Taxation and tax relief service

When it comes to saving on the expenses derived from the development of self-employment activity, tax deductions contribute directly to the reduction of corporate tax in the case of SMEs, personal income tax in the self-employed, and VAT that corresponds to some and others.

In this article we focus on deductible VAT for the self-employed, first going through some simple keys to understand how this tax works and the impact it has on your activity.

You will find the following sections:

1. Introduction to VAT: output VAT, input VAT, and deductible VAT
2. Requirements for the deduction of input VAT
3. Rules of operation of VAT deduction
4. Self-employed VAT deductible expenses
5. Self-employed non-deductible VAT expenses

1. Introduction to VAT: output VAT, input VAT, and deductible VAT

Before specifically addressing the VAT deductible expenses of the self-employed and SMEs, we begin by pointing out that VAT is an indirect tax on consumption.

This means that it is precisely the professional or entrepreneur whose economic activity is subject to VAT, who is in charge of collecting it and then paying it to the Treasury on a quarterly basis.

Therefore, the self-employed broker between the tax relief Administration and the client.

To understand how VAT works, it is essential to know the difference between VAT charged (or accrued), VAT paid and VAT deductible.

The difference between the first two lies basically in the condition of the seller or recipient of the service or product.

But if we talk about input VAT, it is the professional or entrepreneur, who pays the VAT on the products or services that he acquires from his suppliers, assuming the role of client.

Generally, input VAT and deductible coincide. But, as we will see later, not all input VAT quotas are in turn deductible.

You can find more information about these concepts in our article on how VAT works.

  1. Requirements for the deduction of input VAT

Corporate or professional taxpayers

Taxpayers with the consideration of entrepreneur or professional are entitled to the deduction. For this, they must appear in the census of Treasury entrepreneurs to which self-employed workers and SMEs are incorporated through model 036 or model 037.

VAT quotas for operations within the country
Professionals and businessmen can deduct the VAT quotas for operations carried out within the country and also accrued there.

Operations that give rise to the right to the deduction

Deliveries and provision of services are subject to and not exempt from VAT.
Intra -community deliveries of goods.

That they are conveniently justified, preferably by invoice.

Temporary requirements for VAT deduction
The right to deduct arises at the time of accrual (generally the time the sale or provision of the service occurs) of the deductible fees.

3. Operating rules for VAT deduction

If you carry out two economic activities with different VAT rates and one of them is exempt from VAT, you must apply the VAT pro-rata rule, which determines the percentage of input VAT that you can deduct. This VAT management, which may seem quite complicated at first, becomes a simple task if you have the right tools.

With this software, the self-employed person can manage his accounting with the records of invoices/expenses established by the regulations, allowing him to indicate the allocation percentage when registering each invoice received, expense, or investment, as well as assigning the type of adequate spending.

These actions are enough for you to automate the calculation of taxes at the end of the quarter, with the consequent time savings that this entails for the self-employed.

4. Self-employed VAT deductible expenses

  • Exploitation consumption: VAT supported on this type of expense will be deductible if it meets the requirements seen above. VAT would also be deductible for accessory activities, such as the one charged by the carrier for their transport.
  • Wages and salaries and Social Security: this type of expense is exempt from VAT, so it does not require further analysis.
  • Leases and fees: it is a very frequent type of expense. If it is rentals subject to VAT, this will be deductible. 
  • Independent professional services: this type of expense will almost always carry the appropriate invoice and is subject to VAT (which we can deduct). The most typical examples of these services are the fees of economists, lawyers, auditors, or notaries.
  • Other external services: VAT on this type of expense is deductible to the extent that the expenses are deductible. 
  • Fiscally deductible taxes: these taxes do not usually carry VAT, however, there are some public prices that are subject to this tax. Such is the case of the waste collection canon whose VAT would be deductible.
  • Financial expenses: by their nature, they do not carry VAT.
  • However, there are circumstances that may lead to the regularization of this VAT in the four years following the acquisition.

The special case of the vehicle expense deduction

This is indicated in article 95.3, which establishes that 50% of the fees paid for the acquisition, import, lease, or transfer of use of passenger cars, motorcycles, etc., will be presumed to be affected by the development of the business or professional activity.

To guarantee the correct deduction of your expenses, it is best to have an expert tax advisory service.

5. Self-employed non-deductible VAT expenses

There is a tendency to assimilate input VAT as deductible VAT. But be careful because, although it is true that they generally coincide, input VAT will not always be deductible.

  • Food (except for special circumstances), tobacco, and drinks.
  • Shows or services of a recreational nature.
  • Jewelry, jewelry, precious stones, pearls, and objects made with gold or platinum.
  • Goods or services intended for attention to clients, employees, or third parties.

The detailed ones are controversial expenses in the taxation of the self-employed that swell this article 96 of nondeductible expenses.

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