Rose and Clavel Blog

Following new changes to the localisation rules with regards to VAT, there are yet more compliance obligations for businesses arising from this change in legislation.

Traditionally, only companies that were acquiring or selling goods within the EU had to register with the EU traders list so that they were able to exchange these goods without charging VAT at source. In these transactions, the VAT was deemed to arise at the point of receipt, so it was the client who accounted for such VAT in their local return via the VAT reversal mechanism. This has not changed.

Before the new changes very few services followed a similar treatment of accounting for VAT at the point of receipt. For the majority services, VAT was charged at source. Now and as a consequence of these new changes in legislation, the VAT on the supply of all services between companies in the EU will also be deemed to have arisen at the point of receipt.

Consequently, all companies delivering or receiving services within the EU should now apply for registration in the EU traders list. Once on this register, the company will have to file an additional return, namely Modelo 349, declaring details of the clients/suppliers and the amounts exchanged in the period.

More importantly, it is obligatory for all companies now, before issuing an invoice without Spanish VAT, to confirm that their client (in another UE country) is properly registered in the EU traders list. Here is how you go about checking whether your customers are registered on that list:

1- Go to http://ec.europa.eu/taxation_customs/vies/
2- Follow the instructions on the screen.

Consequently, any company rendering services without Spanish VAT to another EU company that is not on this register can be subject to a VAT adjustment by the tax office and potentially a fine.

Whilst there is nothing to panic about; this is yet another hurdle the tax authorities have set for us as tax payers in business. We share your frustration with regards to the additional compliance requirements, although of course Rose & Clavel can help you meet these new obligations accordingly, to safeguard your interests and avoid future problems with the tax office.

One of the key challenges in every entrepreneur’s life is managing cash flow effectively.

If you have a basic understanding of your balance sheet you will know that in addition to your bank balance you will have both rights (debtors) and obligations (creditors) therefore acknowledging these elements will ensure you don’t just spend all the funds in your bank account with total disregard of future obligations.

During the course of your transactions you are effectively acting as a tax collector for the tax authorities in two ways. Firstly you collect VAT by adding it to your sales and secondly you collect income or corporation tax by withholding tax on some of your expenses such as rent or salaries. Consequently, at the end of each period you may have collected considerable funds on the government’s behalf which will need to be paid over in a timely manner. You can read more about the tax collection system in Spain on the useful information section of our website.

The most effective way to ensure you don’t accidentally spend resources that have been collected in this way is to have a separate bank account where you regularly set funds aside to allow you to meet your payments when due.

You may go about deciding how much to set aside in a number of ways:

“The balance sheet method”: Each month take a look at this financial statement and calculate how much you should set aside. You should take into account all current tax creditor accounts minus your savings account balance to calculate how much your piggy bank needs to be stocked up by.

If you don’t have access you an up to date and reliable balance sheet you may prefer to use the “Rule of thumb method”: Each month set aside between 15 and 20% of sales; adjust your percentage each quarter to compensate for slight under or over provisions.

People often complain that they don’t always get enough notice from their accountant with regards to the quarterly tax payments; don’t make excuses. As a business manager you should not just rely on your external accountant to warn you about payments coming up, you should be aware of the tax collection implications of your transactions and take control of the situation by setting aside whatever is needed as you go along.

Accountants have a difficult job in juggling the clear conflict of interest that arises when a client asks whether or not they can claim relief on certain expenses. On one hand, our clients clearly expect us to help them save as much tax as possible, and on the other hand we are supposed to protect them to ensure that should they ever have an inspection, the tax office does not turn around and make huge adjustments that lead to both additional taxes and penalties.

In reality, the fact is that those two objectives are clearly mutual opposites, and therefore we need to find a balanced approach that allows us to achieve both aims to a reasonable degree.

We often come across people who complain that their accountant never wants to challenge the tax office, and consequently they feel they pay too much tax. On the other side of the spectrum, we also encounter people who what to take legal action against their previous accountant because they had an inspection and suffered consequences which they believe were the accountants fault.

Bear in mind that claiming just €100 worth of expenses that turn out to be deemed unjustifiable in an inspection; whilst the original saving would be around €35 between VAT and tax, you could end up with a total risk of well over €100 by the time you pay the tax saved plus the penalties.

At Rose & Clavel we believe that it is you who should decide how much risk you are willing to take, and of course we will give you the information you need to make an informed choice when deciding whether or not to claim relief on your business costs.

