  dissimilarities  in  national  VAT  regimes  (e.g.  dissimilarities  in 
VAT administrative procedures and rates) affect negatively intra-EU trade, particularly bilateral 
trade flows232. 

Question 4: How relevant is the EU intervention? 

SMEs are considered the engine of the EU economy, representing 98% of all EU businesses and 
contributing  to  over  65%  of  employment  in  the  private  sector.  Because  of  their  size,  small 
businesses  are  much  better  at  identifying  and  embracing  new  trends  in  the  industry  and, 
therefore,  driving  innovation  within  their  respective  sectors.  Small  businesses,  particularly 
micro-businesses,  can  also  be  much  more  adaptable  to  change  than  larger  and  more  complex 
organisations.  Hence,  their  development  is  fundamental  to  ensuring  economic  growth, 
innovation,  job  creation,  and  social  integration  in  the  EU.  Yet  many  obstacles  preclude  SMEs 
from  seizing  the  full  potential  of  the  Single  Market.  For  instance,  diverse  and  complex  VAT 
rules across the EU can result in a high compliance burden on SMEs, particularly when trading 
with other Member States. This does not only hamper their growth but may even prevent them 
from engaging in cross-border trade and reap the benefits of the Single Market. As stated above, 
despite representing a significant part of the economic activity in the EU, small businesses only 
generate 15% of the total EU turnover compared to large companies which contribute over 75%. 

With the Small Business Act for Europe, the EU put SMEs at the centre of its policy actions and 
adopted  two  key  principles  to  address  their  needs:  designing  rules  according  to  ‘Think  Small 
First’ and helping SMEs to benefit more from the opportunities offered by the Single Market. 

Question 5: How coherent is the EU intervention internally and with other (EU) actions? 

The  modernisation  of  the  VAT  system,  of  which  the  special  scheme  for  small  businesses 
constitutes  an  integral  part,  is  an  ongoing  long-term  process  started  in  2010233.  The  guiding 

230  It  was  estimated  that  if  the  VAT  compliance  costs  associated  with  intra-EU  trade  were  equivalent  to  1%  of 
firms’ sales, eliminating them would increase intra-EU trade by 4.3%, GDP by 0.4% and consumption by 0.3%. 
See IFS et al., 2011, A retrospective evaluation of elements of the EU VAT system, p. 23. 

231  See the 2017 Deloitte study on SMEs, Volume I, p. 43. 
232  It was estimated that a 10% reduction in the dissimilarity of general VAT obligations would increase intra-EU 
trade  by  3.7%,  GDP  by  0.4%  and  consumption  by  0.3%.  See  IFS  et  al.,  2011,  A  retrospective  evaluation  of 
elements of the EU VAT system, p. 23. 

123 

 
                                                 
principles  of  this  work  are,  first,  that  businesses  trading  across  the  EU  and  those  trading  only 
domestically  must  be  treated  equally  and,  secondly,  that  the  VAT  compliance  costs  related  to 
intra-EU trade must be reduced. The creation of a simple, modern and fraud-proof VAT system 
is indeed one of the fiscal priorities set out by the Commission for 2017 (Annual Growth Survey 
2017234) which should contribute to deepening the Single Market.  

An  EU  intervention  in  the  VAT  area  aimed  at  reducing  the  compliance  burden  on  small 
businesses would be consistent with the Single Market Strategy (SMS)235, which recognises the 
complexity  of  VAT  rules  for  SMEs  and  identify  some  initiatives  to  assist  small  businesses 
accessing  the  Single  Market.  This  intervention  would  also  be  consistent  with  the  objectives 
under  the  REFIT236  programme  to  make  the  EU  law  simple  and  less  costly,  mainly  for  small 
businesses. 

The objective of reducing compliance burdens for SMEs is also highlighted in the EU’s growth 
strategy for the coming decade (Europe 2020  – A strategy for smart, sustainable and inclusive 
growth237). 

Question 6: What is the EU added value of the intervention? 

The  above  analysis  confirmed  that  the  current  VAT  rules  for  small  businesses  suffer  from 
several  drawbacks.  In  particular,  the  SME  exemption,  based  largely  on  when  Member  States 
joined  the  EU,  does  not  reflect  the  Single  Market  perspective  and  the  move  to  a  definitive 
system  based  on  the  destination  principle:  the  scheme  is  targeted  mostly  at  businesses  trading 
domestically and in the B2C context. 

