I am Interested in taking the VAT exemption scheme in Spain?
As you may have read in the press, it is possible that from 2025 onwards a VAT exemption scheme will be established in Spain whereby entrepreneurs below a certain turnover may choose not to charge VAT …
This has long been the wish of many self-employed and micro SMEs in Spain.
Not to have to declare VAT!
It would be great, wouldn’t it?
Yes it is, for many small businessmen it would be great not to have to pay VAT, not to have to keep the paperwork, the burden of payment, the possible requirement of the tax authorities, to pay the deferment, etc…
But are they really interested?
If you are not going to pay more to the tax authorities because you don’t have to go through the hassle, we don’t want you to be interested.
Let’s make numbers to see if you are more interested in the VAT exemption regime or not!
Here are 3 examples of vat threshold
What is vat exemption scheme?
It is a European VAT regulation
European VAT legislation allows countries that wish to do so to adopt an exemption scheme so that businesses and entrepreneurs whose turnover is below a certain threshold are not obliged to charge VAT.
However, these businesses and entrepreneurs will not be entitled to deduct their input VAT and will not be required to submit VAT self-assessments.
The exemption system is in place in most countries.
Most EU countries have set up an IVs¡A exemption system, with different sales limits.
From 2025 it is planned that these thresholds may not exceed EUR 85,000.
Although Spain is not one of these countries, in the Canary Islands it has been approved with regard to IGIC for individual entrepreneurs with sales of less than 30,000 euros.
Are you interested in the vat exemption scheme ?
Well, as you will have read in the press, it is possible that Spain will end up approving this VAT regime by 2025 or later.
If so, if you as an individual entrepreneur have a turnover below the threshold to be established, will you be interested in the franchise scheme?
Well, pending the passage of the law, it will mainly depend on your type of customers….
Opting for the VAT exemption scheme depends on your customers
No right to deduct VAT
If the majority of your customers are private individuals or entities that are not eligible for input VAT deduction (i.e. if they are acting as final consumers), it is likely to be worthwhile for you to use the exemption scheme.
In this case:
- After entering the scheme, you can generally continue to provide your services to these customers for the same total amount as when you invoiced them with VAT (without altering the cost), but this time you will keep the full amount received.
- On the downside, as your services will be exempt from VAT, you will not be able to deduct the input VAT.
However, if you currently charge more VAT than you actually bear (which is most often the case), you stand to gain.
Entitled to deduct VAT
However, if the majority of your customers are other businessmen who can deduct VAT, then using the exemption scheme will generally be a bad option:
- Your customers will ask you, as their sales will be exempt, to deduct the VAT you were previously charging them.
- Contrary to what happens when your customers are private individuals, when they are businesses, if you do not deduct VAT, they will bear a higher cost.
By deducting output VAT and not deducting input VAT, you will lose out.
3 examples of VAT exemption
You are an entrepreneur with an annual turnover of EUR 50,000 (plus VAT) and expenses of EUR 10,000 (plus VAT) – your annual net income is EUR 40,000.
If Spain approves a franchise scheme with a threshold of 85,000 euros, see what your net income will be under the franchise scheme if you
- All your clients are individuals (option 1)
- if you are all entrepreneurs entitled to deduct VAT (option 2)
- If your turnover is split 50/50 between businesses and individuals (option 3):
| Concept | Opción 1 | Opción 2 | Opción 3 |
| Income | 60.500 | 50.000 | 55.250 |
| Expenses | 12.100 | 12.100 | 11.050 |
| Performance | 48.400 | 37.900 | 44.200 |
If most of your sales come from private individuals, you will most likely be better off under the franchise scheme.
However, if they come from businesses and you have to deduct VAT from the amount of your sales, it will not be worthwhile.