When we do business we inevitably incur many expenses. Some of them are clearly business related. For instance, furniture purchases if we are a furniture retailer or dental materials if we are dentists.

Other costs, however, are not be so straight forward to justify as genuinely necessary for the purposes of the business. For instance, are petrol costs really necessary for a retailer who does not deliver anything as part of their normal course of business?

Furthermore, when you incur costs that are partly for business reasons and partly for private reasons, such as electricity costs of a home office, it gets even harder to decide whether or not the item is a business or private expense.

Frankly, we believe that both client and accountant should be able to sleep at night and therefore we don’t want to take risks on your behalf.

At our firm, we will not go as far as to help you evade tax. We would not allow you to claim tax relief on items that are clearly not business related. However, for those items that can be subject to interpretation and judgment we would, within reason, allow you to make your own choice providing you both understand and assume responsibility for the potential consequences should your choice ever be challenged by the tax authorities.

The problem is that most people want to “have their cake and eat it”. They want to save as much tax as possible but they are not willing to take the risks. It is time to wake up and acknowledge that the ball is in the client’s court.

If a fine comes as a result of claiming relief on the wrong expenses, it will be you who will face the consequences, so make sure you work with a good accountant who tells you the way it is, but be prepared to make your own decisions and stand by them.

Here is what you should know to enable you to make sensible decisions when asking yourself: to claim or not to claim? There are two tests expenses need to pass:
1. The expense needs to be wholly necessary for the purposes of the trade
2. There needs to be appropriate documentary evidence to support your claim

The 100% test

In other countries, such as the UK, it is often possible to claim relief on a percentage of certain costs when there are both private and business reasons behind the expense. We are afraid to say that in Spain that is not the case. Strictly speaking and with legislation in mind, if an expense is not 100% business related, then it is not allowable.
This immediately writes off the possibility of claiming relief on items such as car costs, home office costs, even mobile telephone costs.

In today’s internet age increasing numbers of people run their businesses from home. If that is your case, you need to know that claiming tax relief on your home costs, including rental, electricity and even telephone could potentially be challenged.

Claiming tax relief on car costs is commonly challenged. People sometimes say that “their friend or accountant told them that if they sign-write the car with advertising” then the expense can be allowed. Beware and ask yourself: Do I really use the car only for business? Is a vehicle necessary for my ordinary business activities?

Don’t accept other people’s feeble reasons nor take risks without knowing the implications. You can learn more about claiming relief on cars on our website: www.roseandclavel.com, in the useful information section.

In practice, however, people sometimes claim relief on these costs. In the event of an inspection, providing the claims have been reasonable and that they are lucky and the tax inspector has already met his or her targets, they do get away with it.

In an inspection, the inspector should look at the overall picture, for instance if you are a sole trader and claim relief on your car, providing you have another family car then you may get away with it.

Or a wholesale business with a sales rep may get away with claiming relief on a car providing there are people on the payroll and that the car is not high spec vehicle.

If in doubt apply your “reasonableness test”.

The documental proof test

It is sometimes very hard in Spain to obtain a proper invoice.
At the best of times it is time consuming to get a proper invoice. Have you ever tried queuing at the customer service desk in Corte Inglés to obtain one?

My husband recently requested an invoice at Opencor and was first told that “they did not issue them”, then that “the lady who does them was away on holiday”. If took three visits to the store to finally get the invoice. If a major chain such as this cannot always comply, you can imagine how some smaller shops react.

Sometimes, you may be dealing with cheeky suppliers who just give you an “albarán” or a “presupuesto”. They do charge you VAT, yet it is highly probable that the transaction will not end up on their tax return. Hence the tax office does not allow you to claim relief on something that has not been taxed via someone else’s return.

We understand that obtaining proper invoices can be both time consuming and difficult, however your discipline in doing so will be your insurance policy if you do claim tax relief on the expense.

We came across a case where the rental costs were rejected as allowable in a VAT inspection because the invoice did not have an invoice number. It sounds crazy, as there was a contract to prove the rental agreement and an invoice with the taxable amount and VAT split. Unfortunately, if the inspector is adamant to follow the letter of the law, then your chances of ending up with a big tax bill are quite high, unless you take the necessary precautions.
You can learn more about the requirements of invoicing in Spain in our useful information section.

