Glossary

EU VAT SME Scheme

The EU VAT SME scheme is the optional exemption that lets a small business established in an EU member state stop charging VAT on its sales while its turnover stays under a national threshold of no more than EUR 85,000, and, since 1 January 2025, under the same exemption in other member states while its total EU turnover stays at or below EUR 100,000.

Also called: SME scheme, small business VAT exemption, special scheme for small enterprises, cross-border SME scheme, EX number, Directive (EU) 2020/285

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Definition

Every EU country can exempt its smallest businesses from VAT. The business doesn’t charge VAT, doesn’t file normal VAT returns, and in exchange can’t reclaim the VAT it pays on its own costs. The rules for that exemption sit in the “special scheme for small enterprises” in Articles 281 to 294 of the VAT Directive (2006/112/EC), and the European Commission calls it the SME scheme.

Council Directive (EU) 2020/285 rewrote those articles. Member states had to apply the new rules “from 1 January 2025.” Two things changed. Each country’s threshold is now capped: Article 284(1) says it “shall be no higher than EUR 85 000.” And for the first time a small business can use the exemption outside its home country: Article 284(2) extends it to “taxable persons established in another Member State,” provided “the Union annual turnover of that taxable person does not exceed EUR 100 000.”

The scheme is not the same thing as the EUR 10,000 EU distance-selling threshold, which decides whether an EU seller charges its home country’s VAT or the customer’s on cross-border consumer sales. Stripe calls that one the “small seller option.” A business under the SME threshold charges no VAT at all.

Key points

+Optional for each member state and for each business: you can always choose to charge VAT normally instead.
+National thresholds are set by each country, up to EUR 85,000, and may vary by business sector.
+The cross-border exemption requires Union annual turnover of no more than EUR 100,000, in the current and previous calendar year.
+Cross-border use needs a prior notification to your home country and an identification number with the suffix “EX”.
+A business using the exemption can’t deduct input VAT and may not show VAT on its invoices.
+Going more than 10 percent over a national threshold during the year ends the exemption from that point, unless the country set a different ceiling.
+Only businesses established in the EU can use it. A US or UK company selling into the EU cannot.
+In Stripe Tax, no registration means no tax calculated, and those lines show the taxability reason not_collecting.

The domestic exemption: a national threshold of up to EUR 85,000

Article 284(1) lets a member state exempt supplies made in its territory by “taxable persons who are established in that territory” whose annual turnover in that country is under a threshold the country sets. The cap is EUR 85,000. A country may set different thresholds for different business sectors, but a business that fits more than one “can only use one of those thresholds.”

The countries chose very different numbers within that cap, so always check the national rule. Germany is a useful example of how the test is written. Section 19(1) of its VAT Act (UStG) exempts a business whose total turnover “did not exceed 25,000 euros in the previous calendar year and does not exceed 100,000 euros in the current calendar year” (our translation). Opting out of the exemption in Germany binds you “for at least five calendar years” under section 19(3).

Going over the line has a set sequence. Article 288a(1) says that if the national threshold was exceeded in the previous year, the exemption doesn’t apply in the current one. During the year, if turnover goes over the threshold by “not more than 10 %,” the exemption continues to the year end; if it goes over by “more than 10 %,” the exemption “shall cease to apply as of that time.” Countries may set a 25 percent ceiling instead, or none, but never so that turnover above EUR 100,000 in that country stays exempt. Germany’s current-year line of EUR 100,000 sits at that maximum.

The cross-border exemption from 2025: EUR 100,000 and the EX number

Before 2025, a country’s exemption was open only to businesses established in that country. Article 284(2) changed that. A business established in one member state can now use another member state’s exemption if two conditions hold: its Union annual turnover is EUR 100,000 or less, and its supplies in that other country stay under that country’s own threshold.

Union annual turnover is defined in Article 288 as the business’s total turnover across all member states, “exclusive of VAT,” leaving out disposals of capital assets. The Commission’s SME portal adds that the EUR 100,000 test applies “in the current and previous calendar year.”

The administration all runs through the home country. Under Article 284(3) the business gives “prior notification to the Member State of establishment” and is identified there by a number that “shall have the suffix ‘EX’.” Article 284(5) says the exemption applies once that number is issued, “no later than 35 working days” after the notification arrives. Article 284b then requires a report “for each calendar quarter” of the turnover in each country, due “within one month from the end of the calendar quarter.” If Union turnover goes over EUR 100,000, the business must tell its home country “within 15 working days,” the cross-border exemption ends from that point under Article 288a(2), and the EX number is deactivated everywhere except the home country, according to the Commission’s portal.

Why US and UK sellers can’t use it

This is the point that matters most for a US software company with a few thousand euros of EU sales. The scheme is written for EU businesses. Article 284(1) covers businesses “established in that territory,” and Article 284(2) covers businesses “established in another Member State.” A company established outside the EU fits neither.

The Commission’s Explanatory Notes on the scheme say it directly: “Non-EU enterprises cannot apply the SME scheme (domestic / cross-border).” Having a branch in the EU doesn’t change that: “A non-EU enterprise which has fixed or permanent establishment(s) within the EU cannot apply the SME scheme either.” Since Brexit, the notes add, businesses established in the United Kingdom, including Northern Ireland, “should be regarded as non-EU enterprises” for the scheme.

