Although we know the term ‘VAT’ (value added tax) from seeing it on our shopping receipts or every time we buy a product, it also exists in other aspects of the economy, especially if you have a business. It is necessary to know that, in reality, there are 3 types of VAT: the general, the reduced and the super-reduced. But, which one has to be applied to each product? Each one is used for a specific case, so you have to know the 3 models and use them correctly. Therefore, in today’s post we will explain what the different VAT rates in Spain consist of, paying special attention to the reduced VAT. Let’s get started!
Brief introduction to VAT
As we discussed in a previous post, VAT or value added tax is, effectively, a tax that slightly increases the price of any item we buy and every service we receive. This tax, therefore, is paid by the end consumer only. This money is not kept by the company from which we buy the product or service, but goes to the Treasury. The purpose of the tax is to finance the public services offered by the State, so, thanks to this tax we can enjoy all the public services that our country has.
There are 2 types of VAT in the process of purchasing a product or service. This is because VAT is a tax that is levied on each and every stage of production of a product (materials, additional services…). If the entrepreneur cannot deduct it, the price of the product that the customer would have to pay would be very high. Therefore, the input VAT is deducted on the output VAT. We explain what each of them consists of:
- Input VAT: this is the VAT that we pay when we buy a product or service that will be used to develop our economic activity. In the case of a self-employed worker, for example, if he buys a laptop to be able to perform his work, the VAT of this product would be input VAT. This means that he will pay the tax that corresponds to the product, but then he will be able to deduct this tax, which will be subtracted from the following VAT rate.
- Output VAT: here it is the self-employed or entrepreneur who charges VAT to his customer or buyer for services rendered or products purchased. In this case there is no difference between companies or final consumers. It is the VAT that is added to the taxable amount (the gross cost) in the invoices. Therefore, when we are making an invoice, it is important to correctly calculate the VAT to be added. Let’s take an example: we are going to sell a consulting service with a value of €100. The operation to be carried out is as follows:
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- Taxable amount: 100€.
- VAT (+21%): +21€.
- PERSONAL INCOME TAX (-15%): -15€.
- Total to be collected: 106€.
We would like to remind you again that the percentage of VAT that a worker collects is not yours. He/she will have to return the amount to the Treasury in the quarterly tax return, presenting the forms 303 and 390 in the annual tax return. The output VAT, therefore, is the base from which the input VAT will be subtracted.
What VAT do I have to apply on an invoice?
The VAT and the rates that may exist depend on the country where we are. In Spain (except in the Canary Islands, Ceuta and Melilla) 3 VAT rates are applied for different activities and products. Let’s see what they are:
General VAT. As its name indicates, this is the most common type of tax and the one normally applied to most services rendered or provided to us. If the product or service does not fall into any of the reduced or super-reduced VAT categories, the general VAT rate applies. This is 21%.
Reduced VAT. The percentage of this rate is 10% (less than half of the general rate) and is applied in the following cases of sales or services:
- Products for nutrition (human or animal). Alcoholic and soft drinks with added sugars do not count.
- Animals or plants to be used to obtain products for nutrition.
- Seeds or animal or plant materials used directly and habitually in agricultural, forestry or livestock activities.
- Water for feed or irrigation.
- Medicines for veterinary use.
- Some pharmaceutical products, feminine hygiene products and contraceptive products. It would also apply to medical equipment, apparatus and instruments to treat different physical, mental, intellectual or sensory deficiencies.
- Buildings or part thereof for use as dwellings, including garages (if conveyed jointly).
- Flowers, ornamental plants or products of vegetable origin.
- Transportation of passengers and their luggage.
- Hotels, spas, restaurants and food and beverage supplies.
- Services in favor of the owners of agricultural, forestry or livestock farms (sowing, planting, fertilizing, harvesting…).
- Cleaning of public roads, parks or public gardens.
- Collection, storage, transport or disposal of waste, cleaning of public sewers and wastewater treatment.
- Admission to libraries, museums, art galleries, art galleries, art galleries, cinemas, theaters, circuses, bullfights, concerts and other live cultural shows.
- Social welfare benefits (not exempt).
- Sports shows (amateur).
- Exhibitions and fairs of a commercial nature.
- Renovation and repair works in buildings or part of them destined to housing.
- Leases with option to buy of buildings or parts of them that will be destined to housings. This includes parking spaces and annexes that are leased jointly.
- Services of interpreters, artists, directors and technicians (who are natural persons). Also producers of cinematographic films or organizers of theatrical and musical works.
- Works corresponding to contracts between the promoter and the contractor for the construction or rehabilitation of buildings or parts of the same ones destined mainly to housings.
- Works corresponding to contracts between homeowners’ associations and the contractor for additional garages.
- Imports of antiques and collector’s items or deliveries of art objects by their authors or by businessmen (who are not considered resellers).
- Intra-community acquisitions of art objects. The supplier must be their author or not be considered a reseller.
Super-reduced VAT. It is currently 4% and applies to the following sales and/or services:
- Basic foodstuffs (bread, bread flour, milk, cheese, eggs, fruits, vegetables, legumes, tubers and cereals).
- Books, newspapers and magazines.
- Medicines for human use.
- Wheelchairs and/or vehicles for persons with reduced mobility.
- Prosthesis, orthosis and internal implants for disabled persons.
- Government subsidized housing.
- Repair services for vehicles for persons with reduced mobility (also includes the repair of wheelchairs).
- Leases with option to purchase of buildings or parts thereof for subsidized housing.
- Tele-assistance services, home help, day and/or night centers and residential care.
How is the reduced VAT applied?
Now that we know which products or services fall under the reduced VAT rate of 10%, let’s see how this tax is applied to them.
Let’s take an example: you are self-employed or you own a company and you sell food products for human consumption. We choose one of your products and see that its gross price is €12 (this means that no tax or deduction has been added). As this is a case that falls into the category of reduced VAT, you must apply 10% on the base value.
If the product is worth 12€ and a 10% reduced VAT rate is applied, the final price will be 13.20€ (12+1.20). The tax rate is the percentage applied to each consideration subject to tax (in this case, 10%).
Reduced VAT on construction and renovation work
We have wanted to separate this case because the works of masonry, plumbing or carpentry usually generate certain doubts when it is necessary to emit invoices. It will always depend on the type of work being carried out and the condition of the recipient. Generally, to the reforms and repairs the VAT of 21% is applied.
In the case of plumbing, masonry and carpentry work, there are exceptions. A self-employed person will be able to apply reduced VAT on his invoices as long as one of these situations is fulfilled:
- The contract for the work/s (with or without contribution of materials) has been formalized directly between the promoter and the contractor. It must be for the construction or renovation of buildings or parts thereof, intended for housing (including premises, garages or facilities).
- The materials to be contributed to this type of work shall not exceed 40% of the total invoice.
- The recipient is a community or a natural person. They may not act as entrepreneurs or professionals and may not use the property being worked on for their own use.
- The construction or renovation of a dwelling or building has been completed at least 2 years before the start of the works entitled to the reduced VAT rate.
Blegal’s services
We know that VAT rates can be confusing and complicated to apply. For this reason, our team is ready to answer any of your questions and handle your case thanks to our consultancy service. Although it may not seem like it, having all your taxes and insurance in order can save you a lot of money. If you want to know more about Blegal, do not hesitate to contact us.
Image of @kanchanachitkhamma.