It is worth pointing out that the rules for VAT are much stricter with regards to the existence of a full invoice, so watch out! We often have new clients who, when subject to our initial review realise that the previous provider had been claiming VAT relief on all sorts of inadequate documents: tickets, hand written notes, costs dated well before the registration date, clothes and even hamster food.

Frankly, in these circumstances we believe that both parties were at fault. The previous accountant could have been more prudent and not claimed relief on those expenses. Also, the client should not have handed in all sorts of things from ski passes to grocery bills in the hope that they would slip the net.

If you have a business, we are sure you also have common sense. Start thinking about the implications of claiming relief on your doubtful business expenses and don’t just rely on your accountant to both help you save tax and keep you out of trouble. Achieving both objectives fully is not possible so take our advice and make your choice.

We always recommend that clients obtain proper invoices, although in practice that is not always possible. Consequently, for business expenses that are supported by an invoice we claim both VAT and tax relief. When the supporting document is just a receipt or ticket, we don’t claim VAT relief but claim the total cost against tax.

As accountants we are able to offer our clients other legal and safe methods of saving tax such as correct splitting between salary and dividend, without putting our clients at unnecessary risk.

Ultimately we aim to achieve a happy medium. We are prepared to be challenged by tax office and claim relief on expenses you feel are justifiable, but only when we feel that we have sufficient evidence and arguments to support the decisions made.

We are well aware of the “anecdotal” advice most new-comers to Spain receive from other “old-timers” here on the coast: “Oh, don’t worry about tax, nobody pays tax here.” Or, “My accountant is great” They just ask how much tax I want to pay” and then deal with it.

Well we are sorry to tell you, those days are numbered. Spain has been put under enormous pressure from Brussels to clean up the economy, and the recession has done nothing to help tax revenues. Of course, this will not happen over-night, but we have to warn you, if you do listen to advice like that, and do get caught, then the penalties will make you wonder if it was worth it in the first place.

Doing business in Spain is not an easy task. We encourage you to take control of the decisions that may have future consequences for you and your business. Don’t just assume that your accountant has it all in hand, especially if you don’t work with Rose and Clavel.

This is the thought that has been on many expats minds in recent times. Many people have actually gathered their families and moved on, others however are still trying to make their living in the sun dream a permanent reality.

There is no point pretending that the last two years have not been challenging for many businesses here on the coast. Some have seen their long established businesses go under in a matter of months; others have seen their dreams of success with a new venture shattered by the harsh conditions and the volatility of demand in their product or service.

I started my own business three years ago, and although we have been fortunate and have built a successful accountancy practice with an excellent team of professionals and clients, the ride has been anything but easy. I have learnt a lot from the experience and I take every opportunity to share that knowledge with other people in business here in Spain in the hope that they will have better chances of success.

If your business is at the stage where you wonder whether you will still be open in another few months or even weeks, perhaps you would like to consider some points carefully:

* Lifespan of debts
* International cooperation
* Personal guarantees
* Continuation of business
* Pro-act, don’t react

If you are just about to start in business or are already on the way, perhaps you should also consider all these issues carefully as prevention is always better than cure and many problems commonly faced by businesses can be mitigated if not avoided altogether.

Many people make decisions based on hear say that unfortunately doesn’t always turn out to be true.

Lifespan of debts

There is a misconception out there that debts expire after a while. You must be careful with this assumption. It is true that when it comes to potential liabilities with the tax office, if they do not start an inspection process within 4 years, then the period is deemed outdated and hence no new liabilities can result from challenges or enquiries. However, it is quite common for tax enquiries to commence just before this 4 year period is up and the mere commencement of the enquiry process will make the financial period and therefore the potential liabilities current and open potentially indefinitely.

Generally you must assume that anything you or your company owe, will continue to be a debt subject to collection by your creditors. If you close down your business owing money to the tax or social security office the chances are that at some point in time, perhaps even many years, this debt will be collected by the authorities by either freezing your assets or taking funds directly from your bank account. These debts don’t just go away and the longer you ignore the problem, the more expensive it will be to settle the debt.

International cooperation

As Europe becomes smaller with harmonized rules and close connections between member countries, the ease with which the tax authorities can pursue debts in other countries is becoming more evident. It is now quite common  for the tax authorities to assist each other in the collection of debts, so don’t think that just because you are leaving for another country that any debts will stay in Spain, and just because you don’t intend to come back they will eventually be forgotten.

