When is the self-employed exempt from VAT?
The payment of Value Added Tax is one of the main concerns of the self-employed in Spain. Knowing when a self-employed person is exempt from VAT is important, with the aim of making savings through tax management.
Below we analyse the activities exempt from VAT for the self-employed and their impact on the financial activity of this regime.
VAT and its impact on the self-employed
VAT, or Value Added Tax, is an indirect tax on the consumption of goods and services in the territory of a country. This tax is initially paid by the end consumer, but it is the entrepreneur or professional (including the self-employed) who pays it to the tax authorities, acting, in essence, as an intermediary between the consumer and the tax administration.
For the self-employed, VAT is twofold:
- Output VAT: This is the tax that the self-employed add to the price of their goods or services and charge to their customers. In other words, it is the tax that is passed on to the end consumer.
- Input VAT: This is the tax that the self-employed person pays when acquiring goods or services necessary for his activity. When a self-employed person buys material, products or services for his business, the price he pays generally includes VAT.
The difference between the output VAT (what you charge) and the input VAT (what you pay) is what the self-employed must pay to the tax authorities every quarter, or what you can claim as a refund if the input VAT is higher than the output VAT.
It is vital that the self-employed to have a vat number and keep a detailed record of all their transactions in order to correctly determine the amount to be paid. In addition, depending on the regulations, there may be different VAT rates (general, reduced, super-reduced) and special regimes, so it is essential to be informed and, in many cases, to have professional advice.
Difference between exempt from VAT and activities not subject to VAT
VAT exempt activities and activities not subject to VAT, although they may appear similar, have fundamental differences in their tax and legal treatment.
VAT-exempt activities
- Although they fall within the scope of VAT, these activities do not give rise to a duty to charge VAT.
- Those carrying out exempt activities may not be entitled to deduct input VAT on their purchases and expenses, as they do not charge VAT on their sales. This may generate an additional cost, as the input VAT becomes, de facto, an additional expense.
Activities not subject to VAT
- These activities are outside the scope of VAT, i.e. they are not considered as transactions subject to VAT.
- As they are not subject to VAT, they do not give rise to a duty to charge or deduct VAT.
- A classic example of a non-taxable transaction is the transfer of a set of elements forming a company (transfer of a business as a whole) or the sale of undeveloped rural land.
It is essential to distinguish between these two categories because the tax implications and formal obligations vary. In any case, for a correct interpretation and application, it is advisable to consult a tax advisor.
Exempt from VAT activities in Spain for self-employed persons
In Spain there are several activities that are exempt from VAT for the self-employed. It is important to mention that these exemptions may vary over time and according to legislative changes, so it is important for the self-employed to consult the current conditions:
- Education: Includes teaching at different levels, such as formal education, from nursery school to university, as well as extracurricular activities and occupational training provided by authorised private entities or centres.
- Health: Services provided by professionals related to medicine or surgery, including clinical analysis, diagnosis and treatment. Services provided by dentists, physiotherapists and nurses are also included.
- Social services: Such as care for dependent persons in residential centres, as well as services provided by public entities or entities of a social nature related to the care of children, young people, the disabled or the elderly.
- Cultural: Activities related to culture, such as theatrical, musical, choreographic, cinematographic performances and exhibitions, among others. Also admission to publicly owned libraries, archives and documentation centres.
- Sports: Those related to physical education and sports provided by non-profit organisations.
- Insurance and financial services: Although it should be borne in mind that not all financial transactions are exempt, the most common ones are.
- Postal services: Such as the provision of services by the Post and Telegraphs.
- Rental of housing: When it is intended for regular use, except if the lessor provides services typical of the hotel industry.
- Associations and non-profit organisations: Some of the services provided by these entities are exempt from VAT, as long as they comply with certain conditions.
At Asesoría Orihuela Costa we offer you the best advice for the self-employed, so that you can adapt your tax expenses to the current legislation.
