How Spanish VAT works for a small business

Lucía has just opened a small web design studio in Valencia. Her first client pays an invoice of 2,420 €, and she is tempted to treat the whole sum as turnover. Of that amount, 420 € never belonged to her: it is VAT she collected on behalf of the Treasury and must hand over a few weeks later, minus the VAT she paid on her own purchases.

A tax on consumption collected by businesses

The Spanish value added tax, the Impuesto sobre el Valor Añadido or IVA, is meant to be paid in the end by the final consumer. Businesses and professionals do not carry it as a cost in the normal case: they act as collectors, adding it to their prices and passing the net result to the Tax Agency.

The mechanism relies on two flows that run in opposite directions. Every time a business sells, it charges VAT to its customer. Every time it buys for the activity, it pays VAT to its supplier. The periodic return nets one against the other, and only the difference is paid, or carried forward when purchases exceed sales.

The practical consequence for Lucía is simple and often forgotten. The 2,420 € on her bank statement is not revenue. Her revenue is the taxable amount, 2,000 €. The remaining 420 € is a debt towards the Treasury that she holds temporarily, and a sound cash plan puts it aside the day the money arrives.

The rates written in the Act

Article 90 of Ley 37/1992 sets the general rule in one short sentence: the tax is charged at 21 per cent, unless the following article provides otherwise. The rate that applies to each transaction is the one in force at the moment the tax falls due, not the one in force when the invoice is paid.

Article 91 then lists the exceptions. Its first section applies a 10 per cent rate to a long list of goods and services, starting with products fit for human or animal nutrition, with explicit carve-outs such as alcoholic drinks and soft drinks with added sugar or sweeteners.

Its second section applies a 4 per cent rate to a shorter list of operations. The detail of both lists is long and changes more often than the general rate, so the safe habit is to check the exact item in article 91 before invoicing anything other than the general 21 per cent.

Its fourth section adds a 0 per cent rate for goods handed over as donations to non-profit entities under Ley 49/2002 that use them for their general-interest purposes. Outside that narrow case, this course and the VAT calculator work with the 21, 10 and 4 % rates.

Some operations are not taxed at any rate because article 20 of the Act exempts them, for instance certain education and childcare services. An exempt operation carries no VAT on the invoice, but it has a cost: as a rule, the VAT paid on purchases linked to it cannot be deducted either.

That is why an exemption is not always good news for a business. A taxed business recovers the VAT on its equipment and passes VAT on to its customers. An exempt one charges nothing, recovers nothing, and absorbs the VAT on its purchases as a cost that ends up, one way or another, in its prices.

When the tax falls due

The chargeable event, the devengo, decides in which period an operation is declared. Article 75 of the Act links it to the operation itself rather than to the payment. For a supply of goods, the tax falls due when the goods are made available to the buyer.

For a service, the tax falls due when the service is provided, carried out or performed. A consultant who completes a job in March declares the VAT on that job in the return covering March, even if the client pays in May. The gap between the two dates has to be financed by the business.

Advances follow a different rule. Section two of article 75 provides that when a taxable operation gives rise to payments before it takes place, the tax falls due when the price is collected, in whole or in part, for the amounts actually received. A deposit therefore carries its own VAT at the date it is cashed.

Charging VAT: the invoice is the vehicle

Article 88 says how VAT reaches the customer. It must be shifted by means of an invoice, with the tax shown separately from the taxable amount and the rate applied indicated. The shifting takes place when the invoice is issued and handed over, which makes the invoice the central document of the whole system.

The same article sets a time limit that surprises newcomers. The right to shift the tax onto the customer is lost once one year has passed since the chargeable event. A business that forgets to invoice VAT on an operation and notices it two years later cannot recover it from the client.

Section one of article 88 also settles a frequent dispute over quotes. When the customer is a public body, a business that submits an economic proposal, even a verbal one, is deemed to have included VAT in it. Quoting a town hall 10,000 € and adding VAT afterwards does not work: the 10,000 € already contains it.

With private customers the safe practice is the same in spirit: state clearly whether a price includes VAT or not. The Act obliges the customer to bear the tax when it is correctly shifted, but a misunderstanding over a quote is settled in a negotiation, not by the Act, and it is the seller's margin that usually pays for it.

Deducting VAT: global, per period, with an invoice

Article 99 describes how deduction works. In each return, the taxpayer deducts globally the total of the deductible input VAT borne during the period from the total output VAT accrued during that same period. There is no matching of each purchase to a given sale: the calculation is made on the totals of the quarter or month.

Input VAT is considered borne when the business receives the invoice or other supporting document that gives the right to deduct. No invoice, no deduction: a till receipt without the buyer's details, or a purchase paid in cash and never documented, leaves the VAT as a pure cost.

The right to deduct is not limited to the period in which the invoice arrives. It can be exercised in that return or in later ones, provided that four years have not passed since the right arose. A forgotten supplier invoice can therefore still be deducted in a later quarter, within that window.

Deduction also depends on the use of the purchase. Section two of article 99 requires deductions to follow the foreseeable use of the goods and services acquired, with a later correction if that use changes. A laptop bought for the business is deductible; a television bought for the living room is not.

The duties that come with being a taxpayer

Article 164 of the Act lists what a VAT taxpayer must do. The list begins before the first sale, with declarations relating to the start, change and cessation of the activity, and a request for a tax identification number, the NIF, which must then be communicated and proved where required.

• Declare the start, modification and cessation of the activity (census declaration)
• Obtain a tax identification number and show it where required
• Issue and deliver an invoice for every operation
• Keep the accounts and the registers set by regulation
• Report operations with third parties when required, including intra-EU operations
• File the periodic returns, pay the resulting tax and file an annual summary return

None of these duties depends on turnover. A freelancer who invoices a single client and a shop with fifty daily sales carry the same list. What varies between them is the volume of paperwork, not the obligation itself, and the periodic return is the moment where all the other duties meet.

A cash habit rather than a tax trick

A small business's VAT difficulties are mostly practical, not legal. The tax is collected every day and paid after each quarter: VAT collected on 1 October, money that is not the business's own, can stay in the till until 30 January, almost four months. Spent on stock or salaries, it has to be found again when the return is due.

A simple discipline avoids the problem: each time an invoice is paid, move the VAT it contains to a separate account, and each time a supplier invoice is paid, bring the deductible VAT back. At the end of the quarter, the balance of that account is close to the amount of the return.

The same logic applies to late payers. Because VAT on a service falls due when the service is performed, a business can owe the tax on an invoice its client has not yet paid. Following receivables closely is therefore part of managing VAT, not a separate question of credit control.

The next module follows that return step by step: how often it is filed, by which date, what happens when deductible VAT exceeds the VAT collected, and which service of the Tax Agency is used to prepare and submit it.