VAT (value added tax)

What it is

VAT taxes the value each link of a supply chain adds to a good or service. The final consumer bears it, but businesses collect it: each one charges VAT to its customer on the invoice and deducts the VAT charged to it on its own purchases and expenses. It pays the tax authority only the difference. That is why a business that buys and sells with VAT does not bear the tax as a cost, apart from expenses the law does not let it deduct.

Rates in Spain

Law 37/1992 sets the standard rate at 21% (article 90) and two reduced rates in article 91: 10% for, among other things, food in general and passenger transport, and 4% for basic necessities and items such as books and medicines. The rate that applies is the one in force when the tax falls due. At EU level the VAT Directive requires the standard rate to be at least 15% and allows reduced rates as low as 5% for certain categories.

Where it applies

The tax runs across Spanish territory except the Canary Islands, Ceuta and Melilla, which fall outside the harmonised VAT system; the Canary Islands have their own tax, IGIC. In the Basque Country and Navarre the tax is levied under the same law and under their own concierto and convenio regimes (article 2).

How it is declared

Businesses and professionals file quarterly returns (modelo 303), except those whose volume of operations in the previous year exceeded 6,010,121.04 euros, who file monthly. The duty exists even when no tax fell due or is deductible in the period.

Common mistakes

• Applying 21% by default without checking whether the product or service has a reduced rate.
• Deducting VAT on expenses without a valid invoice, or unrelated to the activity.
• Using VAT on supplies located in the Canary Islands.
• Forgetting that on an invoice with reverse charge, the recipient is the one who accounts for the VAT in its own return.
• Skipping the return for a quarter with no activity.

How Frihet handles it

Frihet computes a live quarterly VAT estimate, builds a preview of modelo 303 with the official fields, and offers an invoice-by-invoice breakdown per quarter with CSV export. These are working calculations: you or your advisor submit the return on the tax agency’s portal.