As a reminder, as of 1 January 2025, a new VAT special scheme for SMEs has been introduced, included in Council Directive (EU) 2020/285, which aims to simplify the tax obligations of small businesses trading and providing services within the European Union. Under this legislation, small businesses will be able to sell goods and services in other EU countries without charging VAT (using an exemption) and to carry out simplified reporting.
In practice, this means that eligible businesses will not have to register for VAT in every country where they have customers, significantly reducing administrative costs and quite a barrier to the development of cross-border business.
Operating rules of the SME VAT Scheme
- Turnover thresholds.
To benefit from the VAT exemption, a company must meet two turnover thresholds.
Firstly, the sum of its turnover in all EU countries (the so-called EU threshold) in the current and previous year must not exceed EUR 100,000.
Secondly, the turnover in each individual country where the company wishes to apply the exemption must not exceed the national VAT threshold set by the country of consumption (maximum EUR 85,000 or currency equivalent).
Each EU country may therefore apply its own threshold (often up to EUR 85 000) and some even introduce different thresholds for different industries. Entrepreneurs intending to sell to specific EU countries should therefore equip themselves with knowledge of the applicable turnover threshold in the country in question before commencing sales. Furthermore, the entrepreneur will be obliged to provide his turnover in the current and previous year (or in the two previous years, if the country in question requires it) in the registration declaration, so that the authorities can check that the conditions for exemption are met.
- Conditions of participation.
Only small and medium-sized enterprises registered for VAT in the EU can benefit from the SME procedure. The use of this procedure is, of course, voluntary - a trader can apply the exemption in selected countries and stay with the normal VAT rules in others.
Simultaneous use of the SME Scheme and the OSS (One-Stop Shop) procedure in the same country will unfortunately not be possible, although a company can be exempt in some countries and at the same time accounted for by OSS in other countries.
- Registration and ID.
In order to enter the SME VAT Scheme, a trader should submit a so-called 'prior notification' in his country of establishment - an electronic notification containing information on planned countries and turnover. In Poland, the following tax offices are responsible for handling SME registrations: Naczelnik II Urzędu Skarbowego Warszawa-Śródmieście (for Polish taxpayers) and Naczelnik Urzędu Łódź-Śródmieście (for foreign companies).
Once the notification has been submitted, the authority has up to 35 days to assign the entrepreneur an individual identification number with the suffix '-EX' (example: PL1234567890-EX). The number entitles the trader to an exemption in selected countries and is required to be indicated on invoices.
4.Reporting obligations.
A company using the SME does not settle VAT either in the individual countries of consumption or through the OSS - instead, it submits simplified reports to the tax authorities of its country of establishment.
The entrepreneur should send quarterly information on the value of turnover in each EU country where the exemption has been applied. In Poland, quarterly reports are submitted within a month after the end of the quarter on the so-called SME_IK form.
In this way, the administration has an ongoing view of the company's turnover and can control whether it still falls within the set thresholds. By using the exemption, the entrepreneur does not charge VAT on his invoices, which also means that he loses the right to deduct input tax from the purchase invoices related to these transactions.
To sum up:
- The entrepreneur does not have to settle VAT in other countries; he carries out all formalities in his country of establishment;
- He issues sales invoices with the rate 'zw.' (exempt from VAT) and the number EX, which indicates a transaction covered by the SME VAT SCHEME procedure;
- Once a quarter, it reports the total turnover in each country.
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Comparison with the OSS (One Stop Shop) procedure
The One Stop Shop (OSS) procedure also serves to facilitate VAT settlements for B2C consumer sales in the EU, but works differently. Under the OSS, it is the seller calculates VAT at the rate of the country of consumption and settles it through a single declaration in the country of identification, rather than registering in each country. In contrast, in the SME VAT SCHEME procedure the vendor does not charge VAT at all - he uses an exemption - which eliminates the need to pay tax but removes the right to deduct it.
Key differences between SME and OSS
- Turnover threshold.
The OSS procedure has an EU threshold of EUR 10,000 (the sum of revenues from B2C services and intra-Community sales of goods) - as long as a company does not exceed this amount in a given year, its supplies are treated as domestic and it may not benefit from the OSS. Once the threshold >€10,000 is exceeded, or if the company immediately wants to account for VAT in the customer's country, it should register under the OSS. The SME VAT SCHEME procedure has different limits (see above - €100,000 EU, €85,000 domestic) and these are, as we can see, much higher.