So a non-EU seller of digital services to EU consumers works from the ordinary rules: VAT is due in the customer’s country, usually through the non-Union scheme of the [EU One Stop Shop. The SME thresholds of individual countries don’t remove that obligation. Article 284(1) does say that thresholds “shall not differentiate between taxable persons who are established and those who are not established,” but that sentence governs how a country words its threshold, not who may use the scheme.

No input VAT recovery, and when opting out pays

Exemption is a trade, not a gift. Article 289 says exempt taxable persons “shall not be entitled to deduct VAT” and “may not show the VAT on their invoices.” Every euro of VAT on your software subscriptions, hardware, contractors and advertising becomes a cost. The input VAT entry explains what you give up.

The trade suits a business that sells mainly to consumers, who can’t reclaim VAT, so a price without VAT is a real advantage. It suits a business that sells mainly to VAT-registered companies much less: they could have reclaimed the VAT you would have charged, so the exemption saves them nothing while you lose your own deductions. Article 290 lets exempt businesses “opt either for the normal VAT arrangements” or for simplified procedures, and the country sets the detailed rules for doing so (remember Germany’s five-year lock).

Two practical effects follow. An exempt business usually has no ordinary VAT number to give its business customers, so those customers can’t treat your sales as a reverse charge supply in the normal way. And Article 220a allows simplified invoices for a business using the exemption, which is one reason exempt invoices often say only that no VAT is charged under the small-business rules.

The SME scheme in Stripe Tax

Stripe Tax doesn’t know about your exemption unless you tell it, and the way you tell it is by not adding a registration. Stripe’s registration guide says that “to calculate and collect tax for a location … you must register with the local tax authorities and add the registration to Stripe Tax.” With no registration for your home country, Stripe calculates nothing there, and each line carries the taxability reason not_collecting, which Stripe defines as “no tax is collected either because you are not registered to collect tax in this jurisdiction, or because the non-taxable product tax code (txcd_00000000) was used.”

Stripe’s EU page acknowledges the pattern: some EU countries let businesses wait to register until sales exceed a threshold, and “businesses below the threshold can apply for special schemes that exempt them from VAT collection obligations.” What Stripe’s documentation doesn’t describe is the SME scheme itself. Its threshold monitoring and its small seller option (“your total sales across the EU are below 10,000 EUR in a calendar year”) track the distance-selling rule, not your national SME threshold or the EUR 100,000 Union cap. Those two numbers are yours to watch, and the quarterly report under Article 284b needs turnover by country, so keep a report of Stripe sales by customer country for each quarter.

The day you go over, the order matters. Register with your tax authority first, then add the registration in Stripe so tax starts on the next invoice. If you add the registration before you are registered, Stripe charges customers VAT that no return is yet filed for. If you leave it too late, the sales between losing the exemption and adding the registration carry no VAT on the invoice, and the VAT may still be due out of the price you charged.

The SME scheme in your QuickBooks books

While the exemption applies, the books are simpler than a registered business’s but not empty. Sales go to income at the full amount, with no output VAT split out. Purchases go to expense or the asset account at the gross amount, including the VAT you paid, because none of it can be reclaimed. If your QuickBooks company is set up with VAT, sales should carry an exempt or no-VAT code, not a zero-rated one: a zero-rated supply is taxable at 0 percent and normally keeps the right to deduct, which an exempt business doesn’t have, and mixing the two is a common mistake in an exempt file.

The file still has to support the thresholds. Keep a report of turnover by calendar year, and if you use the cross-border exemption, by country and quarter, excluding VAT and capital asset sales, so the Article 284b report and the EUR 100,000 test come from the books rather than from memory.

When you leave the scheme, the change is a dated switch. Sales from the date the exemption ends carry output VAT to the VAT liability account, and purchases from that date carry reclaimable input VAT. How VAT on purchases made before that date is treated is a national rule, so ask your adviser before you post any adjustment.

Frequently asked questions

What is the EU VAT SME scheme?

It is the optional exemption in Articles 281 to 294 of the EU VAT Directive that lets a small business established in an EU member state make sales without charging VAT while its turnover stays under a national threshold. In return, the business can’t reclaim VAT on its own purchases.

What is the SME scheme threshold?

Each country sets its own national threshold, which since 1 January 2025 can be no higher than EUR 85,000. To use the exemption in other member states, a business’s total turnover across the EU must also be no more than EUR 100,000 in the current and previous calendar year.

Can a US or UK company use the EU SME scheme?

No. The scheme covers businesses established in an EU member state. The European Commission’s Explanatory Notes say non-EU enterprises cannot apply it, even with an establishment in the EU, and that businesses established in the United Kingdom are treated as non-EU enterprises.

What is an EX number?

It is the identification number a small business receives from its home member state when it notifies that state that it wants to use the cross-border SME exemption. The number carries the suffix EX and is deactivated if the business’s Union turnover goes over EUR 100,000.

Can I reclaim input VAT under the SME scheme?

No. Article 289 of the VAT Directive says businesses using the exemption are not entitled to deduct VAT and may not show VAT on their invoices. VAT you pay on your costs is part of the cost.

How do I set up Stripe Tax if my business uses the SME exemption?

Don’t add a registration for the country where you are exempt. Without a registration, Stripe Tax calculates no tax there and marks the lines not_collecting. Add the registration only after you have registered with your tax authority, so VAT starts on the right date.

Is the SME scheme the same as the EUR 10,000 small seller threshold?

No. The EUR 10,000 threshold decides whether an EU business charges its home country’s VAT or the customer’s on cross-border consumer sales, and Stripe calls it the small seller option. The SME scheme removes VAT from sales altogether for businesses under the national threshold.

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