Spanish bureaucracy gets funny

Sorry if you have seen this before. I put it on the main website under "Autonomo : the Movie" but it is worth a look, even a second look. It´s a short film from the No Todo FilmFest (Spanish but with English subtitles) that features a young woman trying to register as autonomo and coming up against an intransigent bureaucrat. Sounds very unpromising material but actually is extremely well done and anyone who has dealt with Spain´s officialdom will agree that it is achingly true to life. Thanks to the client (an autonomo himself) who alerted me to it. It is 3 1/2 minutes long -

Our autonomo service is not quite as painful: Services for self employed / autonomos Spain

Is there such a thing as an autonomo free lunch?

Going self-employed in Spain - "autonomo" in the local parlance - has many attractions for foreigners living here, not least of which is that good paying contracted jobs are in short supply, particularly for foreigners without much Spanish. Many foreigners in Spain run their own business, er, "informally" without registering or paying any tax but would prefer to be legal either because they fear investigation and prosecution or because of the limitations of working in the black economy e.g. not being the equivalent of "VAT registered" and being able to issue proper invoices or not being able to sign a lease, take a loan or employ people.

That all points to registration and formalising your business but many people are put off by the taxes and social security. Without going into massive detail (there is a guide on the firm's website which covers all of this - Autonomo Guide) the main sticking point is social security for most people. It is a minimum of 251€ per month and can be more if certain unemployment, sickness insurances are taken in addition to the basic cover. Even if you don't make a profit (or make losses) this monthly payment never goes down, although younger autonomos can get a 30% discount for their first 15 months registered.

The "solution" if you want to register as autonomo but don't fancy this hefty outlay is sometimes touted as opting out due to low earnings. Spain has a national minimum wage and theoretically autonomos who earn less than it can apply to opt out of social security. But there are conditions which make it only applicable to a minority.

- you must always earn under the minimum wage so anyone earning irregular amounts which sometimes exceed the minimum could not apply

- you must be working occasionally - if you are doing a regular contract or regular work you cannot apply

- you cannot have a permanent place of business

This is why the bulk of people continue to have to pay social security if they are self-employed in Spain. Besides unless you pay into the system you cannot apply for the benefits, mainly health and pensions related which could ultimately be worth hundreds of thousands of euros (see article Spanish pension benefits )

Are Spanish self employed / autonomos overtaxed?

As a British accountant operating in Spain I sometimes feel the need to defend the Spanish tax system against accusations of (a) unfairness and (b) expensiveness.

At times that is a bit like trying to defend a war criminal or the English back four's performance in that World Cup defeat to Germany - because it is indefensible. Mostly though it is the Social Security system that is the real villain not income tax. There are two main problems with social security in Spain:

autonomos (Spanish self-employed) have to pay a minimum of 250€ before they can legally operate and this does not go down even if they earn a big fat €0 during any given period. A big disincentive that I have talked about before on this blog (Spain won't recover without encouraging its autonomos). But there is at least some leeway - see this article lower rates of Spanish social security in our Autonomo guide.

Also employers have to pay a whopping 30% or so in NI contributions making it ludicrously expensive and risky to hire anybody.

At least you get something for social security - health and pension rights. But what about Spanish income tax? When self-employed clients or small businesses start rolling their eyes at all the tax they must pay on top of those nasty social security contributions, I have to remind them of a few points:

- the contributions themselves are set against the self-employed's taxable income (thus reducing the effective cost of social security by up to 43%)

- the UK's top rate is now higher than Spain's (50% vs 43%)

- Spain's allowances are more generous (see Spanish tax rates)

- there is more scope to create tax efficiencies in Spain. Say no more.

Part of the resentment about autonomo tax comes from a misunderstanding of retenciones and the quarterly income tax that the self-employed have to pay. Without going into all the details, besides social security, autonomos must pay income tax every quarter and (sometimes) suffer a sort of PAYE on their invoices, where the customer deducts up to 15% and pays it to the tax office. But both of these types of tax are kinds of advanced income tax and the autonomo gets credit for them when they do their tax returns. Retenciones are offset against the quarterly tax bill and that in turn is credited against any tax payable when the annual Renta tax return is due. Quite often this can mean a tax rebate to the self-employed taxpayer.

That's enough defending the taxman. I can't keep it up for long.

Subsidies for Spanish self employed autonomos

Free money! The Spanish government may be so short of cash it is being downgraded by the ratings agencies, and being bailed out by the Germans, but there is still plenty of money sloshing around if you know where to look.

