Key Reforms And Changes Coming In 2025

As 2024 draws to a close, it is essential to review the key VAT developments set to take effect across Europe in January 2025. The year 2025 will introduce significant changes to VAT regulations in many European countries, with reforms aimed at modernizing systems, improving compliance, and addressing the challenges of a rapidly evolving digital economy. With expanded e-invoicing mandates, simplified schemes for small businesses, more flexible VAT rate applications, and new rules for virtual events, these updates are likely to impact many businesses operating across Europe.

E-invoicing mandates gain momentum

E-invoicing is gaining significant traction across Europe as governments implement measures to modernize and standardize invoicing systems. The EU’s VAT in the Digital Age (ViDA) reforms, mandating real-time digital reporting for cross-border trade through standardized e-invoicing from July 2030, were approved in November 2024. Several countries are preparing to implement their e-invoicing mandates ahead of this timeline.

The ViDA reforms introduce several changes that will take effect once the ViDA Directive comes into force. The Directive is expected to enter into force on the twentieth day after its publication in the Official Journal of the European Union, anticipated in 2025. These changes will allow member states to mandate e-invoicing for domestic transactions conducted by local businesses without requiring prior approval from the European Commission. Furthermore, customer agreement will no longer be required for issuing e-invoices, meaning businesses will be obligated to accept e-invoices if a domestic e-invoicing regime is implemented.

In Romania, e-invoicing became mandatory for business-to-business (B2B) transactions on July 1, 2024. Romanian-established businesses must issue and transmit electronic invoices through the national RO E-Factura system to other Romanian recipients. Beginning in January 2025, business-to-consumer (B2C) transactions will also require reporting via the RO E-Factura system, with a reporting deadline of five calendar days.

Germany is rolling out its B2B e-invoicing mandate in phases. From January 2025, all German resident businesses must be capable of receiving structured, machine-readable electronic invoices. The German Ministry of Finance has clarified that no specific transmission mechanism is required, and e-invoices can be sent via email. The obligation to issue electronic invoices will follow in 2027.

In the UK, as part of the 2024 Autumn Budget, the government announced plans to encourage the widespread adoption of e-invoicing across businesses. His Majesty’s Revenue and Customs (HMRC) plans to launch a consultation to gather feedback from businesses on how to support investment in and promote e-invoicing. While the consultation date has not yet been confirmed, it is expected to occur in early 2025.

Simplified VAT for small businesses

Beginning January 1, 2025, the EU will introduce substantial changes to its special VAT scheme for small and medium-sized enterprises (SMEs). The updated framework will consist of two voluntary schemes: a domestic scheme and a cross-border scheme, allowing eligible businesses to apply VAT exemptions to all supplies of goods and services in the member states where the scheme is elected. It is important to note that these exemptions do not apply to purchases made by the SME. Transactions such as intra-Community acquisitions of goods, and purchases of services subject to the reverse charge mechanism will remain under the standard VAT regime, requiring SMEs to report and pay VAT on these transactions.

The domestic scheme will be available to businesses established in the member state where VAT is due, provided their annual revenue does not exceed the threshold set by that member state. These thresholds will continue to be determined nationally, with a maximum cap of €85,000.

The cross-border scheme will extend VAT exemptions to SMEs operating across EU borders. To qualify, businesses must meet two conditions: their total annual EU-wide revenue must not exceed €100,000, and their revenue in the non-establishment member state must remain below that member state’s national threshold. To participate in the scheme, businesses must notify their country of establishment, obtain a unique “EX” identification number, and report the total value of their sales in each member state to their home country for oversight purposes.

The new rules will also impact businesses transacting with SMEs. If an SME using the domestic exemption supplies goods to a business in another member state, the supply will be exempt (not zero-rated), and the transaction will not trigger an intra-Community acquisition. Consequently, the business customer will not need to account for VAT on this purchase.

For services provided by SMEs to businesses in other member states, two scenarios apply. If the SME does not use the cross-border scheme in the customer’s member state, the business customer must account for VAT under the reverse charge mechanism. If the SME applies the cross-border scheme in the customer’s member state, the supply will be exempt, and the business customer will not need to account for VAT.

