EUROPEAN COMMISSION DIRECTORATE-GENERAL TAXATION AND CUSTOMS UNION Indirect Taxation and Tax administration Value added tax Brussels, 11 Apr. 17 taxud.c.1(2017) 2171823 Summary Report Responses to the public consultation on the special scheme for small enterprises under the VAT Directive Directorate General for Taxation and Customs Union April 2017 1
1. Background In December 2016, the Directorate General Taxation and Customs Union launched an open public consultation on the special scheme for small enterprises under the VAT Directive. The review of the current VAT legislation for small enterprises (hereinafter "SME scheme") is one of the initiatives set out in the VAT Action Plan - Towards a single EU VAT area - aimed at reducing administrative burden for small enterprises and at contributing to the creation of an environment favourable to their growth and cross-border trade. The objective of this consultation was to seek the views of all stakeholders on: (1) the current VAT provisions for SMEs and their application; (2) possible changes as regards the VAT provisions for SMEs. The online questionnaire was available from 20 December 2016 until 20 March 2017 via the EU Survey platform. The Commission received 113 submissions, out of which 44 (39%) are from businesses and organisations listed in the Transparency Register. This report gives an overview of the responses to the public consultation. The inputs received in the open questions have been summarised and grouped on the basis of their content. Some of the feedback received from participants has been disregarded, where negligible (e.g. where answers referred to the option "no opinion" or "other" in some of the questions). The individual submissions and the additional documents provided by the participants are also published on the Commission website, with the exception of those for which it was requested not to disclose them. 2. Profile of respondents Given the objectives of the public consultation and the need to assess the impact of the current rules, some questions in sections 3 and 4 of the questionnaire were specifically addressed to businesses. The other questions were addressed to all stakeholders. Due to the targeted and technical nature of the public consultation, the profile of the business respondents is therefore a factor to be taken into account when reading the summary report. In this regard, it is important to note that some questions although addressed to all stakeholders were not answered by a number (at times a large number) of respondents other than businesses. The majority of the respondents were indeed businesses (46%), most of which, self-employed and micro-enterprises (1-9 employees). Business organisations and citizens represent respectively 30% and 7% of the participants. Moreover, three public authorities, four academics and a number of tax consultants have responded to the public consultation. 2
Q3: Distribution of respondents (by category) Member of the public 7% Other 11% Academic 3% Public authority 3% Business 46% Business association 30% The large majority of all the businesses (about 64%) which have participated in the consultation stated an individual annual turnover not exceeding EUR 100 000; a number of businesses (about 17%) stated an annual turnover between EUR 100 001 and EUR 2 000 000. Another 19% of business respondents were companies with a turnover above EUR 2 000 000. 35.00% 30.00% Q9: Distribution of businesses (by annual turnover) 30.77% 25.00% 20.00% 19.23% 19.23% 15.00% 10.00% 13.46% 7.69% 9.62% 5.00% 0.00% Below EUR 5 000 EUR 5 001 50 000 EUR 50 001 100 000 EUR 100 001 EUR 500 001 500 000 EUR 2 000 000 Above EUR 2 000 000 As regards the type of activity, 40% of business respondents were mainly suppliers of goods, 31% were mainly service providers and 29% were businesses involved in both types of sales. The number of business respondents making primarily B2C transactions was slightly higher than those who make B2B supplies; however the majority of business respondents (54%) make both B2B and B2C supplies. Moreover, the large majority of business respondents (75%) conduct domestic and crossborder trade within and outside the EU. Then, only few business respondents carry out domestic activity only. 3
Q12: Distribution of businesses (by trading markets) 12% National market only 13% National market and market(s) of other Member States 75% National market, market(s) of other Member States, and market(s) outside the EU 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 the submissions from the European business federations and associations which are based in Brussels. 3. Overview of consultation results 3.1. Information about the application of VAT provisions for SMEs Section 4 of the questionnaire was mainly addressed to businesses in order to get an overview about the application of the current VAT provisions for SMEs. 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. In particular, the special scheme for small enterprises provides measures aimed at: (1) reducing the burden for SMEs of charging and collecting VAT, such as the flat rate scheme (Article 281 of the VAT Directive); and (2) eliminating this burden, such as the SME exemption and graduated relief (Articles 282-294 of the VAT Directive). It results from the consultation that the SME exemption is applied by 27% of business respondents. However, not all of them are released from VAT obligations (e.g. registration, invoicing, accounting and filing of returns). This can be explained by the fact that some simplification measures are optional for Member States to apply and they are not covered by the SME exemption scheme (Article 272 of the VAT Directive). The flat-rate scheme and the graduated relief for SMEs are applied respectively by 7% and 5% of all the participating businesses. None of the participants affirmed to benefit from the flat-rate scheme for farmers. 4
