As part of our VAT Guidance series, we’ve looked at the basic rules around value-added taxation and how the regulations change depending on different types of goods and services. There’s an additional layer of distinctions based on the size of the entity as well. VAT for small business is not the same as it is for larger organisations. The variations in laws depend on which country the firm is in, but a common framework applies to entities no matter their location in the EU. This article will explain the core principles at work.
In the EU, there are three schemes of VAT for small business.
- Article 281 of the VAT Directive discusses a simplified charging and collection system.
- Articles 283 to 287 cover exemptions. Based on an organisation’s financials, it can opt to avoid registration for the tax.
- Articles 282 to 292 discuss graduated relief.
In some member states, it can be challenging to apply standard taxation procedures because of the structure of SMEs and their daily operations. In such instances, the authorities can incorporate more straightforward methods. One example of a more manageable process is a flat-rate scheme, where a percentage of your annual turnover is taken as value-added tax.
In the UK, an SME can choose the flat-rate option if its turnover is less than £150,000, for example.
Exemptions from VAT for small business
This is perhaps the most crucial aspect of VAT for small business, namely that all small and medium enterprises (SMEs) don’t need to register for the tax. Generally, a store that sells goods and services in the EU has to be VAT-registered so that it can charge the tax to customers while reclaiming the input tax it pays on purchases. This isn’t the case for exempt items, for certain zero-rated items, and for SMEs.
Many EU countries have special schemes for SMEs, where you can trade goods and services without charging value-added taxes. In most cases, if your business’ turnover is under a certain threshold, you don’t need to register. This means that you don’t need to charge VAT to customers, but you also lose the ability to reclaim input taxes paid on purchases.
The turnover threshold changes from one member state to the next and this table will help you identify those variations. In the UK, for instance, if an entity makes less than £85,000 in revenue, it can avoid registration. In Germany, domestic businesses have a turnover threshold of €17,500.
Each nation’s scheme has a standard set of rules, though, and the exemption doesn’t apply if a firm:
- Exports goods to other countries
- Engages in occasional business activity
- Exports exempt services of new means of transport
- Or has its transactions fall into another restricted category depending on the nation.
However, it must be noted that some countries don’t accommodate exemptions for SMEs, in which case businesses both small and large need to be registered. Spain and the Netherlands fall into this category.
If a country does have an exemption scheme, though, and a business opts to enrol, in most cases it loses the ability to reclaim VAT.
This is the final arrangement of VAT for small business. As we mentioned in the previous section, if a firm’s revenue is below a certain threshold defined by national laws, it doesn’t need to register for value-added taxes. However, some SMEs still opt to enrol in order to reclaim input taxes paid on purchases.
Some countries have schemes providing relief to SMEs if they make less than a certain amount of sales. As SMEs begin to expand and increase their revenue base, this relief gradually decreases until the tax threshold is reached.
The criteria that exclude firms from exemptions apply here as well.
To get a more firm understanding of the various schemes, the European Commission’s guide will be extremely useful. It also states if specific regulations are optional or obligatory for EU countries and firms. The rule of law is more lenient when it comes to VAT for small business. Authorities don’t want to apply undue pressure on SMEs since they form the backbone of most economies.
Consequently, they receive certain benefits to relieve the tax burden. Whether you’re an SME that receives these advantages or not, the process of VAT recovery is common to all businesses. If you need help automating the refund process, VAT4U can help your organisation save time and money. Check how our service works and get in touch.