Spanish families squeezed for €415 more tax

€415.  That's the estimated annual cost per household of the increase in IVA recently announced by the Spanish government to try and close the fiscal deficit.

The general rate applicable to anything sold in the country apart from reduced or VAT-free categories (see below) is up to 21% from the current 18%.

Beneath this headline-grabbing rise is a second increase to the "reduced" rate category of taxable goods and services which goes up from 8% to 10%.  This 25% hike in tax is important as it is the rate applicable to such things as some food and non-alcoholic drink, health products, transport, entertainment etc that ordinary people consume every day.  So it will really make everyone feel poorer and reduce spending power right through society.

This reduced rate also applies to new build construction so a new house will cost an extra 10% in tax on top.  This does not apply until 2013 as the previous government brought in a temporary VAT cut to 4% for new homes which expires this year.

And that's just IVA of course.  Spending cuts have targeted unemployment benefits and the pay of public sector workers.  The latter seems bound to lead to strikes.

Another move, specifically at the request of Spain's new fiscal masters in Brussels apparently, has been to abolish the offset of housing costs versus tax except for buyers of property post-2006.

Economists foresee the already shrinking economy declining further as a result of the new hits to demand, with forecasts of recession through to 2014.  No surprise there but there is a surprise, to me at any rate, in the size of the expected contraction.  For example the IMF is talking about a 1.5% fall in GDP this year and actually growth of 0.6% next year.  Hardly Greek style-collapse but the IMF have been wrong before.

If they are right and Spain can muddle through with the economy merely stagnant while these deficit measures take effect and the banks are sorted out then perhaps a full blown bail-out or euro exit can be averted.

I have my doubts.  Looking around the country it seems like there is an air of desperation and bewilderment among the population even before these latest tax rises and spending cuts.  Big price rises across the board, wage and benefit cuts, higher income tax, regional spending cuts etc will surely crucify what is left of economic confidence.  And I wouldn't rule out the Spanish people rising up and demanding that some of the measures are reversed as the pain becomes too great to bear.  We'll see.

From our website:  Allowable business expenses in Spain

Spanish property owners face a double tax shock

In among a welter of new taxes that have been introduced by the new conservative-led Spanish government, are a couple which will hit foreign owners of Spanish property:

(1) The non resident tax rate is set to rise to 24.75% from the current 24% level.  That doesn't sound much but it comes on top of the reintroduction of the wealth tax and a big crackdown on holiday home owners who neglect to pay their taxes (see our guide What to do if you get a letter from the Spanish tax office)

(2) IBI or local property taxes are also set to rise across the country by an average of €30 for each of the next two years as the government seeks to let local councils raise about another €1 billion in taxes.  It is supposed to be a temporary measure.

Older properties that haven't been revalued for 10 years will be the worst hit as the tax will go up 10%

If you want to see whether you will get off lightly or suffer then take a look at your last IBI bill and look for the "ano rev" or year of revaluation - if it is 2002 or prior it will be a 10% rise, 2002-6 6%, 2009 or later 4%.  Properties revalued between 2007-8 will see no increase as they were the peak property bubble years and the properties are overvalued any way.

The taxman wants some of your Spanish rental income

If you live in Britain but own a home abroad which you rent out you can’t fail to have seen the recent headlines like this one:

Taxman pursues Britons hiding holiday rent on overseas homes

Apparently the Revenue have set up a special unit to go after “the rich” (defined as those paying 50% tax i.e. earning over £150,000 pa) and one of their tasks is to recover £560 million in unpaid tax on foreign rental income.

With the stern promise that there is “no hiding place for tax cheats” they will look at things like land registers and letting adverts to catch people earning income from their properties but not declaring it.

I don’t know how worried I would be if I was renting out my holiday home and hadn’t declared the tax. These kind of campaigns have been launched before and you sometimes get the impression its more about the publicity and scary newspaper headlines than anything of real substance.

It also wasn’t abundantly clear whether the campaign is purely about the holiday homes of “the rich” or whether it is anyone with a holiday home that is under threat.