Non-EU businesses with a fixed establishment in the EU are not eligible for either scheme and must account for VAT from their first sale. The scheme is exclusively available to businesses headquartered within the EU.

Rising VAT rates and EU reforms

Effective January 1, 2025, the European Union will implement major changes to its VAT rate system, granting Member States greater flexibility in applying reduced VAT rates. The number of goods and services eligible for reduced rates will expand from 21 to 29 categories, enabling reduced rates to cover a wider range of items, including environmentally friendly products and socially beneficial services. Member States will also be permitted to apply VAT rates below 5%—including zero rates—for up to seven categories, such as basic foodstuffs, medicines, and cultural items. This increased flexibility is expected to result in more rate variations across EU countries.

Slovakia will be the only EU country to increase its standard VAT rate in January 2025. The standard rate will rise from 20% to 23%, while the current reduced rate of 10% will be replaced with a new rate of 19%. The super-reduced rate of 5% will remain unchanged. These changes are part of a fiscal strategy to reduce Slovakia’s budget deficit, which is projected to decrease from 5.8% of GDP in 2024 to 4.7% in 2025.

Beginning January 1, 2025, the UK government will impose a 20% VAT on private school fees, including education services, vocational training, and related boarding and lodging. This policy marks a significant shift in private education taxation and is expected to raise annual private school fees by approximately 20%, potentially placing a significant financial burden on families and prompting some to reconsider private education. The VAT will apply to terms starting on or after January 1, 2025, with payments made from July 29, 2024, also subject to the tax under anti-forestalling measures aimed at preventing pre-payment tax avoidance. The measure is projected to generate £1.7 billion annually to support state education, funding initiatives such as hiring more teachers and improving resources. However, it may also strain state schools if a substantial number of students transfer from private institutions due to rising costs.

New rules for virtual events

Starting January 1, 2025, the European Union will implement new VAT rules for virtual events and live-streamed activities, aligning their tax treatment with digital services. Under the new regulations, VAT will be determined based on the customer’s location.

For B2C transactions, event organizers will charge VAT at the rate applicable in the consumer’s member state. With the EU VAT rate reform also taking effect in January 2025, member states may apply reduced VAT rates to certain virtual events if similar rates apply to in-person attendance. To simplify compliance, organizers can use the One Stop Shop (OSS) system to handle VAT collection across the EU, eliminating the need to register for VAT in each customer’s country. For B2B transactions, VAT will not be charged at the point of sale but instead handled through the reverse charge mechanism, consistent with the treatment of other B2B services.

Switzerland’s new rules for platforms

While the EU’s ViDA rules for platforms facilitating short-term accommodation rentals and passenger transport will not take effect until July 2028, significant changes in the platform economy will occur in Switzerland starting January 2025. Switzerland will introduce the deemed supplier model for e-commerce platforms, shifting VAT compliance responsibilities to platforms facilitating cross-border and domestic sales.

Currently, Switzerland does not impose any tax collection obligations on platforms facilitating sales of goods. Since 2019, foreign merchants selling more than CHF 100,000 annually in low-value consignments (where VAT is less than CHF 5, equivalent to shipments valued under CHF 62 for standard-rated goods or CHF 200 for reduced-rated goods) to Swiss customers have been required to register for Swiss VAT, act as the importer of record, and collect Swiss VAT on all sales. However, due to weak enforcement, many merchants fail to register even after exceeding the threshold.

To address this issue, the deemed supplier model will hold platforms responsible for VAT compliance. Platforms facilitating sales exceeding CHF 100,000 annually in low-value consignments must register for Swiss VAT under the 2019 e-commerce rule. Platforms may also voluntarily register for VAT. Once registered, platforms will act as the importer of record and invoice Swiss VAT on all consignments sold to Swiss customers.

Merchants registered under the 2019 e-commerce rule who sell via platforms may deregister from Swiss VAT starting December 31, 2024. However, they may still be jointly liable for VAT if the platform fails to comply with the new regulations. To mitigate this risk, merchants are encouraged to include hold harmless clauses in agreements with platforms, safeguarding against financial or legal consequences from platform non-compliance.

The opinions expressed in this article are those of the author and do not necessarily reflect the views of any organizations with which the author is affiliated.