Spain's new VAT cash accounting regime - Or, how to turn a good idea into a bad one

When I heard that Spain was bringing in a new VAT cash accounting system, I was stunned. The first thought: how very progressive for Spain. However, then I read the law and how it will work, I quickly changed my mind, it would seem that the lawyers and governmental bureaucrats who wrote the law just do not know how small businesses work in the real world.

The idea appears to be simple enough.  You only pay VAT on the sales you have been paid for, and you can only claim VAT on the inputs you have paid for.  Nice, I liked that....and then I read the rules:

Seven main points about the new VAT law you should know.

1)      Only businesses with an annual turnover of less than 2.000.000 € can elect for this.  

2)     You must elect to join the system before the end of the year.  

3)     You cannot exit the system until 3 years are up.  So you better be sure that you will benefit from it before you sign up.

4)     If you do not elect to join the system for 2014, you can elect to join for 2015.  You must stay in the system for a minimum of 3 years.  

5)     If a sales invoice is not paid, you must pay the VAT on it anyway before 31 December the following year.

6)     The same rule applies to purchase invoices.  You cannot claim the VAT until you pay but if you do not pay them by 31 December of the following year of their issue, then you can claim the input VAT anyway.

7)     Many businesses are not prepared to spend the money to upgrade their systems, in order to avail themselves of the new VAT regime. There is currently no accounting reporting system that can deal with the new requirements of the law.  This will change but in the meantime a manual system would be needed, and a very complicated manual system at that.

My personal opinion is that it is too little too late. The law should have been in place at least 15 years ago. I also believe that it will take at least one year for accounting systems to really catch up with the law.  Only then will it be workable.   

I have been dealing with many small businesses in Spain for almost 20 years and, the practice is that they do not usually issue sales invoices anyway until payment has been received, so this new system should not affect the majority of small businesses in Spain in the near future. 

Its almost like the Government wanted the newspaper headlines to say how helpful it was being to business but wanted to make sure that the system was impractical so that they did not have to face the cost.