By coincidence I got a reminder of how brutal the Spanish taxman can be when it comes to foreigners (and locals to be fair) when it comes to undeclared rental income. I got an email from someone asking what they could do about €6,000 that the Spanish tax office (la Agencia Tributaria) had taken from his bank account, with no warning or even a letter to say they had done it.

It turned out he had two holiday homes and he let out one through an agency for several years without declaring a cent for tax purposes, not even completing the non resident tax return which surely every Spanish property owner knows about by now (if you don't see this post 'Tis the Season to Pay Spanish Taxes).

We have to assume that the rental agency were asked for their records by the hungry Spanish tax wolves. I have some sympathy for the guy but then again a lot of people do things properly and pay their taxes, so why should the non-payers get away with it?

If you want to be one of those who declare their income then here is a link to an article on our main website which explains what to do:

UK and Spanish tax implications of renting out a holiday home in Spain

Big brother is watching your Spanish bank account

The Spanish authorities must be getting desperate for money - the papers have been full of scary stories about the tax office (Agencia Tributaria) saying how they are going to raise billions of Euros by cracking down on tax fraud. News of last year's haul even made the New York Times as everyone worries about the prospect of Spain struggling to finance its budget deficit (Spanish fraud crackdown nets 10 billion). This year's priority is to cooperate with the Social Security department to catch people operating in the, erm, "informal" economy without registering for tax. The intention is to use new powers to demand information from utility companies, credit card providers and banks.

The full story is on our website Authorities tackle tax avoidance in Spain but a couple of aspects to all this are worth highlighting. The first is a new rule in force from 2011 but applying to transactions that go back to 2010, that all banks report all transactions over 3.000 with the following details:

- name and NIE (or company name and CIF) of payer/recipient

- amount

- whether deposit, withdrawal or transfer

- date account

Worth bearing in mind if you are paying for a property partly in cash or making a gift transfer which should be declared for gift tax (see explanation Spanish Gift Tax).

Also the Agencia Tributaria are keen on catching more people who don't declare rental income. Already they boast of trapping 200.000 shifty landlords by simply requiring that anyone claiming a tax deduction for rent paid has to state the catastral reference (Land Registry number) of the house or apartment on their tax return. This is used to check the owner's tax return to see if they have declared the income. The once sleepy Spanish tax authorities are waking up!

Can you do business in Spain without registering?

In my experience as an accountant most people wish to play by the rules, do the right thing, fulfil their responsibilities etc ... so long as doing so is not unduly complicated or punitively expensive.

A consequence, which I see a lot, is a frustration among people in Spain who want to do business legally but are put off by the red tape and tax implications, especially social security and IVA (spanish VAT). The problem applies mainly to small part time businesses where the income is expected to be patchy or very low. If you are only expecting to earn a couple of hundred euros a month or are doing something which brings in revenue periodically (e.g. running courses) then it is totally infeasible to set up as properly registered business with the following expenses:

monthly social security

accountancy costs

quarterly taxes

In addition all businesses have to charge IVA which, while it should not be an expense of the business, nevertheless results in higher charges to the customers and a lot of admin.

Also you can't declare income for tax unless it has been earned through a registered business with the IVA accounted for. It's like the old saying about it not being possible to be "a bit pregnant". You can't be "a bit legal" - it's all or nothing. If you want to make your small business earnings legal you have to do all three things - start paying the social security, deal with IVA and pay income tax.

The situation is a bit more complicated than this (see the autonomo guide on our website) but in essence that is the situation - it is totally uneconomic to legalise a small business unless you expect to earn a decent income right away - you either don't start up in business at all or do so on a cash in hand basis.

And lots of people in Spain do. Much more so than in the UK. One of the reasons for this is that in the UK there is a threshold of 70.000 before which businesses do not have to register for VAT. This means small businesses do not have to worry about one of the main business headaches until they are well-established. Imagine if Spain had a similar system - some IVA would be lost to the government but many more businesses would go legal and pay income tax and social security. Some would grow big enough to start paying IVA.

In the UK some voices are calling for the VAT threshold to be raised even further. The Federation of Small Businesses has suggested a rise to 90.000£ would create 35,000 new jobs according to the BBC. Spain can only dream of such a windfall. But this is what Spain badly needs. With so many people unemployed and the Spanish economy stagnating, making it easier to initiate LEGAL new businesses is essential.