There are so many subsidies and programs available for new and existing businesses, either funded by the government, the regional government or the EU, that it's impossible to keep up with them. There is a whole network of government offices in Andalucia whose sole job it is is to guide potential claimants to these bags of loot (these are the CADE offices - see website here).

But there is a snag or two of course. State handouts wouldn't be state handouts without strings attached, hoops to jumps through to get and a bias in the system to certain favoured groups. I attended a seminar at the Marbella CADE office this week to learn about an autonomo subsidy program which I have described in full on the Advoco website -

http://www.advoco.es/hot-topics/54-subsidies-for-newly-self-employed-autonomos.html

To be fair it looked fairly straightforward in terms of applying although it is only available for certain times of the year (for the next month and then again in September). There is also a big bias in favour of certain favoured groups. The subsidy starts at €5.000 for an ordinary bloke and climbs steadily with each feature you have which the government deem to be a disadvantage e.g. women (€2.000 more), disabled (€3.000), immigrant (€3.000) etc A bit unfair and patronising maybe? The €11.000 jackpot goes to unemployed, disabled women who have been victims of domestic violence.

Spain won't recover without encouraging its autonomos

How's this recovery thing working out for you? 2010 is supposed to be the year of recovery and maybe it is taking off in the rest of the world (China's growing too fast I read this week "China's GDP surges 11.9%"). But there's precious little sight of a recovery in Spain. The newspapers are still full of bad news stories, the property market is stalled and shops are still being boarded up. Even the weather, usually a consolation, has been letting us down.

What's stopping things getting back to normal or at least improving? Mostly I suppose it comes down the severity of the downturn that Spain suffered. As in Britain the housing boom and bust left a mountain of mortgages and personal debt as well as businesses used to a level of demand that simply wasn't sustainable. We badly need something to take the place of the housing boom but on a more sustainable basis; new enterprise to fill up the empty shops and premises, provide employment and get demand growing again.

But that needs new businesses starting small and hopefully growing and sparking a recovery. Unfortunately Spain's system of self-employment or "autonomo" is putting off a lot of people from even trying to begin a business and provide themselves (and others) with work.

We get a lot of enquiries from people who have an idea for a business but as soon as they hear what's involved with autonomo they are put off: the high minimum social security costs (you have to pay at least 250€ a month even with zero income), the need to charge VAT (there's no small business exemption) and the quarterly reporting and bureaucracy all put people off. The rules also seem to do everything possible to discourage small businesses - e.g. autonomo's don't get unemployment benefit and have lower tax allowances.

You start to realise why the number of people going autonomo has fallen for 23 months in sucession (see article) and why so many people go into business unofficially i.e. illegally without registering or paying tax. There must be millions of business plans that have been shelved or entered into "negro" (black economy). This is damaging in so many ways: potential business owners stay on the dole, they don't pay taxes on the "lost" business and there is no chance of them employing anyone themselves.

Reform is long overdue but there are a few good things about Autonomo and lots of people are giving it a go. There is even an exemption from those social security charges and some subisidies available. For details see our Autonomo guide.

Social Security exemption for autonomos

A lot of people living in Spain and thinking of starting their own business are put off going self employed by the high fixed social security contributions. Anyone registering as “autonomo” with the Tax Office is also obliged to sign up for self-employed social security which costs a minimum of €250 a month. If you are starting a small business with uncertain revenues or if it is only a minor concern where you know the income is going to be pretty minimal this is very offputting.

The situation is worse when you do not need the social security because, for example, your family has private health insurance or you do not need to make any more state pensions contributions (e.g. because you paid the maximum already in the UK).

There is a possible exemption which may make a small business viable in this position. If your are registered autonomo but this is not a full time regular income generating occupation then you can be exempt from joining autonomo social security (known as “RETA” or Regimen Especial Trabajadores Autonomo ). The law does not give a hard and fast definition of how an “occasional” autonomo should be classified but case law has suggested that, in the absence of any other factors, earning less than the annual minimum wage would suffice.

The minimum wage, or the “salario minimo” or “salario minimo interprofesional” (“SMI”), is €7,599.60 for 2010. It is most commonly referred to as a monthly amount ( currently 633,30), and is changed annually by the Bank of Spain.

Once someone earns more than this monthly amount they won’t be able to claim the exemption from social security. It should also be noted that they won’t be able to claim any benefits or benefits from social security while they are not making payments.

More information can be found at the new Autonomo page of the Advoco website which also includes a video guide to the autonomo.