Spanish and UK VAT implications of a no-deal Brexit

So a Brexit without any agreement is being considered a very real possibility. How would this affect VAT on transactions between Spanish and British companies ?

Current members of the European Union apply the provisions of the the EU 6th VAT Directive.  By far the most important regulation included in the Directive regards the VAT on the provision of services between businesses in different EU countries. For instance, if a consultancy business based in Spain provides B2B services to a UK company, then no Spanish VAT needs to be added to their invoice. This is the so-called Reverse Charge principle, where the place of supply of goods is considered to be where the customer is based, and therefore in this case the UK customer would account for the UK VAT on the invoice as both Output and Input VAT, the net result being zero.

After Brexit, the same Spanish consultancy company sends an invoice to its UK customer.  Spanish VAT cannot be applied because the UK is now outside the scope of application of EU VAT.   The customer would not apply the reverse charge because they are no longer governed by EU VAT legislation. So the transaction would simply be exempt from Spanish VAT.  In a similar way, invoices on professional services by a UK consultancy business to a client in Spain will be exempt from UK VAT.

Being exempt rather than zero-rated transactions, any local VAT on costs associated with the provision of services will not be deductible. So in the case of a Spanish consultancy company providing services to clients in other EU countries (80%) as well as clients in the UK (20%), then 20% of the Spanish VAT on associated expenditure (phone, internet, commissions etc.) would not be deductible. So in this respect, it is the Spanish businesses which will suffer from Brexit more than their UK counterparts !

For further information and details on our services, please visit our Spain Accountants website.

Spanish businesses registering on the VIES

A couple of years ago, in an article on this blog , we addressed the problems that Spanish businesses face when trying to register on the EU VAT database (VIES). Sadly, nothing has improved to date.

To recap, a business that registers for VAT in Spain is not automatically registered on the VIES, as is the procedure in other EU countries. The Spanish Tax Office insists on a separate application being made and the taxpayer being subject to an inspection before approval is given. Often a Tax Office inspector will turn up at the registered address of the business without notice, and if there is no-one there (quite possible for a work-from-home sole-trader) then the approval process will be put on ice, delayed for months, or be rejected.

We ask ourselves, what is the reasoning behind this extra layer of bureaucracy from the Spanish authorities ? We can only think that it is some misplaced attempt to prevent VAT fraud, and to check that the business is a bona fide one before allowing it on the EU VAT database.  Although other more enlightened and streamlined administrations such as the UK and France do not have such a procedure- in these countries, as soon as the business has a local VAT number, it is added to the VIES.

The damage done to the competitiveness of Spanish businesses is significant.  If a Spanish business purchases goods or services from a supplier in another EU country, the supplier will often do a check on the VIES database and if their client does not appear then they may insist on charging local VAT. Due to the difficulties and further bureaucracy of claiming foreign VAT back via the Spanish Tax authorities, this VAT may never be recovered and represent an extra cost for the Spanish business. Especially in markets where margins are narrow, this extra expense could make the difference between success and failure.

So once again we say to the Spanish authorities: cut the bureaucracy and add new businesses to the VIES as soon as they register for VAT !

For further information and details on our services, please visit our Spain Accountants website.

Spanish income tax changes for the year 2019 ?

For two years now there has been no change to the income tax rates and allowances in Spain. With the new government in Spain led by the Socialist Party of Pedro Sanchez, it is fair to expect that there will be some kind of tax shake-up.  However Sanchez has a minority government after being put into power without elections following the forcing out of the Popular Party´s Mariano Rajoy by a no-confidence vote, so he will need the support of other parties to pass the new  Budget and tax changes for 2019 and onwards.

For us here at Spain Accountants, the priority of the government should be not so much to change tax rates, but to deal with two easy-to-solve issues that are holding Spain back in competitiveness.

Firstly, the astonishingly backwards Spanish Tax Office system for incorporating businesses in the European Union´s Intracommunity VAT registration system (VIES).  I will deal with this in another article to be posted later today.

Secondly, the Social Security contribution for the self-employed (autonomos).  Now over the last couple of years, Spain has introduced limited reforms which allow newly-registered self-employed businesses to pay a reduced flat rate Social Security. However these flat rates only last for 18 months and after that time, the business must pay Social Security at the full rate, around 300 Euros per month, regardless of whether they are making a profit and how much.

Now businesses take time to succeed. Of course some will fail, and the current Social Security legislation is adding to the failure rate. Or encouraging new businesses to stay out of the Tax and Social Security system entirely and operating in the black market.

So real reform is required, to bring Spain up to level in competitiveness with its sister economies around the world, and introduce a Social Security contributions rate for the self-employed that is in direct proportion to the profit actually made !

For further information and details on our services, please visit our Spain Accountants website.