The UK also has national insurance breaks for small businesses and is much more flexible in allowing income to be declared when there is no job or registered business involved. Spain desperately needs a similar approach.

From the main website What should you do with your savings in 2011

‘Tis the season to pay Spanish taxes

A rather dull topic this week but an important one for anyone with property in Spain, because the deadline is looming for declaring non resident taxes. All Spanish income tax declarations for non residents (modelo 210) have to be in by 31st December. The tax is collected either directly from the taxpayer’s bank account on the last day of the year or it can be paid in cash at the bank, with the completed modelo 210.

Resident property owners don’t have to pay this tax but it is worth noting that the Spanish tax office will not consider you a resident unless you have registered as such and filed at least one tax return (even if it is a “nil” return with no tax paid).

Also be aware that the system for non resident property owners who rent out their Spanish homes has changed. As in previous years the annual modelo 210 is not appropriate if you actually earn rental income – you are supposed to file quarterly form 215s. The change is that this year, for the first time, expenses “exclusively relating to the rental” can be claimed against the gross income. Rates (IBI), agents’ fees and advertising costs would fit under this category.

Back to the modelos 210 which non resident property owners have to declare if they don’t rent out. Full chapter and verse on the tax can be found on our website which has a special page (Spanish Tax Form 210) explaining all about it and giving details of our service where we will do it all for you for 30€.

Alternatively you can do it yourself - it is not a particularly complicated form to fill in and you can download it from the Agencia Tributaria’s website here. Remember that you have to register first before you declare (modelo 30). You pay it at the bank, but you will need to fix Agencia Tributaria identification stickers on the form before the bank will accept it. These stickers can be obtained from the Agencia Tributaria offices simply by showing your NIE (once you are registered with them).

The advantage of our service is that you can do it all online / by email even if you are not in Spain, and that includes the registration process. We even allow clients to settle our bill in pounds to a UK bank account.

Modelo 30 and other Spanish tax forms

My firm has just published a major new guide on its website:

Spanish tax forms explained

For anyone living in Spain or with fiscal interests there, should consider bookmarking it for future reference. Besides explaining what all of the most commonly used Spanish tax forms (modelos) are for, it also has links to their downloads.

The first one covered in the guide is the Modelo 30 which is the most commonly used of all the forms, for private individuals - as opposed to businesses - any way. As the guide says this is the form you use to sign up for Spanish tax in the first place. If you become liable to tax in Spain or think you may be due a tax refund (see Getting a Spanish tax refund) then it is necessary to register using this form. The same form is used if you become liable to Spanish NON resident income tax, which all foreign owners of Spanish property or assets probably are (unless they are residents).

A lot of people expect that if they are liable to tax in Spain they will find out soon enough i.e. they will be sent a tax return or demand and take action accordingly. Others think that by obtaining their NIE number or residency certificate, that identifies them to the Spanish tax authorities. Neither is true - the modelo 30 is the only way to register for Spanish tax.

Luckily it is an easy form. We process these for clients but you could do it yourself easily enough. Go to your local Agencia Tributaria and you will see a desk somewhere near the entrance where they hand out tax forms. Ask for a modelo 30 and fill it in there are then. It is relatively untaxing information like name and passport number. One tip is that if you are registering as a couple, you use one form and put a cross in both boxes 101 and 102 on section 1 (the other half is the "conyuge') . Then you fill in one spouse's personal data in section 2 and the other in section 3. Both sign at the end. Simples.

Note that the modelo 30 is also used to modify any aspect of your tax status and it is an offence not to do so. Things that would trigger a modification:

- change of adress (Spanish)

- change of residency status e.g. becoming a resident after previously paying non res taxes

- end of residency e.g. you are leaving Spain and are no longer liable for tax

- change of marital status

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.

Spain's economic crisis turns nasty

If you thought 2010 was going to be back to normal with the economy and the year of recovery, looks like you are out of luck. A dreadful week for the Spanish economy ended yesterday with the administrators moving into CajaSur a major savings bank in the south of the country. Depositors should be reassured that there is deposit protection insurance of €100.000 per person so that a joint account would have up to €2000.000 of their deposits safe.

