VAT Exempt Activities in Spain
Law and Tax ChangesTax Agency (Hacienda)
VAT is a tax that you must pay when you provide a service or when you deliver goods. There is a general, reduced or super-reduced VAT, 21%, 10% and 4% respectively. You will find the latter in essential products, that is, food or medicines. In today’s article, we will see what the VAT exempt activities and some more critical details related to them are.
- 1. Example of VAT exempt activities
- 2. What do we do with VAT?
- 3. When is mandatory to register in RETA (Social Security)?
- 4. Withholdings and Form 130
- 5. Social Security payments and flat rate
- 6. Deductible expenses if you work at home
- 7. Other deductible expenses
- 8. Mandatory accounting books
- Related articles
1. Example of VAT exempt activities
Although the rule is that all deliveries of goods and services are subject to VAT, there are activities exempt from paying the tax. These are some of them:
If you teach in public and private centres, as well as private classes to individuals when the subject is included in the curricula of the Spanish educational system.
Here are also included the services of attention to children in the educational centre provided inside the school time. For example, an English course taught by a freelance teacher at the school where children study would be an activity exempt from VAT.
1.2. Health service
If you are a health or medical professional, assistance to individuals is exempt from VAT.
If you are a professional and in addition to your services as a professional you include copyright, this is the case of writers, plastic artists, graphic collaborators, among others, then your activity is VAT exempt.
That includes all mediation services performed to individuals in exempt financial operations. Also, within this point are included those services that public notaries provide in exempt financial operations.
All services and operations that are related to insurance and capitalization are exempt from VAT.
The leasing of homes and the delivery of rural non-buildable land are exempt from VAT.
2. What do we do with VAT?
If your activity is exempt from VAT, you should not include VAT on your invoices. That means that when you register with the Treasury, you must mark that you exclusively carry out VAT-exempt operations.
Therefore, you will not have to submit quarterly Form 303 or the annual VAT summary (Form 390) that is done in January of each year.
3. When is mandatory to register in RETA (Social Security)?
Until today the regulations have not clearly defined when it is mandatory to register in RETA, because the law speaks of HABITUALITY in the development of the activity.
Finally, the courts have defined this term of “habituality”, considering that a delimiting criterion of a regularly developed activity is one that reports higher returns than the interprofessional minimum wage.
Our advice is that whenever you start an economic activity, register in RETA!
4. Withholdings and Form 130
When you carry out a professional activity, such as the training or courses given by a self-employed person, the invoices you issue to Spanish companies must be subject to withholding.
In other words, if your training service amounts to € 100.00, you will charge € 85.00 (€ 100.00 – 15%) on your invoice. Those € 15.00 that your client retains, he must enter them in the Treasury in your name. With that amount the Treasury will already have a part of the taxes that you will have to pay.
If more than 70% of your income is subject to withholding, you will not be obliged to submit form 130 of fractional payment. With this form, it is intended that you pay part of your tax quarterly.
Therefore, the purpose of withholdings and form 130 is the same, to advance the future payment of taxes with the annual income statement (renta).
When we have talked about withholding, we are talking about 15%. That is the general rate. But there is a reduced rate of withholding to 7% that the new self-employed can apply during the current tax year and the following two.
What advantages do you have with the 7% withholding?
With this reduced withholding you will have more liquidity during the year, as you will charge more on your invoices (in the case of the example, instead of charging € 85 you will charge € 93).
5. Social Security payments and flat rate
One of the expenses that the teacher who carries out a training activity will have to bear is the payment of the self-employed fee.
For this financial year 2020, the minimum payment is € 286.15. Although if it is your first registration or more than two years have elapsed since the previous deregistration (3 in case that you had taken advantage of a bonus such as the flat rate), you can opt for the flat rate.
If you are entitled to this bonus, the costs considerably reduce. During the first 12 months, you will only pay € 60.00, in the first semester of the second year you will pay 50% less (€ 143.08), and in the second semester, you will pay 30% less (€ 200.31).
6. Deductible expenses if you work at home
Everyone will think that it is coherent that a shoemaker who owns a small shop where he carries out his work as a craftsman can deduct the electricity, water, gas, telephone and Internet, related to that shop as an expense from his activity. But what happens to the teacher who uses a room in their home? Does it make sense that they can deduct part of the supplies?
The obvious answer is yes, but what amount can you deduct? That has been a problematic issue for many years until from 01/01/2018 Law 6/2017 on Urgent Reforms of Self-employment delimited it quite clearly.
If the taxpayer partially designates his habitual residence to the development of his economic activity, a certain proportion of the supplies can be deducted.
The expenses of supplies of said dwelling, such as water, gas, electricity, telephony and Internet, will be considered a deductible expense in the percentage resulting from applying 30 per cent to the proportion existing between the square meters of the dwelling designated for the activity with respect to its total area.
7. Other deductible expenses
The criterion that must always be very clear when including payment as a deductible or not is the correlation criterion between income and expenses. Any expense that is necessary and has been incurred to achieve income will be considered deductible.
Therefore, all those expenses that a teacher has to be able to carry out his activity and obtain income will be deductible.
However, it is essential to be able to demonstrate these expenses; that is, you must keep the complete invoice and the payment receipt.
8. Mandatory accounting books
There is a false idea that if you register for VAT-exempt activity and you do not have to submit quarterly forms, you do not have accounting or registration obligations either.
It is an error to think that because the rule establishes that taxpayers who carry out professional activities whose performance is determined by the direct estimation method, in any of its modalities, will be obliged to keep the following record books:
- Income record book.
- Record book of expenses.
- Record Book of investment assets.
We hope that it is now more evident to you what the VAT-exempt activities consist of. If you think you should register in Hacienda in such an activity, you can contact us to ask us your questions.