Suggestions to avoid having problems when paying VAT form 303
Tax experts point out that VAT on form 303 is not a tax that entrepreneurs have to pay, but that they are mere intermediaries and collectors of the Treasury. In other words, we are mere collectors but we do not collect the tax. Clever, isn’t it?
However, it is true that the self-employed and companies can often find themselves with liquidity problems when it comes to paying VAT on a quarterly basis because they have spent the VAT that they have to pay to the Inland Revenue every quarter.
We all know that spending money that is not yours is going to cause you problems later on. But isn’t that what banks do?
Fund managers do it too.
Even politicians do it.
The main problem when paying VAT form 303
One of the main problems faced by the self-employed or entrepreneurs is the financial management of Value Added Tax (VAT). We are human, the brain thinks we are rich if we have a lot of money in our account. But that money is not ours.
In fact, many clients tell us that they work to pay the tax authorities or that one day they have a lot of money in their account and when the taxes arrive, it is empty. If you have been an entrepreneur for years, you know what I am talking about.
That is why we must always keep our feet on the ground to avoid problems that prevent us from disbursing the amounts of tax that we have previously collected and that we have declared on the 303 form. As they say in the series “Mente Fria”.
Tax experts insist that VAT is not a tax to be paid by the self-employed (and they are right), but that the self-employed is simply an intermediary and/or collector through which the Treasury collects the VAT on the invoices issued by the self-employed (it is called Iva repercutido), as it is the client of the entrepreneur who pays the tax.
The self-employed also pay VAT when they purchase goods or commission services from third parties and can deduct this VAT (called deductible VAT).
To understand how this tax works and its impact on the liquidity of a company’s or self-employed person’s accounts, it is important to know that every self-employed person or entrepreneur works with two different types of VAT: as an entrepreneur, he sells products and/or offers the provision of services and collects the tax paid by his customers (accrued or output VAT), but he also purchases other products and/or services necessary to carry out his activity (deductible or input VAT).
The VAT result to be declared quarterly through form 303 will be the difference between both VATs. If the difference is positive, the 303 form will be payable, and if it is negative, it will be compensated or refunded (the refund is requested in the fourth quarter).
(accrued or output VAT) – (deductible or input VAT) = If it is positive, the VAT is payable; if it is negative, the VAT is to be compensated.
What does it mean to say that VAT goes to offset?
As the VAT is normally submitted on a quarterly basis, if the VAT result is negative in one quarter. This VAT is not refunded but is offset against the following quarter.
As a temporary VAT collector or collector of VAT (accrued or output VAT), the main advice given by all the experts is never to spend the VAT you have collected on your invoices.
Sometimes it is difficult not to do this because, as we said before, the brain fools itself into thinking that everything we have is ours. Or we think that if I invest here, I will quickly get it back there.
But if you spend the VAT collected, you will have to pay it in another way, because the tax authorities do not forgive (we know the saying that the tax authorities are like the biscuit monster) and will demand in one way or another that you pay on time every quarter. If you do not pay on time, you will have to face surcharges, interest and penalties.
However, there are also some ways that businesses can take into account to avoid cash flow problems when it comes to paying VAT.
Have another bank account for VAT
Traditionally, the most recommended and simplest method for a business that does not require too much paperwork is to have two bank accounts.
One for the daily payments and receipts and another one to keep the VAT on what is collected. You can also keep withholding or profit taxes in the second account.
You will have to transfer the VAT collected to the VAT account. It is true that your cash-flow will be reduced (because you will have more money in that account, but consider it as savings) but it is a price you have to pay to avoid surprises with the tax authorities.
If you have two separate accounts and the VAT account is left untouched, you should have no problems when it comes to paying VAT to the tax authorities.
But there are other tricks to managing VAT correctly. Self-employed people embarking on a self-employed activity should bear in mind that, in order to complete this tax return correctly, it is necessary to have an accounting system and to keep a record of invoices, which are also necessary to justify possible tax deductions.
