Trying to wrap your head around value-added tax in all its different forms? Get the lowdown here.
6 min read
Value-added tax (VAT) is the main form of indirect tax placed on goods and services, which means it impacts the final price of virtually everything you’ll buy or use in Spain. Understanding this complex type of tax is anything but simple—so, if you want to know how VAT works, who has to pay it, how to declare it, and the different VAT rates that apply in Spain, then this article is for you. You may not realize it, but whenever you pay the bill at a restaurant, book a night in a hotel, or settle an invoice for work done on your home, you’re also paying VAT. Unlike other taxes such as personal income tax, value-added tax is a percentage that’s added onto the basic price of consumer goods and services. Both the type of VAT as well as the percentage applied depend on a number of factors. Let’s take a look.
How VAT works
VAT is a tax collected by the Spanish tax office on both the items we buy and services we use. Companies and service providers are required to charge VAT to the customer, but they don’t get to keep it—each quarter, they have to pay what they’ve accumulated to the Spanish tax office. However, individuals and companies that charge VAT can also deduct their input VAT—the VAT they pay as part of their expenses—when they file tax returns. This means that every time they pay VAT for supplies and services, they can subtract that VAT amount from what they owe to the tax office. If you want to know about what are taxes, we wrote an article about it.There are three different VAT rates depending on the product or service, and the region where the transaction takes place. While the general rate of IGIC (Impuesto General Indirecto Canario) is 7%, in Ceuta and Melilla, the IPSI (Impuesto sobre la Producción, los Servicios y la Importación) rate varies between 0.5% to 10%.VAT is one of the Spanish government's most important taxes. It accounts for one third of the government revenue, which is used to finance itself and provide public services.
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Any individual or company that charges VAT has to declare it to the tax office. This includes self-employed individuals, as well as commercial companies and owners of rental properties.While large enterprises tend to file monthly VAT returns, the self-employed and SMEs generally do so quarterly. If you want to know how to complete a VAT return, it’s important to first understand the different assessment systems:
Direct assessment. Under this system, anybody that charges VAT has to then pay it to the Spanish tax agency in accordance with their revenue. To calculate the amount of VAT they need to pay, they first subtract deductible business expenses—such as salary payments or business expenses—from their total profits. The VAT is then applied to the remainder. The amount varies according to the business’s performance.
Objective or module-based assessment. This is a simplified taxation system that isn’t calculated using actual expenses, but instead uses the tax office’s estimation. The tax office uses a series of parameters or modules to calculate the VAT amount you have to pay. In this case, you’ll need to be registered for the simplified system and file tax form 131 every quarter.
Cash basis. This fairly recent arrangement is for companies with an annual turnover of less than €2 million. In this case, the company pays the collected VAT to the tax authorities once the company’s been paid for their goods or services, rather than when they deliver or provide the goods or services.
Who pays VAT?
Although VAT is charged on what both individuals and companies consume, it's ultimately only paid by individuals. This is because companies and the self-employed play two roles—they collect VAT every time they make a sale, and they pay VAT on what they purchase from their suppliers. When the amount of VAT they charge is more than the VAT they paid on their purchases, the company owes the government money. Alternatively, if the company has paid more VAT than it has received, it can claim a refund from the tax office. In this way, companies act as middlemen—or passive taxpayers—for the VAT that consumers pay.Value-added tax is a regressive tax, given that it taxes consumption without considering the taxpayer's personal and financial situation. Nevertheless, on certain occasions, the government has modified the VAT rate to offset price hikes of certain consumer services and goods, like electricity.
VAT rates
Outside of the rate differences we’ve seen in IGIC tax in the Canary Islands and IPSI in Ceuta and Melilla, VAT is subdivided into three tax rates which are applicable according to the goods and services purchased:
General VAT. This is the most common type of VAT in Spain and sits at 21%. Gyms, hair salons, footwear, clothes, and white goods carry this VAT rate.
Reduced VAT. At 10%, this rate is charged on all food products for human or animal consumption, as well as water, public transportation, and hotel and catering services.
Super-reduced VAT. At 4%, this is the lowest VAT rate, which is applied to basic necessities such as bread, fruits and vegetables, housing, and pharmaceuticals.
VAT-exempt products. Certain products and services are exempt from VAT. These include healthcare services, postage stamps, and financial products.
Accrued VAT and deductible VAT
Product receipts or service invoices need to show the gross value of the product, as well as the percentage of VAT added. VAT that’s paid by consumers of goods and services is known as accrued VAT.When a company pays for services or buys products from another company, it pays a kind of VAT known as input VAT. To be able to deduct input VAT, companies and self-employed people need to do the following:
Submit an invoice of the purchase to the company involved in the transaction
Keep a record of the purchased goods or the services they used in the investments and expenses ledger
Prove that the expenditure generated by the input VAT went towards business operations—such as the payment of social security contributions, payroll, rent, or taxes
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