Watch out for Spain's super strict expenses policies
We like to think one of the advantages of living in Spain is the laid back approach to life and the relatively unobtrusive State, but things are tightening up and there are traps for the unwary. ¬†As an example of the tougher, more regulated climate think back ten years ago to what it was like in Spain:
- you could speed on the motorways with a fair degree of confidence that there were no speed cameras. ¬†Now there are and the system of traffic penalties is rigorously enforced.
- you could buy a house for cash without a NIE number
- you could smoke where you liked including banks and government buildings, whereas now Spain has one of the strictest anti-smoking laws in Europe
Most of the changes are for the better. ¬†I can't say I hanker after the days when every time you entered an office you had smoke blown in your face or when drink driving was considered somehow acceptable because you were abroad. ¬†But back to the point of this article - the Spanish tax authorities are much less generous when it comes to allowable business expenses than other countries, including the UK. ¬†In fact it is one area where they are too strict and the consequences can be severe if you fall foul of the rules.
And that is part of the problem - there are no definitive or specific rules on what is and what is not acceptable to claim against business income, whether that be as a company, partnership or self employed. ¬†There are three general rules which are firmly enforced with little or no leeway. ¬†To be deductible for tax purposes expenses must be:
- wholly business-related
- substantiated by invoices
- accounted for
The last one is pretty easy to do but also to overlook: you are obliged to keep proper accounting records as a business and have them ready for inspection by the Agencia Tributaria at any time. ¬†If you haven't included the expenses in your accounts then you can't claim them. ¬†If you are subject to a tax inspection and suddenly pull out some invoices to justify the declarations you have made in the periods under inspection that will be no good if they are not included in accounts which tie into the declared amounts.
The documentation / substantiation test is also largely a question of keeping the right paperwork and being diligent, but it can be tricky. ¬†For one thing a lot of suppliers may not want to give you a proper IVA invoice and wish to receive cash in hand or offer only a ticket or "albaran" (goods received note) which will not suffice. ¬†Some expenses or costs of doing business do not come with neat and tidy "VAT invoices" e.g. car hire and flights, goods bought online abroad. ¬†Retail outlets like supermarkets and garages give only till receipts which will not do as they are not proper facturas made out in your name or that of your company. ¬†In mitigation of these difficulties the Agencia Tributaria does allow some¬†small ticket items like parking tickets to be supported by other than facturas. ¬†Also shops and garages can be made to make out a proper factura in your name (with NIE or CIF) - they may resist but they are obliged to on request.
In the case of airline tickets you can either order through a travel agent and get an invoice from the agent or try and claim with whatever documentation you can get from the airline who, not being subject to VAT, will not give VAT invoices.
It is really the first general rule that bites the most however. ¬†In the UK and other countries there is an acceptance on the part of the tax authorities that some expenses are for mixed - business and private - purposes, so there can be claims for part of your household bills if you have a home office for example. ¬†In Spain the rule is much stricter and the whole expense must be demonstrably business-related before it can be claimed. ¬†A good example is a car which you use for visiting clients. ¬†If you only have one car then it is assumed that you use it partly for private purposes so the whole expense is not deductible (although if you keep receipts you can claim for petrol used for specific business related journies). ¬†Another example of inflexibility is air travel where even a small element of private use invalidates the whole claim e.g. it would be difficult for a British resident of Spain to claim air travel to the UK for business purposes because it would be assumed - unless it can be proved otherwise - that there is a private motive for the journey.
The "home office" is a common cause of confusion and frustration because of this rule. ¬†Claiming a proportion of your rent because you use part of the house for work is theoretically possible but you had better be able to demonstrate very specifically how a part of the house is exclusively dedicated to your business and could not be used for anything else - a computer and phone in the lounge would not do. ¬†Also you will have to have a VAT invoice for the rent. ¬†Other expenses like water and electricity can only be claimed if you have a separate bill from the utility company for the business (e.g. a separate connection in a converted shed or outhouse).
Consequences of false claims
If you (or your accountant) make expenses claims which are subsequently struck out during a tax inspection, the tax saved then becomes payable together with a penalty. ¬†As a rule of thumb you could end up paying roughly three times as much as the orginal saving.
See also Spanish tax deadlines and IVA (VAT) rates in Spain