Q17: Which of the special provisions listed below do you apply? (% of businesses) 0.00% 5.00% 10.00% 15.00% 20.00% 25.00% 30.00% SME exemption None Other simplification measures Cash accounting Annual EU Sales list Flat-rate scheme for SMEs SME graduated relief Other Flat-rate scheme for farmers 0.00% 7.69% 5.77% 5.77% 3.85% 11.54% 26.92% 25.00% 21.15% 19.23% However 57% of businesses participating in the consultation affirmed not to apply the SME exemption scheme, mainly, because their annual turnover exceeds the threshold. Some of these businesses also indicated that they are not interested in the SME exemption scheme because they cannot deduct input VAT. Others simply replied that the scheme is not available in their Member State. As regards the assessment of the present rules for SMEs, it results from the consultation that the measures provided for under the SME scheme address the need of reducing the burdens related to the application of normal VAT rules. In particular, a large number of respondents affirmed that the existing SME exemption works well or perfectly well. Nevertheless the majority of all stakeholders participating in the consultation stated that the SME exemption could or should be improved. The main reasons for improvements were related to the fact that the exemption: (1) may have a distortive effect on competition, because it is currently only available to domestic SMEs; or (2) can be detrimental to domestic SMEs not benefitting from the exemption compared to those who are exempted. A number of stakeholders also indicated that the current system is too complex and costly to apply. In this regard some respondents underlined that exempted SMEs cannot deduct VAT paid on inputs. In addition, some respondents indicated that, for small businesses, it can be very difficult to undertake activities in other Member States in a VAT compliant manner. Nevertheless, with the advent of internet, small businesses are more encouraged to make supplies in other countries. For that reason, in the context of a review of the SME scheme, special provisions for cross-border sales are desirable. In some replies it was also indicated that possible improvements should take into account the levels of threshold which are considered outdated or too low. 5
A small number of respondents who benefit from the SME exemption acknowledged that they limit the growth of sales in order to keep turnover levels below the exemption threshold. In this regard two business associations indicated that the SME exemption may be abused and lead to fraudulent practises designed to keep small businesses under the threshold. Concerning the cross-border context, the vast majority of businesses and a number of other respondents affirmed that VAT obligations are important or very important in deciding whether to sell in other Member States. In this regard, a large number of businesses indicated that complying with VAT obligations (mainly registration and VAT reporting) is more or much more difficult when selling to other EU countries compared to domestic trade. It was agreed by a number of businesses that the greatest difficulty is to find information on VAT obligations in other Member States. 40.00% 35.00% 30.00% 25.00% 20.00% 15.00% 10.00% 5.00% 0.00% Q16: To what extent are VAT obligations important in deciding to sell in other Member States? (% of businesses) 3.85% Not important at all 17.31% Not very important 36.54% 36.54% Important Very important 5.77% Furthermore, almost all business respondents agreed that taxpayers from other Member States should be able to benefit, if eligible, from SME exemption provided in their own Member State. Similarly a large number of respondents would be interested, if available, in benefiting from SME exemption in other EU countries, when selling cross-border. However, it is important to note that a large number of respondents other than businesses did not answer to questions 22 and 23 concerning the possible application of the SME exemption to non-established EU companies. 3.2. Possible changes as regards the VAT provisions for SMEs Section 5 of the questionnaire was targeted at getting the stakeholders' feedback as regards 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, particularly, an SME exemption (80%), aimed at alleviating the effects that SMEs are confronted with in dealing with VAT. 6
Q27: Is there a need for the SME scheme? (% of respondents) No 7% 15% Yes 78% Q28: Is there a need for the SME exemption? (% of respondents) No 7% 12% Yes 81% The main argument in favour of an SME scheme resulting from the consultation was that SMEs, particularly small and micro businesses, incur disproportionate compliance and administrative costs compared to big companies. It was also observed that small businesses often do not have sufficient knowledge of the VAT system and are therefore required to seek help from tax accountants. When asked if the SME scheme should remain optional for both Members States and businesses, the majority of stakeholders, mainly self-employed and micro businesses, replied that the SME scheme should be mandatory for Member States but optional for businesses. Nevertheless, a number of respondents were in favour of keeping the rules optional also for Member States. As regards the SME exemption, a majority of stakeholders, 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 schemes, currently applied in different ways across the EU and with different thresholds, should be harmonised. 7
Nevertheless, as additional comment, it was indicated that a harmonisation of the SME exemption thresholds may lead to different market circumstances in the Member States since the economic and purchasing power is quite different across the EU. Therefore, some respondents indicated that, given the different economic situation among Members States, it would be appropriate to leave some flexibility for Member States to set the threshold. Additionally, some respondents pointed out in their comments that exemption for SMEs creates an unfair competition between businesses within the internal market. For that reason, the exemption should not be extended to businesses other than microbusinesses. Under the present rules, SMEs can only benefit from the SME exemption in their own Member State. In the context of a possible review, 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. In this regard, nearly half of the respondents indicated that the application of the SME exemption should be limited on the basis of the business turnover. Q32: Should the SME exemption in a Member State be made available to suppliers from other Member States (% or respondents) No 7% 13% Yes, partially 13% Yes, fully 67% The most cited reasons for such change were the needs to encourage SMEs to fully seize the potential of the Single Market as well as to reduce the tax burden and the administrative costs of SMEs selling cross-border. A large number of respondents also mentioned that the access of non-resident businesses to the SME exemption would achieve a more level playing field among taxpayers. Respondents indicated as highest potential benefits deriving from the extension of the SME exemption scheme the facilitation for SMEs to carry out supplies in other Member States, followed by the support for start-ups and SMEs to grow quicker. Other potential benefits indicated by a number of respondents were the potential in terms of the Single Market and the achievement of a level playing field. On the other hand, a limited number of respondents indicated as main reason against the opening up of the SME exemption the increase of administrative costs for both Member States and SMEs, derived from increased audits and controls. They also mentioned a possible negative effect on Member States' revenues. 8
