The European Union has long recognised the need for a special VAT scheme for small enterprises, first introduced in 1977 to ease the compliance burden on SMEs. However, as business models and cross-border trade evolved, the existing rules became outdated. In response, the EU has introduced new VAT provisions, set to take effect in 2025, which extend the VAT exemption for small enterprises to cross-border transactions under specific conditions. While this reform aims to simplify VAT compliance, it also presents hidden complexities that SMEs must carefully consider before opting in.

 

Key provisions of the 2025 VAT scheme

The revised directive brings several key changes to how VAT applies to small enterprises across the EU. SMEs that qualify for VAT exemption in their home country can now extend this exemption in other Member States where they operate, even if they are not established there. Additionally, updated national exemption thresholds aim to create a more consistent and fair system across the EU, minimising discrepancies between Member States. To further support small businesses, the directive allows enterprises that temporarily exceed the VAT exemption threshold to retain their exempt status, preventing sudden operational disruptions. Lastly, both exempt and non-exempt SMEs will benefit from streamlined VAT reporting, reducing administrative burdens.

 

Transposition into Maltese Law

Malta has introduced amendments to its VAT Act, specifically to Article 11, to align with the EU directive.

A new provision, Article 11A, grants VAT exemption to small Maltese businesses supplying goods or services to other EU Member States. Such businesses must submit quarterly reports to the Maltese tax authority, detailing transactions across all Member States. These reports are due by the end of the month following each quarter.

Article 11B establishes a VAT exemption for non-Maltese SMEs conducting business within Malta, allowing them to benefit from VAT relief.

Additionally, Malta has introduced a standardised VAT exemption threshold of €35,000, replacing the previous sector-specific limits.

 

VAT simplification: A double-edged sword?

The 2025 SME VAT registration update as designed with good intentions, to make VAT compliance easier for SMEs. But if past experience has taught us anything, it’s that so-called simplifications can often make things more complicated or more administrative challenging than they were before. Businesses have been down this road before with measures like the triangulation rules and local Article 12 VAT monthly notices, which ended up creating more headaches than solutions.


At first glance, extending the VAT exemption to cross-border transactions seems like a win. Less paperwork, fewer compliance hurdles. What’s not to love? However, before businesses jump on board, they need to take a step back and think things through. One major concern is that SMEs dealing with taxable persons under Articles 44 and 196 of the VAT Directive could find themselves at a disadvantage. Why? Because they wouldn’t be able to reclaim input VAT, which could put a financial strain on their operations and ultimately cancel out any benefits they expected to gain.

Also, let us stress that the measure isn’t a blanket exemption. Many transactions, like intra-community acquisitions (ICAs) of assets, are not covered by the update. That means some businesses might assume they’re completely exempt when, in reality, they still have VAT obligations to deal with. Falling into that trap could lead to costly mistakes and trouble with the authorities.

Experts in the field shared these concerns. Such as, Fernando Matesanz, President of the International VAT Association and a member of the EU Commission’s VAT Expert Group. He recently wrote about this issue in the International VAT Monitor (2024, Volume 35, No. 5) warning that this scheme might end up being a “poisoned chalice” for SMEs that don’t fully grasp its implications.


The bottom line: seek professional advice

The bottom line? While the VAT scheme promises to make life easier, businesses need to do their homework before opting in. What looks like a shortcut might just lead to an unexpected detour, and no one wants to get lost in VAT compliance red tape.

Before opting for the exemption, SMEs should consult a VAT professional to evaluate their transaction flows, customer base, and long-term strategy. Get proper guidance today to prevent VAT compliance issues in the future.

 

For expert guidance on VAT compliance and the implications of the new SME VAT scheme for your business, please contact us here. 

 

Written by Kenneth Cremona, Senior Manager - Indirect Tax Advisory and Compliance