The Hungarian government has announced an increase in the value threshold for VAT exemption for small enterprises, raising it from 12 million to 18 million forints.

This change, effective from January 26, 2024, will apply retroactively to January 1 of the same year.

The new threshold for VAT exemption will be available for businesses whose total turnover does not exceed 18 million forints either in 2024 or is not reasonably expected to exceed this amount in 2025.

Entrepreneurs have until February 28, 2024, to declare whether they will opt for the VAT exemption.

Balog Ádám, the Vice President of the Hungarian Chamber of Commerce and Industry (MKIK) and former deputy state secretary for tax affairs, highlighted the necessity for reduced administrative burdens in both Hungary and the European Union.

He noted that previous legislation deemed too costly in relation to its benefits has been either abolished or merged with existing regulations.

Balog emphasized the importance of minimizing administrative pressures on small enterprises, as they play a significant role in the labor market and contribute considerably to the country’s GDP. He remarked on the growing complexity of administrative requirements, which small businesses often struggle to navigate compared to larger corporations that may have dedicated departments for this purpose.

The last amendment to the VAT exemption threshold occurred in early 2019 when it was raised from 8 million to 12 million forints.

During this period, inflation in Hungary exceeded 50%, making this latest increase timely to ensure that small businesses can operate without undue administrative overhead.

The MKIK is currently collecting market information on the effects of this measure and may request another increase to the threshold by 2026, highlighting the tendency for inflation to prompt such adjustments in the future.

The VAT system operates under European Union regulations, which set a harmonized threshold of 85,000 euros, approximately 34 million forints, indicating that there remains room for legal adjustments by the Hungarian government.

The MKIK will continue to analyze whether the impacts of the threshold increase compensate for any potential loss in tax revenue.

Small enterprises, particularly those reliant on labor-intensive operations, show a strong inclination to adopt this VAT exemption, benefiting from reduced tax liabilities and simplified administration related to VAT compliance.

However, the measure has faced criticism.

Critics, including Zsolt Ruszin from the Hungarian Association of Accountants (MKOE), labeled it as a 'low point in tax policy' and described the law as having 'damaging consequences.' In contrast, the Tax Consultants Association, led by László Zara, countered that the assertions regarding negative impacts on businesses lack legal foundation.

Balog acknowledged the validity of constructive criticism while maintaining that aggressive and inaccurate claims are of no professional value.

He remarked on the emergence of a collaborative effort among government figures, chambers, accountants, and tax consultants all advocating for reduced administrative burdens and streamlined procedures for small businesses.

As the effective implementation of the VAT exemption is voluntary, micro-entrepreneurs can decide to opt-in based on their operational needs.

This decision will allow businesses to avoid unnecessary administrative complications that could arise from stricter VAT compliance requirements.

Additionally, the recent increase in the VAT exemption threshold assists many businesses, including those affected by prior changes to the tax regulation system under the flat-rate tax (KATA) framework.

Balog suggested that ways to facilitate invoicing for the new KATA entities should be explored without reopening discussions on tax avoidance.

The National Tax and Customs Administration of Hungary has issued guidelines to aid accountants in managing the transition effectively, amidst a busy period marked by tax return deadlines.

Balog expressed confidence that the changes would ultimately ease administrative burdens for affected businesses as they adapt to the new VAT rules.