Personal guarantees

Another common mistake people make is that they believe that when they trade through a limited company any debts will belong to the company and not the shareholder or director. This is a bitter lesson to learn in you have to wait until you become personally responsible for your company’s obligations. Companies afford you a little protection. However, in practice the “veil of responsibility” can be lifted and therefore the director becomes personally liable if the director fails to meet his responsibilities within that role.

It is also common for banks, when they give a loan to a company to include a personal guarantee from the director within the deed. Read the small print and don’t just assume that your bank manager will tell you if that guarantee is indeed being applied!

Continuation of business

If you are advised that one potential option is to close down, and to open up a new company, beware. This option is at the very least dubious practice, potentially dangerous, and in reality may not actually afford you any protection against the debts of the previous company.

This practice was very common in the past, and although it will buy you time it will not provide you with a long term solution to your problems.

You should also bear this in mind if you are acquiring or investing into a business in trouble. You should take the necessary precautions to ensure that you do not inherit someone else’s debts when you take over the business.

Pro-act, don’t re-act

Unfortunately, too many people bury their heads in the sand when the initial signs of trouble appear. This leads to debts spiraling out of control before the decision to either sell or close is made, hence leaving the entrepreneur in a very vulnerable position.

You should tackle signs of trouble head on at the early stages as if you do this, even if you are unable to turn the business around, you will be more likely to walk away without worrying about your future.

Having access to quality professional advice should help you manage your situation whatever the stage of your business, don’t make the mistake of ignoring warning signs or simply walking away from a difficult situation in the hope that the debts will just be forgotten.

It is not uncommon to find businesses that are very busy, yet they find that they don’t have enough cash. If you are one of these entrepreneurs who wonder where the money has gone to there are two “usual suspects”: Insufficient margins and poor optimization of resources.

When margins are not sufficient, you can tackle the problems by making changes to your pricing, volume, and costs. Making small changes in your pricing can have a considerable impact on your overall turnover and margins.

The key for many businesses is efficiency and encouraging your customers to drive your occupancy/utilisation levels up as high as possible.

Reducing cost of sales may be quite hard as it could entail either negotiating hard with your suppliers or reducing the input at the production levels which may well have an impact on quality.

The best way to reduce the cost of sales is to look for opportunities to minimize wastage or even theft. Simple but effective stock controls can make an enormous difference. If your business is based around delivering services, instead of goods, then you should monitor time spent on each job carefully.

Overheads reduction is an area that you can tackle without necessarily affecting the output of your business. Have a look at your profit and loss account regularly to identify areas which are not as necessary as you think. Even consider using an on and off system for certain items such as marketing.

Finally, in order to truly assess your business’ inherent and potential profitability you need to make sure that you take into account the cost of all of the resources that are utilized and that includes the value of the owner’s time.

In order to have a long-term successful venture in your hands the business needs to stand on its own two feet, potentially without you.

Our advice is, don’t just go with the flow, take the time to stop and carefully consider the financial information relating to your business. If you don’t do that you may well fail to identify and correct areas which will cost you either your ability to succeed or to sell your business once you are ready for it.

If your business is profitable, you are still at risk of running into cashflow difficulties if you don’t understand some of the key principles behind the difference between profit and cash availability.

In an ideal world our profit should be available for us to spend. However, as our business is a complex maze of transactions, even if we do make profits, the chances are that this profit will be locked into all sorts of assets which may not be turned into cash for a while.

You need to understand that purchasing fixed assets is not an expense. We often come across clients that complain that they have no profit because they have invested heavily on the business that year. I am afraid that because such assets are going to be used for a number of years the tax man does not allow us to claim full relief in the year we acquire such items. Watch out those of you making considerable investment in your companies, don’t spend all your money as you may need to set some aside for tax despite your efforts.

Current assets can also be a trap for your resources. If you are unable to collect payment for all your sales, your profit is still the same but some of this profit is locked into your debtor balances on your balance sheet, thus reducing the amounts available for you to use.

Similarly, if your business is in the early stages and pilling up stocks then the chances are that your book profit is much healthier than you feel in your pocket.

Once your year has come to an end, tax will arise on a book profit which by now you are well aware may not be readily available for you, therefore it is likely that you may not have sufficient reserves available to meet your tax obligations unless you make alternative arrangements.

Don’t forget, understanding your accounts can be a key tool to help you manage not just your business operations but also your cash flow requirements.

Welcome to my professional blog. I will be soon posting interesting news about accountancy on the Costa del Sol.