Rose and Clavel Publications

Anglo-Spanish Chartered Accountants

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Archive for May, 2010

To claim, or not to claim: that is the question…

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.

 
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