The assessment identified some areas for improvements of VAT rules for small businesses that 
require  EU  intervention238.  The  amendments  to  the  VAT  Directive  should  bring,  in  particular, 
the following benefits:  

  More level playing field for SMEs. The existing distortions should be addressed at two 
levels:  (1)  between  small  businesses  under  the  SME  exemption  and  those  that  do  not 
make  use  of  the  exemption;  (2)  between  small  businesses  that  trade  only  domestically 
and those that trade cross-border.  

  Greater effectiveness in reducing VAT compliance costs for SMEs. Simplified VAT 
obligations should be made available for all eligible SMEs and not only to those covered 
by  the  SME  exemption  (this  would  in  particular  address  the  problem  of  SMEs  trading 
mostly  B2B).  Furthermore,  the  regulatory  framework  should  provide  an  alignment 
between  different  national  regimes  making  use  of  best  practises  (e.g.  common  set  of 
simplified requirements). 

233  Work  on  the  future  of  VAT  started  with  the  launch  of  the  2010  Green  Paper  followed  by  the  2011 

Communication. 

234  https://ec.europa.eu/info/publications/2017-european-semester-annual-growth-survey_en  
235  http://ec.europa.eu/growth/single-market/strategy_en 
236  Regulatory Fitness and Performance programme: http://ec.europa.eu/info/law/law 

law-making-process/evaluating-and-improving-existing-laws/reducing-burdens-and 
making-eu-law-simpler-and-less-costly_en 

makingprocess/overview-
simplifying-law/refit-

237  http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=COM:2010:2020:FIN:EN:PDF 
238  The  EU  has  exclusive  competence  in  the  field  of  indirect  taxation  to  the  extent  that  such  intervention  is 
necessary  to  ensure  the  establishment  and  the  functioning  of  the  internal  market  and  to  avoid  distortion  of 
competition, under Article 113 of the TFEU.  

124 

 
                                                                                                                                                             
  Encourage  small  business  growth.  It  results  from  the  analysis  that  compliance  costs 
may also affect SMEs’ growth. A more effective intervention to reduce these costs will 
improve SMEs’ competitiveness overall, hence boosting their domestic and cross-border 
activity.  Moreover,  the  VAT  system  may  provide  specific  provisions  to  support  fast-
growing SMEs (e.g. smooth transition to full taxation and standard VAT regime). 

4.  Conclusions 

Overall, the evaluation has confirmed that, given the complexity of the current VAT system and 
the high compliance costs faced by small businesses when dealing with VAT, the existence of a 
special  scheme  for  SMEs  in  the  VAT  Directive  is  still  amply  justified.  Complying  with  VAT 
rules is extremely complex and costly, particularly when SMEs engage in intra-EU trade. 

Although the SME scheme has proved to be effective in reducing SMEs’ burden related to the 
application  of  normal  VAT  rules,  it  offers  a  limited  and  fragmented  response.  Namely,  the 
effectiveness of the scheme varies considerably from one Member State to another depending, in 
particular, on the number of simplified VAT obligations combined with the exemption and the 
type  of  economic  activity  carried  out  by  the  SMEs.  Moreover,  the  scheme  creates  distortive 
effects on competition at both domestic and cross-border level, as it does not take into account 
the Single Market perspective. 

It  should  be  noted  that  with  the  evolution  of  the  VAT  system  towards  taxation  at  destination, 
compliance costs related to intra-EU trade are likely to increase239. The heavy burden for small 
businesses will therefore increase if there is no action at EU level to simplify VAT obligations. 
Failure  to  act  will  consequently  lead  to  more  distortions  in  the  Single  Market  and  negative 
effects for SMEs’ growth.  

239   Once the definitive regime will enter into force, the supplier will have to charge and account for VAT in the 
Member State of destination. At present, intra-EU B2B supplies of goods are exempted under Article 138 of the 
VAT Directive. 