Another Caja, CAM, is in merger talks with other banks after it too has got into difficulties.

All this comes after the government announced a series of austerity measures. These come on top of the VAT and investment tax rises that were announced in January. The new measures include a cut in public sector pay (5% on average), ending the 2.500€ gift to new mothers (nicknamed the baby cheque) and a freeze in most state pensions.

The government has also promised to bring in some increased taxes for "the rich" but won't say what they are or who they consider rich. The press is speculating that the wealth tax may be brought back for people with assets over €1m.

This comes just as the economy was reportedly growing again albeit by a miserly 0.1%. You wonder how long such a weak recovery can last in the face of such bad news. The austerity measures are designed to cut the deficit by around 8% of GDP so that's a massive chunk of demand to come out of the economy. The banks' woes will make mortgages even harder to come by we can safely assume which does not augur well for the housing market. On top of this the unions are threatening a General Strike (article) in protest against both the austerity measures and proposed labour market reforms.

The Advoco website has a full guide in English to the economic crisis charting its development and underlying causes from the beginning up to the present day: Spain's economic crisis.

Don't get trapped by Spanish tax penalties

When I first got interested in Spain and bought a holiday flat here (in Valencia) I never even thought about annual tax returns. Nobody told me about non resident tax returns and I didn't know to ask. I blithely went years without submitting a return until a few years ago when I had been a resident for a year or so and had some income to declare. I sold the Valencia flat in 2006 and there were no nasty consequences.

Some clients have not been so lucky. One had a nasty shock recently when they tried to recover the 3% capital gains tax retention taken by Agencia Tributaria when they sold an apartment in Spain. The amount of the retention was 3.000€ and despite making the proper claim for release of the money, the client was told that they had to produce tax returns for every year they had owned the property. It is possible to catch up taxes in these situations and do Form 210 returns in arrears and that is what they will have to do.

It is not just non-residents tax that can come back to bite you. Another case we are currently dealing with involves an autonomo who had been invoicing their clients for years without making quarterly or annual returns. Correcting this will be difficult as there are quarterly business tax and IVA returns to catch up and annual "renta" declarations. Worse of course there are penalties and interest payable on late returns.

The system is complicated and circumstances vary but this is the sort of extra expense that can be incurred:

late return penalty - less than 3 months late 5% surcharge

less than 6 months late 10% surcharge

less than 1 year late 15% surcharge

more than a year 20% surcharge

PLUS interest on amount owed - 5% in 2009 - for amounts paid more than 1 year late

If there is no tax to pay then the fine is a flat 100€

These are all assuming that the returns are made late by the taxpayer voluntarily(they have four years to do so), not because the citizen has been caught out by the Tax Office and ordered to pay tax. In this case the bill rises depending on the gravity of the offence uncovered:

Not serious: 50% extra payable on all interest and penalties

Serious: 100%

Very serious: 150%

The penalty for returns with no tax to pay rises to €200 if not made voluntarily.

Finally another consequence of not making Spanish tax declarations that can trap the unwary is that documentation gets lost. This makes it much harder to complete the returns and in particular difficult to claim any deductions that might have been allowed if things had been done on time.

If you have back tax issues or think you might have they are best tackled sooner rather than later however grim the prospect seems.

Busy, busy - Spanish Tax season looms

It's all tax at the moment. Lots of enquiries responding to our Spanish Tax Advice page. I think it is the time of year, even though the actual deadline for annual tax returns here is the end of June. Once New Year is firmly out of the way you tend to feel it's time for a big push to get some unpleasant jobs out of the way; and it doesn't get much more unpleasant than sorting out your tax affairs.

But like most jobs you put off (cleaning the oven, bathing the dog, thank you letters) it's not so bad when you get on with it. And there's that lovely feeling of having achieved something when you get it done.

