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B Law & Tax
26 September 2023

Tax advisor: Franchised VAT, is it all it seems?

2024 is shaping up to be the year when taxpayers under the simplified VAT regime
and in objective estimation for income tax (IRPF) should start planning their
transition and adapting to the recent tax regimes.

For the past few months, the government and social agents have been discussing
the implementation of European Directive 2020/285, which pertains to the common
value-added tax (VAT) system, specifically regarding the special regime for small
businesses. This regime, known as the franchising or VAT franchising regime, aims
to eliminate the obligation to apply VAT to self-employed individuals whose annual
income is less than 85,000 euros.

At this point, a definitive decision regarding the threshold for the VAT franchising
regime has not been reached. However, some self-employed individuals within that
threshold (yet to be determined) may choose not to charge VAT. This will save them
from the paperwork of quarterly declarations and VAT refund requests.

The unrecovered VAT represents a loss of revenue for the state. Will it impact
prices in any way?

When this measure comes into effect, which self-employed individuals will choose to
apply it? Those who fall below the established threshold and have few expenses or
expenses that are not deductible from the VAT paid on their purchases. It’s evident
that the Tax Authority significantly limits the expenses that self-employed individuals
can deduct from the VAT they have paid.
it’s also clear that if self-employed individuals provide services or sell products to end
consumers, the unrecovered VAT will represent a loss of revenue for the state. Will it
have any effect on prices?

In our opinion, it is likely that the final price paid by the end consumer will remain the
same with or without VAT, and it might even be slightly lower. However, if
consumers are already accustomed to paying a price that includes VAT and perceive
the invoice with VAT as a guarantee of the product or service, why reduce the price?
Now, the invoice wont include VAT, but it will still serve as a guarantee of what has
been acquired, and the final price will be very similar to the previous one. What
seems certain is that the new regime wont be attractive for taxpayers with a high
percentage of expenses relative to their total income, such as transporters, some
farmers, and similar cases.

Focusing on VAT might divert our attention from the income impact. The possibility of eliminating
the objective estimation or module regime is being considered, which could affect many self-employed individuals who benefit from this method of declaration.  Alternatively, transitioning to a special direct estimation with limited expense
deductions is under consideration, and it may not fully offset the loss of benefits from

The definitive solution to this problem, affecting all taxpayers with economic
activities under any tax regime, could be achieved by allowing the deductibility of
expenses related to vehicles used partially or entirely in the business. This has long
been an aspiration that came close to approval in the self-employment law and has
historically sparked disagreements with the Tax Agency (AEAT). Similar to a casino,
the Treasury always profits, which might motivate the AEAT to implement changes
that haven’t been fully realized until now. It is worth noting that the elimination of
[what] has been under discussion since 2016, would affect approximately
600,000 self-employed individuals with very modest businesses.

It appears that restrictions are tightening around small businesses, self-employed
individuals, and SMEs. Expenses are facing increased scrutiny, often resulting in
reductions, and proof of the necessity and direct relationship of deductions to
declared income is being demanded, which can be challenging to verify in many
cases. Furthermore, the fiscal pressure, including social security contributions, has
risen, placing an additional burden on small businesses.

It iss essential for our representatives in the negotiations to exercise caution with
concessions in the forthcoming changes, as we could further complicate the
situation. In any case, 2024 appears to be the year when taxpayers under the
simplified VAT regime (and possibly under the equivalent surcharge regime) and
objective estimation for income tax (IRPF) should begin considering how to position
themselves and adapt to the new tax regimes.

B Law & Tax International Tax & Legal Advisors.


“En B LAW&TAX somos especialistas en asesoramiento fiscal internacional tanto a empresas como para particulares. Si desea ampliar la presente información, estaremos encantados de poder atenderle en el 917817194 o en info@blaw.es