125 

 
 
 
 
 
 
 
 
                                                 
ANNEX 9:  

SME EXEMPTION THRESHOLDS IN THE EU (APRIL 2017) 

Member 
State240 

Exemption for small enterprises241 

Derogation granted 
by242 

Date of 
expiry 

In euro243 

National currency 

Belgium 

Bulgaria 

25 000 

Council Implementing 
Decision 2013/53/EU 

31/12/2018 

25 565 

BGN 50 000 

Czech Republic 

37 008 

CZK 1 000 000 

Denmark 

Germany 

Estonia244 

Ireland 

Greece 

Spain 

France 

Croatia 

Italy 

Cyprus 

Latvia 

Lithuania 

6 726 

DKK 50 000 

17 500 

16 000 

75 000 
37 500 

10 000 

None 

82 800 
42 900 
33 100 

30 864 

HRK 230 000 

Council Implementing 
Decision (EU) 2017/1768 

31/12/2020 

25 000 
30 000 
40 000  
45 000 
50 000 

15 600 

50 000 

45 000 

Council Implementing 
Decision 2013/678/EU 

31/12/2019 

Council Implementing 
Decision 2014/796/EU 

31/12/2017 

Council Implementing 
Decision 2011/335/EU 

31/12/2020245 

Council Implementing 
Decision 2013/677/EU 

31/12/2019 

Luxembourg 

30 000 

240   Some Member States apply different threshold based on factors such as the nature of the supply 

(goods/services) or the level of added value (high/low). 

241   This is based on Articles 284 to 287 of the VAT Directive. This scheme is, according to Article 283(1)(c) of the 
VAT Directive, reserved for taxable persons established within the territory of the Member State in which the 
VAT is due. 

242   A total of 9 Member States are currently relying on derogations. 
243   For Member States not using the euro, the thresholds in euro has been calculated based on the foreign exchange 

reference rates as published by the European Central Bank for 21 February 2017. 

244  As  of  1/1/2018  the  exemption  threshold  will  be  EUR  40  000  –  see  Council  Implementing  Decision 

2017/563/EU. The expiry date of the derogation is 31/12/2020. 

245 See Council Implementing Decision 2017/1853/EU amending Implementing Decision 2011/335/EU. 

126 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
                                                 
Member 
State240 

Hungary 

Malta 

Netherlands 

Austria 

Poland 

Portugal 

Exemption for small enterprises241 

Derogation granted 
by242 

Date of 
expiry 

In euro243 

National currency 

26 067 

HUF 8 000 000 

35 000 
24 000 
14 000 

None 

30 000 

None 

46 442 

PLN 200 000 

Council Decision 
2009/790/EC 

31/12/2018 

12 500 

10 000 

Council Implementing 
Decision 2012/181/EU 

31/12/2017 

Council Implementing 
Decision 2013/54/EU 

31/12/2018 

Romania246 

48 725 

RON 220 000 

Slovenia 

Slovakia 

Finland 

Sweden 

50 000 

49 790 

10 000 

3 168 

SEK 30 000 

United Kingdom 

97 808 

GBP 83 000  

Source: Commission services 

246   Threshold expressed in national currency calculated from the EUR values at the exchange rate on the date of 
accession,  i.e.  1.1.2007.  As  of  1/1/2018  the  exemption  threshold  will  be  EUR  88  500  –  see  Council 
Implementing Decision 2017/1855/EU. The expiry date of the derogation is 31/12/2020. 

127 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
                                                 
 
ANNEX 10:   SPECIAL VAT SME MEASURES APPLIED IN MEMBER STATES  

Member State 

SME exemption 

SME graduated 
relief 

SME flat rate 
scheme 

Cash accounting 
scheme 

Belgium 

Bulgaria 

Czech Republic 

Denmark 

Germany 

Estonia 

Ireland 

Greece 

Spain 

France 

Croatia 

Italy 

Cyprus 

Latvia 

Lithuania 

Luxembourg 

Hungary 

Malta 

Netherlands 

Austria 

Poland 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

128 

 
Member State 

SME exemption 

SME graduated 
relief 

SME flat rate 
scheme 

Cash accounting 
scheme 

Portugal 

Romania 

Slovenia 

Slovakia 

Finland 

Sweden 

UK 

Total 

 

 

 

 

 

248 

 

26 

 

 

 

 

 

 

 

3 

 

 

 

 

 

 

 

8 

 

 

 

 

247 

 

 

24 

Source: Commission services on the basis of 2017 Deloitte SME study (Deloitte Tax Network Survey) 

247   Finland 

introduced 

a 

cash 

accounting 

scheme 

from  1 January  2017:  https://www.vero.fi/en-

US/Tax_Administration/Changes2017/Legislative_changes_affecting_taxes_in_2(40836) . 