Being nice people at Advoco we have taken steps to ensure that the tax reporting season (May and June for residents, later in the year for non-resident property owners) is not too painful. For a start we have published a guide to whether or not you need to do a tax return:

http://www.advoco.es/services/39-do-you-need-to-submit-a-spanish-tax-return.html

Also we are aiming to contact clients before the mad rush in May to get everything together well ahead of time. If you are not registered for tax in Spain we are taking care of that by post so you don't have to go to your local Tax Office. Otherwise we are doing as much as possible by email so you can do everything from home and at your own pace. We are also trying to make payments possible without going into the bank.

Enough of the sales pitch; in future posts I'll publish some info about what sort of things you have to declare, allowances you get and the rates you will pay. Right, back to answer some of those emails.

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Avoiding income tax in Spain - part 3

Keeping the tax man's hands off your money is a preoccupation almost as old as money itself (I am sure taxes were proposed soon after money's invention). I have written before about avoiding income tax in Spain both in general terms - part 1- and by going offshore - part 2. Today I want to touch upon two important and substantial tax savings available to us foreign residents of Spain. They are both entirely above board and sound very enticing but are not quite as attractive as they seem when you dig a little deeper.

Tax saving no 1: Application to be taxed as a non-resident ("Beckham's Law")

As I am sure all you well-informed readers know, a Spanish resident tax payer has to declare all their worldwide income. But there is an exception for foreigners newly tax resident in Spain: they can apply to be treated as non-residents for tax purposes i.e. only have to declare Spanish income and once more at the low rate of 24% (the top rate for residents is 43%). This is what David Beckham did when playing for Madrid, hence the nickname for the law. If your application is successful then you can take advantage of this attractive option for 5 years. There are conditions (see this good explanation here) but it is great on the face of it; certainly foreign footballers have benefited greatly.

Reservations: Two really. One is that you have to read the small print in the conditions which will make a lot of people ineligible, particularly the stipulation that you have to have moved to Spain to begin an employment contract with a Spanish entity and perform most of your duties in Spain. Secondly non-residents don't get the tax allowances and exemptions that residents get so although the rate is lower you may lose out in total because of the lost allowances (depends how much you earn and what sort of allowances you are entitled to).

Tax saving no 2. : €60.000 overseas earnings tax free

Another eye-catching tax allowance which applies if you are resident in Spain but go abroad to work e.g. doing contracts back in the UK or elsewhere in Europe. The problem here is very fundamental: you need to have paid the tax in the country where you worked so it isn't tax free as such although could be very useful if you often work in a country with low income taxes.

Conclusion: depending on your circumstances there are often allowances and benefits available so it's worth getting a tax adviser to look at your Spanish tax position when your tax situation changes. On that self-serving note I will leave you with a link to Advoco's tax services page:

http://www.advoco.es/home/22-latest/35-spanish-tax-advice.html

Non resident tax payers might also be interested in a recent article of mine called "Making sense of Spanish tax form 210"

Avoiding income tax in Spain - part 1

Part 1 - why?

Foreigners in Spain are often very keen to avoid local taxes wherever possible and indeed to keep out of the system in its entirety if they can help it. This may partly be because tax avoidance by the locals is a national sport and also because everyone seems to get away with it. It's not often you hear about the law catching up with anyone.

Also there may be some double standards operating: perhaps people who paid taxes meticulously in their home country do so reluctantly in their adopted country because they don't see themselves as part of the society being financed by those taxes. At some level they are still on holiday in Spain and don't feel the need to become full citizens, for example by signing up for Spanish social security.

Of course the main reason, as ever in matters of human motivation, comes down to opportunity and thus temptation. In your home country you cannot help but become enmeshed in the state system and avoidance opportunities are few (unless you are an MP with homes to flip). By moving states, EU or otherwise, the chance to cut all ties and start over again often brings an opportunity. It's down to you to put yourself in the system and start paying and declaring. For some people it's like being a kid in the sweet shop when the owner has to go out the back to get something leaving the counter undefended. There is a massive invitation to stuff your pockets with confectionery and many succumb.

In future posts I will discuss some of the ways people try and avoid tax, whether as individuals or if they are starting a business in Spain, and the implications.

http://www.advoco.es/services/35-spanish-tax-advice.html