End of year accounts review and tax planning for smaller businesses

More than 30 years of experience of accountancy practice in Spain has revealed that the standard of bookkeeping for small companies is often far below the required standards.

Although members of the long established specialist accountancy institutes in Spain provide the same high standards of bookkeeping as can be found in all developed countries, many smaller services providers are in fact untrained and inexperienced.

As a result, bookkeeping is often regarded by some bookkeepers as nothing more than making entries in a computer as a prior step to completing the numerous declarations imposed on businesses.

The fundamental accounting concept that requires bookkeeping balances to make sense and reflect reality is all too frequently ignored, or simply not understood.

It is also true that Spanish accounting is over-regulated and inflexible when compared to the systems that apply in English speaking countries, with the result that the actual bookkeeping process is especially complicated, making it difficult for inexperienced bookkeepers to avoid mistakes, especially when dealing with companies. Companies are subject to the rules originating from the 1885 Codigo de Comercio, the Ley de Sociedades de Capital of 2010 as well as detailed bookkeeping entry instructions of the Plan General Contable of 2007, supplemented by national and international accounting standards.

Despite the seemingly endless regulations, the fundamental rule that accounting balances must reflect reality remains absolute and common sense will enable a non-expert to easily understand well over 80% of the accounting balances of a company.

We have written articles on this website that explain that company directors have a legal obligation to ensure that their companies maintain correct accounting records and publish sensible annual accounts .

The problem is that directors or owners of small companies often have no bookkeeping knowledge and have to engage the services of a external bookkeeper/accountant. Faced with the apparent complexity of bookkeeping, it is entirely understandable to want to shy away from digging into the accounts of your company, but this really is not a good idea. This article explains why.

Obviously, employing a ‘big four’ firm of accountants will greatly improve or indeed eliminate the risk of problems with accounts but not every business is willing, or able, to pay the kind of fees involved. Not unreasonably, the adage of ‘you get what you pay for’ may apply. That is not to say that a low cost bookkeeper with reasonable ability cannot be found, they are just few and far between.

Our firm bridges the gap between the big firms with their high fees and the inexpert providers of accountancy services and we offer expert accountancy services for reasonable prices, especially when considering that all our staff are bilingual. Our committent to providing services in English is evident by the fact that we even run English classes twice a week to help our Spanish staff perfect their English language skills.

As UK Chartered Accountants based in Spain we feel we have a mission to help the expatriate English speaking community to make a success of living in Spain. In this spirit, this article provides some easy to follow tips for business owners to help them confirm that the bookkeeping services they are paying for are up to standard.

But first I should explain an important warning signal that something may be wrong. You should be especially cautious if your bookkeeper makes no effort to review your business accounts with you, or asks you to sign your annual accounts without explaining their contents.

We all know that we should not sign legal documents without understanding them. Expats may feel feel pressurised to ‘get on with it’ and sign off the annual accounts, perhaps feeling that reviewing what they are being asked to sign is ‘making a fuss’. This would be a mistake.

Company accounts are legal documents and no professional adviser should expect a client to sign a document that they do not understand.

It is perfectly possible that your business accounts may be immaculate and the only problem is that the bookkeeper is not accustomed to business owners wanting to review their relatively boring accounts, or perhaps there are communication problems (on both sides) that make such a review difficult.

On the other hand, your accountant might in fact be absolutely delighted that a client actually takes an interest in the accounts of the business that have taken many hours of hard work over the year to get right!

Checking the important accounting balances

I will preface the next section of this article by saying that no business owner should be afraid of their bookkeeping records, or their accountant for that matter!

The balances produced by accounting records must reflect reality and common sense is all that is needed to understand them (well, in most cases!).

Bookkeeping balances are listed in a schedule called the Sumas y Saldos or Balance (in English, a Trial Balance). This schedule is ordered by bookkeeping account numbers which is usually of 8 or more digits. The first 1, 2, 3 or 4 digits indicate the nature of the balance, i.e. share capital, supplier or customer account, bank account, income and expenses, etc.

Bookkeeping balances must reflect reality. I keep repeating this message but I do because so often this does not happen. You could regard the bookkeeping balances on say 31/12/2020 as a photograph of the value of assets and liabilities of a company on that day. By this I mean that these balances must show, for example, what was in the bank on that date, who you owed money to and how much, and who owed money to you. Honestly, it really is common sense and any person running a business would be capable of understanding their accounts with a bit of guidance from an accountant.

What follows is a list of especially relevant questions that a business owner should ask their bookkeeper.

These questions are based on personal experience having worked for more than 30 years in public practice in Spain and having taken over the bookkeeping of hundreds of clients over the years. The questions are in order of importance with the most common and significant problems I have encountered listed first:

Account number
starts with
Nature of accountDetails and possible problems and their causes
551Director/ shareholder Small companies usually have an account that records money introduced or taken out by shareholders or directors. This is often called a shareholders or directors ‘current account’. This account needs to be reviewed each year to make sure it makes sense and that it reflects the real amount that is owed to the company by the director/shareholder, or vice versa. We often come across companies where bookkeepers have ‘dumped’ unidentified payments into this account to save themselves the time of finding out properly, ‘kicking the can down the road’. Some bookkeepers also dump payments in this account if they regard the invoice provided was inadequate to prove that a cost item is deductible. Over the years the balance of this account can accumulate to a nonsense value of hundreds of thousands of euros, which can cause very serious tax problems.
570Cash This account should only be used if cash sales or expenses are normal for a business, i.e. there are cash sales or cash is used to pay some costs. This account may also be used for ‘Petty cash’ accounting.
1) Obviously, the account should not exist if a company is not transacting in cash or has no petty cash accounting.
2) The account is often used as a dump account for unidentified payments, just like the director/shareholder (551) account.
3) The account must have a balance at the end of the year that makes sense. In other words, the balance must be reasonable and must reflect the amount of cash truly kept by the business at the end of the year.
We have seen numerous company accounts where the balance on this account is insane, some showing cash balances of hundreds of thousands of euros.
40 or 41SuppliersThese balances must reflect the reality of how much is owed to each supplier on the date of the listing, especially if the list is the final list of suppliers balances at the end of the year.
These balances are often wrong because invoices are missing. I would say that well over 50% of the company accounts we take over have nonsense balances for suppliers like Vodafone, Mercadona, etc, obviously companies that never allow credit .
Other frequent errors occur where payments have to be made in advance of receiving an invoice, as often happens with lawyers, notaries, registries and other professionals who often delay issuing invoices until payment has been made and have to be chased to deliver invoices.
43CustomersJust like suppliers balances, a quick review of these balances asking yourself ‘does this make sense’ should reveal any problems. Missing sales invoices are not so likely but missing or misallocated payments from customers are relatively frequent and would show up as a customer balance that should not exist.
47Tax accountsThere will be separate balances to account for IVA, income tax withheld from payment of salaries, certain suppliers and dividends. At the end of a quarter the amounts should be easy to check against payments that were made to the tax office. Beware of any debit balance, i.e. a balance that appears to be repayable to the company according to the bookkeeping.
20-23 and 280-283Fixed assetsThese accounts are used to record the assets a company owns, e.g. properties, vehicles, equipment, etc. The purchase of these assets is not treated as an ordinary expense for a particular accounting year because the asset will be used during many years. Instead, a percentage of the asset cost, reflecting its useful life, is deducted from income each year. This is called annual depreciation or amortisation of an asset. The problem that arises is that these assets simply stay in the company accounts for ever because they are not reviewed each year to make sure they still exist. If they do not exist they should be eliminated from the balances.
This kind of error is very frequent, perhaps as many of 50% of small company accounts show assets that disappeared years ago.
More seriously, in recent years I have seen several companies that had bought in past years properties worth many hundreds of thousands of euros that didn’t appear in the balances. This may seem impossible but it’s true! I practised as an auditor and accountant in the UK for almost twenty years dealing mainly with small businesses and I did not once encounter a single situation that matched this level of incompetence.
572Bank accountsIt may seem mad to say this but you should check the balances on these accounts to make sure that they match bank statements.
520Bank loansSame as above but its also worth mentioning that any bank loan balances that are not repayable within a year should more correctly be recorded in accounts starting with 170 which are reserved for long term loans.
300StockIf the company buys products for resale or buys a lot of consumables then it is likely that it will have a high value of stock. The value of the stock should appear in the bookkeeping at the end of the year. If stock exists but it is not recorded, the company bookkeeping and profits reported in the annual accounts may be significantly incorrect. I wouldn’t worry about recording stock of small value consumables , like printing paper and office consumables, as this would not really distort the company accounting profits.
6, 7Expenses (6) and income (7)A quick review of the balances of the accounts starting with these numbers and a few seconds considering each balance and asking whether they make sense or not, will provide a director with a good guide that the overall profit declared by the accounts is reliable.

The above list is only a guide to the typical problem accounts and you should review and, if necessary, question any balance that you do not understand.

It may be a bit too complicated to tackle the review of the accounts during a face to face meeting (if that is possible these days) so I suggest asking the bookkeeper to send the sumas y saldos made up to a particular date, say as at 30 September 2020. By now (i.e. at the end of November) the bookkeeping should be completely finished up to that date. The year end balances should be available no later than the end of March, as by the 30 April the official bookkeeping records of the company should be presented by the directors to the mercantile registry for inscription.

If you are concerned that the bookkeeping records do not make sense you can send us the sumas y saldos and we can review with you over the phone. We won’t make any charge for something as simple as this.

A few tax planning thoughts for your year end review

Making sure that the company accounts make sense is a big step in the right direction and you can then turn to the more creative side of the financial management of your business and consider the following ideas to make the best use of the tax system:

  1. Check that each director has charged the company at least a minimum amount of salary. This will vary according to the family situation of the directors but for a single person with no children and below 65 years old and paying directors/shareholder social security, the minimum salary amount with zero tax payable is 17.555€.
  2. For a married person whose spouse does not work and with two children over the age of 3, the minimum salary is 20.950€.
  3. Charging a minimum salary makes sense even if the company is recording an accounting loss. This is because the loss made in one year can be used to reduce taxable profits in a future year.
  4. The opposite can also be true and if your business has made losses this year and your salary is high and you are paying a lot of income tax then perhaps you can reduce the salary in the last few months to save personal income tax.
  5. If the company has significant reserves built up from profitable years in the past, consider paying a dividend before the end of 2020 to take advantage of possible dividend tax rates that may go up in 2021. The Government is proposing for 2021 adding up to 4% tax to dividends over 200.000€.
  6. Consider paying into a personal pension scheme before the end of 2020 as contributions of up to 8.000€ are fully tax deductible. Company contributions to personal pension schemes are also possible. The Government is proposing a reduction in the amount of tax free pension contributions for 2021.

Thank you for reading, stay safe and healthy!

Spence Clarke & Co specialises in the provision of Spanish tax, legal, audit and accountancy services, mainly to foreigners with interests in Spain. Our cross-border knowledge helps clients adapt to the Spanish system with the minimum of doubt and disruption. If you have any questions about this article or any other matter contact us, with no obligation, to see how we can help you.