248   Sweden  introduced  a  SME  exemption  from  1 January  2017:  https://data.riksdagen.se/fil/BABBC8C1-C310-

432D-9C10-08801D44891F. 

129 

 
 
 
 
 
 
                                                 
ANNEX 11:   VAT OBLIGATIONS LINKED TO THE SME EXEMPTION PER MEMBER STATE 

Member 
State 

Exemption 
from 
charging 
VAT on 
supplies 

Requirement 
to register for 
VAT purposes 

Requirement 
to register for 
other 
purposes249 

Obligation 
to submit 
periodical 
VAT returns 

Simplified 
accounting 
obligations  

Obligation 
to issue 
VAT 
invoices 

Belgium 

Bulgaria 

Czech 
Republic 

Denmark 

Germany 

Estonia 

Ireland 

Greece 

Spain 

France 

Croatia 

Italy 

Cyprus 

Latvia 

Lithuania 

Luxembourg 

Hungary 

Malta 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

no SME exemption, but SME graduated relief, flat rate scheme and cash accounting to tackle the 
tax and compliance burden 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

250 

 

 

 

 

 

 

 

 

 

249   Such as for commercial or other tax purposes (e.g. corporate or income tax). 
250   Malta released from obligation to submit periodical VAT returns if turnover below EUR 7 000. 

 

 

 

 

 

 

 

 

 

130 

 
                                                 
Member 
State 

Exemption 
from 
charging 
VAT on 
supplies 

Requirement 
to register for 
VAT purposes 

Requirement 
to register for 
other 
purposes249 

Obligation 
to submit 
periodical 
VAT returns 

Simplified 
accounting 
obligations  

Obligation 
to issue 
VAT 
invoices 

Netherlands 

no SME exemption, but SME graduated relief to reduce tax burden 

Austria 

Poland 

Portugal 

Romania 

Slovenia 

Slovakia 

Finland 

Sweden 

UK 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

251 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Source: Commission services on the basis of 2017 Deloitte SME study (Deloitte Tax Network Survey) 

251   Poland released from obligation to submit periodical VAT returns. 

131 

 
 
 
 
 
 
 
                                                 
ANNEX 12:   ENTERPRISE EUROPE NETWORK – SME FEEDBACK DATABASE 

The  Enterprise  Europe  Network252  (EEN)  is  a  project  managed  by  the  European  Commission 
(DG  GROW)  which  helps  businesses  innovate  and  grow  on  an  international  scale,  being  the 
world’s largest support network for SMEs with international ambitions. The network is made of 
600  partners  or  intermediary  organisations  (Chambers  of  Commerce  and  Industry,  Innovation 
agencies, regional development agencies, Technology Transfer departments of Universities and 
other SME support organisations) in all EU Member States and more than 30 non-EU countries.  

The EEN provides assistance  to  the European Commission  in  getting the opinion of SMEs on 
European legislation and initiatives, among others, through the ‘SME feedback database’. This 
database  is  a  register  of  practical  problems  with  EU  legislation  experienced  by  SMEs,  as 
reported  by  EEN  partners.  Since  2006,  more  than  8 000 contributions  have  been  submitted. 
VAT-related  cases  represent  10%  of  this  overall  database  and  constitute  one  of  the  main 
problems encountered by SMEs seeking advice from the EEN.   

Find  below  extracts  of  some  of  the  problems  which  are  relevant  for  the  purposes  of  this 
proposal, as indicated by EEN members in the SME feedback database253. Although they are not 
representative and should be treated as anecdotal, they are real-life examples which illustrate the 
VAT compliance burdens faced by SMEs, notably in relation to cross-border trade.  

Table 24: Examples from the SME feedback database 

Year of the 
contribution 

2014 

2014 

2012 

2011 

EEN member contribution (extracts) 

A local start-up company contacted our offices to get information on e-business of food products 
in the EU. They are planning to sell typical Italian food (except wine) via web, so they needed to 
be assisted on the main aspects before launching the web. They were in particular interested in 
fiscal aspects. They tried to find info on their own but they had difficulties in finding official 
sources and clear explanations on the functioning of the intra-EU vat for e-business. After losing 
much time, they addressed to us. We therefore explained the VAT functioning, in case of selling 
to EU private consumers. In particular the main aspect concerns the national threshold of the 
sales. If it is exceeded, they have to open a fiscal number in the other EU country. This means 
additional time and also costs for the local fiscal mandate.   

