If a company is registered for VAT they will charge you X net price + Y amount of VAT for their items. If a buyer is also a VAT-registered company they subtract Y from the amount of VAT they owe (so it is a tax credit).

If you buy from a small company, not registered for VAT, you only pay X, because the seller is not subject to VAT, so they do not have to add it. So, you only pay X, and the fact that you can't subtract Y from the amount of VAT you owe is irrelevant.

So, the small companies have a competitive advantage of not having to add 20+% of VAT to their prices.

So the price of the small business was effectively X - Y.

Which is what I would call a subsidy.

And a bad subsidy, because it suddenly cuts off at a certain value, discouraging organic growth.

If you’re a small business, you don’t pay VAT for the invoices you wrote, and your business customers cannot deduct any VAT when they buy from you.

How can you attach a "you-get-a-refund-from-the-government" voucher to your invoices if your customers cannot deduct VAT when they buy from you?

(Not parent) In Germany, you can't. In Japan, you could, but that's what's changing.