Keeping accounts up to date is essential
Invoice clutter is never a good thing and, incredibly, many businesses are quite anarchic when it comes to managing their invoices and accounts.
Invoices sometimes pile up in files or drawers until it is time for the quarterly return. Patrick Gordinne Perez, founder of Asesoría Orihuela Costa , insists that the first key to good management is to “keep correct accounts of invoices, which will allow VAT payments to be managed correctly”.
It is necessary to account for invoices on a daily basis, for which there are specific accounting or invoicing programmes.
The two most common options to meet this requirement are “hiring an accounting and tax advisor or acquiring an invoicing programme, which automates the work, avoids manual accounting errors and saves time”.
With Asesoria Orihuela Costa you will have the two requirements in one
What expenses are deductible for VAT purposes?
One of the fundamental conditions for being able to deduct expenses is that they are correctly recorded in the accounts and can be supported by a legal physical document, such as an invoice.
Knowing which expenses can and cannot be deducted for VAT purposes
It is also essential to know the factors that affect the deductibility of VAT. Normally, deductions are made in the tax return for the accounting period corresponding to the time when the self-employed person incurred the VAT to be deducted, although there is a margin of up to four years from the issue of the invoice.
Furthermore, as González Rivas points out, the deduction of expenses related to the development of the activity will only be valid before the Treasury if they are totally necessary for the development of the activity; these include “operating expenses (equipment), leases of the premises where the activity is carried out, deductible taxes or professional services essential for carrying out the work in question”, but they must “comply with the established requirements so that they are not deducted incorrectly” and to avoid possible future penalties from the Treasury.
Deferral of VAT Form 303
Deferring the payment of VAT is possible
A third option is to request a deferral of payment of the tax if we are unable to pay it on the due date. One alternative is to request a deferral from the Tax Agency, using form 303, within the deadline corresponding to the time of the self-assessment. To make this type of application, the self-employed person must have up-to-date documentation.
This deferral is subject to an interest rate, and for it to be approved, the entrepreneur must accredit the impossibility of meeting the payment, with a period of 10 days in which to present the missing documents. This alternative allows debts of less than 50,000 euros to be deferred for 24 months (for individuals) and 12 months (for legal entities) without the need to justify the non-payment of invoices or provide a guarantee.
Having a credit policy
Open a line of credit to provide cash to pay taxes.
Most banks offer credit lines to provide the self-employed and small businesses with cash which, of course, can be used to pay taxes. The conditions and features differ somewhat from bank to bank, but in general it is an amount that the bank makes available to the business and that the self-employed can use when needed.
In fact, in recent times, most banks provide quick loans to pay taxes.
On the other hand, there are the lines of the Instituto de Crédito Oficial.
These are a set of “financial instruments included in the Líneas ICO de Mediación” within the public-private collaboration model, which finance the activity of the self-employed, SMEs and entrepreneurs in all sectors. This includes “liquidity financing for business activities”, according to the ICO.
To access these credit lines, interested parties must go to one of the collaborating entities and submit an application.
The process is made easier for entrepreneurs through advice, as “it has a network of collaborating agents” made up of business associations, chambers of commerce, etc., from whom they can request this guide “to help them in the application process”.
The basic characteristic of these lines is that they are a “simple product”; they are made up of the Línea ICO Empresas y Emprendedores, to facilitate processing and long-term financing, and the Línea ICO Crédito Comercial, which complements the former for advances and discounts on invoices and short-term financing, according to the ICO.
To carry out these plans, the interest rate varies depending on the term for which the self-employed contract the operation, but “ICO establishes a maximum APR depending on the term”.
ICO’s contractual relationship is established with the banks and cooperatives adhered to the mediation system, as well as with the associations and entities that distribute the ICO lines free of charge, among which are the Spanish Confederation of Commerce and Industry, the European Union and the European Union.
These include the Spanish Confederation of Commerce, Spanish communication agencies, the Professional Union, the Valencian Institute of Business Competitiveness and various business federations in Spain’s autonomous communities.