A self-employed translator established in one Member State is exempt from VAT there, and he 
has potential clients in other Member States. He wants to obtain a VAT identification number in 
order to sell to clients in other Member States (where he has to declare VAT), but he finds out 
from his tax administration that he will be denied the possibility to profit from the exemption in 
his Member State, as a consequence of having obtained a VAT number254. 

For obtaining the VAT identification number in another Member State, the criteria often change 
across the EU and the information is in national languages. The information is neither clear nor 
harmonised at EU level255.  

A photographer based in Austria intents to take pictures in Italy during public events. Right after 
taking the pictures he is going to try and sell these pictures to the participants and guests on 
the event. However, as this sales activity is taken out I Italy and therefore subject to Italian 
VAT, the foreign photographer is required to register for taxing purposes in Italy. 

252  http://een.ec.europa.eu/about/about  
253   This database is not publicly available, and this is why only some fragments of the contributions received by 

EEN members are reproduced in an anonymous way.  

254   Original contribution in French (our translation).  
255   Ibid.   

132 

 
                                                 
2011 

2010 

2010 

2010 

2007 

2007 

Our (self-employed) client wanted to supply services connected with immovable property to a 
client in Poland. This kind of services is taxable in the country where the property is located, in 
this case in Poland. This means that our client would have to register with the Polish tax 
authorities. In Germany our client is classified as "small enterprise" which means that he is not 
obliged to invoice VAT. As he opted for this regime he would prefer to avoid VAT registration in 
Poland, as well. However this is not possible.    

Our client has set up a website where he sells goods and wine. Most of customers are from 
Member States other than the one where he is established (France). Registering in every 
Member State where he sells wine requires lots of time and sometimes the need to appoint a 
fiscal representative in the Member State of destination. This is a handicap for this very young 
enterprise that wishes to develop in the Single Market256.  

An Austrian-based retailer for food specialties was invited by an Italian community to sell his 
food specialties during a fair ground to the visitors. The selling activities would be for 3 days 
during a weekend. As the turnover of this selling activity is carried out at the Italian taxing 
territory it is subject to Italian VAT. As a result the company needs to be registered for taxing 
purposes at the Italian VAT office. 

EC Companies that are not based in the UK and which do some assembling and installation work 
in the territory of the UK, are obliged to register for taxing purposes in UK, in the case that 
these foreign companies do exceed a certain annual threshold. This threshold is at about 
EUR 90 000 per annum, so will be met easily even for medium-sized orders. Also in the case the 
contract is made with a company already tax registered in the UK (and not with an individual) 
the taxing registration requirement is in force and has to be met. Even though a representative 
has not to be appointed by law, due to unknown and unfamiliar procedures, deadlines and 
forms, SMEs cannot refrain from appointing a representative at sometimes high charges in 
relation to the order. 

The complaining company runs a bookstore in Austria and due to an invitation by a publisher 
based in Denmark, the Austrian bookshop intents to display books on a book fair in Denmark. 
To make some profits to finance to presentation costs in Denmark, the company also wants to 
offer some books for sale. The problem is that the place of sale is located in Denmark, so sales 
will be taxable in Denmark and a taxing registration is required. But as the expected turnover 
during the 5-days bookfair may be about EUR 1 000,- only, the costs arising from registration 
(by using the help of an export) will exceed the expected income by far. 

Many small and medium sized companies face high expenses when trying to do business in 
other Member States. In the current case an Austrian based stove builder got an order from an 
individual client based in Italy. The place of order was in Italy as well and as the client was an 
individual, the company was forced to make a tax registration in Italy to satisfy Italian tax rules 
and to charge Italian tax to the individual client. As the Austrian stove builder was facing 
linguistic barriers along with unknown tax rules, he was forced to name a tax representative in 
Italy. Unfortunately the income of the Italian order was almost as high as the costs for the 
Italian tax representative. 

2007 

A French micro enterprise has been selling goods in several fairs in Belgium. It is required to 
declare and pay VAT in Belgium for such sales, while it is exempted from VAT in France257.  

Source: Commission services, based on the SME feedback database.  

256   Ibid.   
257   Ibid.   

133