If Spain fails to incorporate into its tax regulations the EU directive 2020/285, approved by the Council of Europe on 18/02/2020, it will be subject to fines from the EU Commission. Perhaps other sanctions will apply and maybe Spain will be prevented from receiving EU funds until they comply. That would be very painful and it would not be the first time this has happened.
This is because the EU directive 2020/285 requires that member states incorporate measures to simplify VAT compliance to assist small business development. The directive requires member states to incorporate new measures to simplify VAT compliance for small businesses and is encouraging member states to give small businesses a modest VAT exemption.
The significance of this could be massive for small businesses in Spain as there are 3 million + self employed, but there are also companies with low levels of sales.
Here is a summary of countries in Europe with their annual sales VAT exemptions limits:
| Austria: €35,000 Belgium: €25,000 Czech Republic: €37,800 Denmark: €6,708 Estonia: €40,000 Finland: €10,000 France: €85,800 Germany: €22,000 Greece: €10,000 | Hungary: €34,164 Iceland: €12,937 Ireland: €75,000 Italy: €65,000 Latvia: €40,000 Lithuania: €45,000 Luxembourg: €30,000 Netherlands: €20,000 Norway: €4,663 | Poland: €45,015 Portugal: €12,500 Slovak Republic: €49,790 Slovenia: €50,000 Spain: No exemption Sweden: €2,861 Switzerland: €93,414 Turkey: No exemption United Kingdom: €95,538 |
Spain’s small business sector desperately needs the simplification of its business tax formalities. Consider this example:
A small business, lets say a plumber, works for him/herself and invoices customers 60.000€ a year including materials bought for 20.000€ . Adding VAT at 21% would mean customers have to pay 12.600€ extra. Supplies would cost IVA of 5.250€ so the plumber would have to pay over to the taxman the input/output VAT difference of 7.350€. No wonder there is such a significant grey economy in Spain!
Putting the tax cost aside, which is really quite significant, the tax filing formalities for small businesses are horrible. Each year almost all the self employed in Spain have to file four quarterly and one annual income tax return, plus four quarterly IVA returns, an annual IVA summary return plus a declaration of customer sales that total more than 3.000€ a year. That is a minimum of eleven tax returns a year!! And that is a simple business that buys or sells nothing to other EU countries, otherwise you can add another four more tax returns. Employ someone and rent a business property? Add another four tax returns for each situation. That’s 23 tax returns a year.
No wonder Spain has the reputation of having the best bureaucracy in the world! Yeah – 10 out of 10!
At the time of writing this article, at the start of November 2024, we still have no real idea what Spain is going to do. We know that the tax office is in discussions with business associations and other parties, but this has been going on for years. Almost 5 years to be precise.
At the risk of being hopelessly wrong, we think that Spain will indeed introduce legislation at the end of 2024 providing a small business VAT exemption. However, the tax office will absolutely hate doing this and will add all sorts of restrictions and conditions to make life difficult. We would not be at all surprised to see a low annual exemption limit, perhaps around 15.000€, which is below the minimum wage limit, making such an exemption all but useless for 95%+ of the self employed of Spain.
Oh well. At least its sunny most of the time and you can play golf almost 365 days a year, or indeed get some sun on the beach!
Much as we would prefer the burdens on our business clients to be reduced to help the country prosper and bring even more foreigners to Spain, we at Spence Clarke are here to look after your tax returns so you can enjoy Spain properly. Indeed, we positively love tax returns but that’s not so surprising as we are accountants!!