Among the potential risks of the SME exemption being made available to non-resident SMEs, a number of respondents indicated, as medium rate risks, the increase of VAT frauds, additional problems for fiscal control and some budgetary losses for Member States. 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 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. Q40: Should SMEs be able to continue during a transition period to benefit from the SME exemption, if their turnover temporarily exceeds the threshold? (% of respondents) Strongly disagree 1% Disagree 12% 16% Strongly agree 36% Agree 35% As regards the simplification measures, it results from the public consultation that there is a broad support for further simplification of VAT obligations for SMEs as well as the need to harmonise them across Members States. Q42: Should VAT obligations for SMEs be further simplified? (% of respondents) Disagree 3% 11% Agree 37% Strongly agree 49% 9
Q42: Should VAT obligations for SMEs be harmonised? (% of respondents) Strongly disagree 1% 13% Disagree 5% Strongly agree 47% Agree 34% The large majority of respondents 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 that simplified VAT obligations should be mandatory for Member States instead of remaining optional. When asked about the registration for VAT purposes, most of respondents indicated that SMEs should always have to register, regardless of whether they apply the SME exemption or not. In this respect, it was clarified that SMEs should be treated as all other taxable persons for reasons of fairness and control, according to the rules of their country of origin. Some respondents pointed out that the registration is needed in particular if the SME exemption were applicable for suppliers from other Member States, in order to give Member States assurance about the identity of the exempted businesses. Nevertheless, a number of respondents replied that SMEs should register only if they are applying normal VAT arrangements (e.g. they have opted out of the SME exemption or they have exceeded the threshold) or make intra-eu acquisitions of goods. It was also indicated that SMEs should have an option to register for VAT (e.g. for reporting VAT under the MOSS), regardless of whether they apply the SME exemption or not. Regarding an appropriate interval to submit periodical VAT returns for SMEs, the most cited answers were quarterly and annual intervals, whether or not they are covered by the SME scheme or subject to the normal rules. In addition, some respondents specified that it would be reasonable for exempted SMEs to submit the VAT return every year and for all other SMEs every three months. Some respondents also pointed to the need for setting a standardised period for the submission of VAT returns at EU level. At the end, the public consultation addressed to all stakeholders a specific question about the VAT treatment of occasional traders, which are taken to mean private individuals carrying out economic activities on an irregular basis outside of their main employment. 10
In this regard, the majority of respondents indicated that the most suitable approach would be to consider the occasional traders covered by the VAT system with the possibility to apply to them either the SME exemption or normal VAT arrangements. Conversely, a number of respondents suggested not considering the occasional traders to be taxable persons. Q49: Which should be the VAT treatment of occasional traders? (% of respondents) Other 6% 12% Not covered by VAT 28% Covered by VAT 54% In some additional comments, it was argued that with the development of the digital economy there is a potential for all users to become taxable persons. Therefore, a new simplified regime for SMEs could address this issue by providing a distinction between private individuals that may carry out incidental transactions and those who carry out a real economic activity. 3.3. Additional comments to the public consultation In their general comments stakeholders highlighted the need for further harmonisation and simplification of VAT provisions for SMEs across the EU. It was in particular pointed out that the current system hampers cross-border trade for small and medium-sized companies. One of the main difficulties encountered by SMEs, which often are located in only one country, is the lack of information as regards the VAT arrangements applied in various Member States. Therefore, the importance of providing businesses, particularly SMEs, with easy access to the relevant information about the implementation of the VAT System across the EU (e.g. by implementing an EU VAT web portal), was stressed. Respondents also underlined that high compliance costs related to the high level of complexity and fragmentation of VAT rules are a problem for all businesses. This situation affects in particular SMEs since they have less resources and knowledge to deal with VAT arrangements, also taking into account their limited turnover. Therefore, it was pointed out that the review of the VAT legislation for SMEs should take into account the simplification of the overall VAT system, in particular the administrative aspects, such as, invoicing, record keeping and the burden of proof for intra-eu transactions. Finally some respondents expressed their support for an extended and reinforced one-stopshop mechanism which is considered one of the most important simplification measures for 11
all cross-border trading companies, in particular as regards the fulfilment of VAT registration and reporting obligations. 4. Conclusions The Commission thanks all participants for their submission and all comments. It was indeed very informative to get feedback, particularly from stakeholders directly interested by this public consultation. The responses to the public consultation, although not significant in number, confirm the stakeholders interest and support for further EU action in the VAT area in favour of SMEs. The results of this consultation will feed into the review of VAT legislation for small enterprises and the preparation of a comprehensive simplification package for SMEs. 12