Running a company of any kind is complicated, especially from a legal point of view. In addition, there are many conditions and points to take into account, so it is normal that we do not understand everything. One of the latest government measures to simplify tax compliance for small businesses is the cash basis. It sounds a bit strange, but it is very practical. In today’s post we explain everything you need to know about this regime, the cash basis and how it works.
What is the cash basis?
This scheme dates back to 2013, the year in which the Government approved it, as part of the Entrepreneurs Law. The demands of the self-employed and entrepreneurs managed to get through to the governments of many European countries, as the new law responds to a European Commission directive.
This regime is completely voluntary, so that all companies and self-employed workers who meet certain requirements can access it. It is a special VAT regime based on a simplified accounting system. Professionals can calculate their tax using the ‘cash method’, a form of VAT settlement. With it you can pay tax on income only if sales have been collected (in whole or in part). Its great advantage (and if great feature) is that very thing.
The legal document that regulates the cash basis is the so-called ‘VAT Law’ (the Value Added Tax Law 37/1992 of 28 December 1992). This law explains all the requirements and characteristics of the VAT regimes. The cash criterion is in the tenth chapter. Although we have already mentioned that it dates back to 2013, it was not until the following year that it was applied. Law 14/2013 of 27 September had to come into force first, the aim of which was to support entrepreneurs and their internationalisation.
We have already mentioned at the beginning that you can access this criterion on a voluntary basis. Therefore, there is no deadline for submission. It is a decision that you must make according to the advantages and disadvantages that this regime can create for you and your business specifically. To access it, you will need to file tax form 036 or, failing that, 037. You must file it 1 month before the start of the tax year in which you are going to pay tax using the cash criterion (December).
This criterion can be used, as mentioned above, by all companies and self-employed professionals who meet certain requirements related to their income. If it is their first year of activity, the self-employed or entrepreneur can use the criterion. If this is not the case, they can only use the scheme:
- Businessmen and self-employed professionals (entrepreneurs) whose annual turnover does not exceed 2 million euros.
- Entrepreneurs who do not invoice more than €100,000/year to the same client.
Who is not eligible for the cash basis?
If the persons eligible for this criterion are those who exceed €2 million per year or who receive more than €100,000 from the same client, companies or self-employed persons who do not fit within these guidelines will not be able to access the system. Nor will those who have waived the cash basis in the last 3 years.
There are also certain activities that do not allow the use of this criterion:
- Activities under other special VAT schemes (simplified, agriculture, livestock and fisheries, equivalence surcharge, investment gold) which apply to electronically supplied services and groups of entities.
- Exports and sales of intra-Community products (European Union).
- Purchases of intra-Community products.
- Imports and transactions assimilated to them.
- Sales in which the payment of VAT is the responsibility of the customer (inversion of the taxable person).
- If the employer or employee uses the company’s products or services free of charge (self-consumption of goods and services).
How does it work?
Let’s look at a practical example: let’s say you meet the requirements to apply the cash criterion. The first thing you will do is apply for it by filing form 036 or 037 for self-employed registration. As we have already mentioned, you have until December to be included in the following tax year. After this document, you will have to fill in VAT form 303, a basic step for any self-employed person or company. However, you will only declare the VAT on the invoices you have received and you will only be able to deduct the VAT on the invoices you have already paid.
You should be aware that, if you apply for de-registration, you will not be able to re-register as soon as you feel like it. You will have to wait 3 years before you can re-register. Think long and hard or consult an accountancy firm about whether now is the best time to take the plunge. Organise your accounts and try to get your finances back on track with it. If you don’t, you won’t be able to go back for some time.
Continuing with the practical case, let’s look at a situation that could easily happen: what if a client has not paid you an invoice by 31 December of the following year? You will have no choice but to declare the VAT on the invoice. In this case in particular, the cash basis of accounting would be invalidated. That is why we recommend that you include a due date on the invoice. In this way you make it clear to your customers until what date they have to pay any debts they may have with you.
What should a cash basis invoice contain?
The cash basis invoice must contain the same elements as a normal invoice (the obligatory data), with the addition of a heading mentioning the ‘special cash basis scheme’ to which you are subject, individually. Remember that some transactions from the same supplier may be covered, but others may not.
Therefore: a self-employed person or businessman covered by the VAT cash accounting scheme will only have to notify that he is covered by the scheme on his invoice. The customer will make a note of this for accounting purposes.
What are the obligations under the special cash basis scheme?
Taxation under the special cash basis scheme entails a number of obligations from an accounting point of view. Therefore, self-employed persons and entrepreneurs have a number of obligations:
Accounting control. You will have to pay close attention to all receipts and payments of your company, as the VAT settlement will depend on it. Any bank and cash movements will have to be accounted for before you make your VAT return so that you can include everything you need to.
Invoice record book. Although it would be advisable to have one already, from now on it is compulsory to keep an invoice record book. There you will note down the dates of receipts, payments and their amount, the means of payment or collection used and the amounts attributed on 31 December, as the time limit has been reached.
Invoice identification. All invoices that you issue after having applied the cash criterion must explicitly include the text ‘special cash criterion system’. The aim is to inform customers or suppliers, as their taxation will also be affected.
Dual system. There are some activities that are excluded from the cash basis regime. You will still have to pay tax on them, but in this case you will have to use the accrual system, and if this is your case, you will have to keep two accounting systems.
Form 347. If you have to file form 347 and you are under the cash criterion, bear in mind the following changes:
- Include information on amounts collected or paid.
- It includes the amounts accrued at 31 December due to reaching the time limit.
Report on an annual basis.
What do I do if I receive a cash VAT invoice and I am in the general scheme?
Taxing VAT under the general system does not mean that we are not affected by companies we work with that wish to tax under the cash basis system. The company that works on a cash basis must always inform us of this so that we can take it into account in our own accounting. We will not be able to deduct the VAT on the transactions covered by these invoices until they have been paid, either partially or in full.
In our company’s book of invoices received, we must record, in a separate area, both the amount of the document and the form of payment used. The dates on which payments have been made must also be recorded in writing.
How can Blegal help you?
The cash basis can be a system with many advantages for the entrepreneur or self-employed person who meets the required criteria. However, you should be careful, as, depending on your situation, it can be a disadvantage rather than a help. It is always a good idea to consult a team of professionals about such changes. At Blegal we have more than 30 years of professional experience, offering a professional, well-trained and diverse team that works closely together to ensure you get what you need.
Here is a link to the Tax Agency’s website in case you need to know more about the cash basis. If you have any other questions, on this or any other subject, please do not hesitate to contact us. Our team will be happy to help you and attend to your problems.
Photo by Dan Meyers on Unsplash