- VAT charging and accounting.
Under the OSS, the vendor calculates VAT at the rate of the individual country of consumption and pays the tax via the OSS declaration. In an SME VAT SCHEME, the vendor does not add VAT to the price (he sells at an exempt rate) and thus pays nothing into the coffers of the destination country. In practice, this means that the OSS involves accounting for VAT (inter-state tax equalisation), while the SME SCHEME involves total tax exemption, with the obligation to keep simplified records (quarterly reports).
- Formal duties.
In the OSS, the business registers in the OSS country of identification and submits periodic declarations (usually quarterly) detailing sales to all EU countries. In the SME VAT SCHEME, the business submits a one-off declaration for the procedure (prior notification) and quarterly reports on turnover in the following countries. A business can use the SME VAT SCHEME in some countries and the OSS in others at the same time - however, both procedures cannot be used in parallel in the same country.
Comparison with the reverse charge VAT mechanism
Reverse charge mechanism applies primarily to B2B transactions: the vendor invoices without VAT, with the notation 'reverse charge', and it is the purchaser (registered for VAT) who settles the tax himself at the applicable rate. In this way, the small supplier does not have to register for VAT in the buyer's country.
The SME VAT SCHEME, on the other hand, refers to the total VAT exemption of the small entrepreneur. In practice, this means that on a sale under the SME scheme, the vendor issues a 'zw' invoice (with an EX number) and does not add any tax - and the purchaser is not required to pay extra or account for VAT.
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From a documentary point of view:
- reverse charge invoice- does not include the VAT amount, but indicates the legal basis for the reverse charge. The purchaser enters the VAT in his return as output and input tax; thus, the seller is not obliged to register for VAT in the country of purchase, but the purchaser can deduct the tax (if he is entitled to do so);
- invoice under the SME VAT SCHEME procedure also does not show VAT - we only mark the exemption with the annotation 'VAT - exempt' with the seller's EX number; the buyer does not add VAT (or deduct it) as the transaction is fully exempt due to the seller's status.
Unlike a reverse charge, in a VAT SCHEME the purchaser is not obliged to account for any tax - the transaction is simply not subject to VAT.
Examples
- B2C goods trading
A small online shop from Poland sells goods to consumers in Germany and France. If his annual turnover in the EU does not exceed EUR 100,000 and in each of these countries does not exceed the threshold there (e.g. EUR 85,000), he can use the SME VAT SCHEME and not charge VAT on supplies to these countries. As a result, the entrepreneur avoids registering VAT in Germany and France - instead, he settles only in Poland on the basis of quarterly reports. For such a trader, the SME procedure may be more advantageous than traditional registration or the use of the OSS (especially when sales are relatively small), as the VAT exemption reduces the trader's administrative obligations.
- B2B services
A freelancer (e.g. a graphic designer) sells services to companies (VAT payers) in other EU countries. Such transactions usually involve a reverse charge mechanism - the graphic designer issues an invoice without VAT and the foreign company settles the tax itself in its own country. The SME VAT SCHEME procedure does not generally affect these B2B transactions (the seller could formally issue an exempt invoice, but the buyer does not pay VAT in practice anyway due to the reverse charge). In the case of business-to-business counterparties, it is more appropriate to use the reverse charge mechanism, while the SME VAT SCHEME actually reduces costs mainly when selling to consumers or small buyers who do not account for VAT themselves.
It will certainly be worth considering the SME VAT SCHEME procedure where it counters the need to register VAT abroad and provides an exemption that simplifies documentation and billing. For strictly B2B transactions, the reverse charge model remains predominant, and for sales to a number of countries, it is worth considering a combination of SME and OSS - using the SME exemption in some countries and registering with OSS in others, depending on thresholds and sales structure.
In practice, registration for the SME VAT SCHEME procedure takes place electronically in Poland in the e-Tax Office system (the 'SME Notification' form).
Once an EX number is obtained, the entrepreneur uses it when issuing invoices. Detailed information on registration, thresholds and reporting obligations can be found on the official EU portal on the SME VAT procedure (in English): bdo.globalsme-vat-rules.ec.europa.eu.
If you have any questions or doubts about choosing the best VAT accounting method - e.g. whether to use the SME VAT SCHEME, the OSS procedure or the reverse charge mechanism - please do not hesitate to contact our law firm. Call or write to us : https://bktkancelaria.pl/kontakt/. We look forward to hearing from you!
