The future implementation of the franchise system in VAT for the self-employed and small businesses.

As you may have already read or heard, the Spanish Tax Agency is preparing a new franchised VAT system under which self-employed individuals and SMEs with annual revenue of less than €85,000 will be exempt from including VAT  on their invoices . This system will likely replace the current simplified VAT regime and the special equivalence surcharge regime. The plan is to roll out this system in three phases, one per year, until it comes into effect in 2025. 

Its adoption is specifically due to Council Directive (EU) 2020/285 of 18 February 2020, amending Directive 2006/112/EC on the common system of value added tax as regards the special scheme for small businesses, and Regulation (EU) No 904/2010 on administrative cooperation and the exchange of information for the purpose of monitoring the correct application of the special scheme for small businesses. This Directive extends the VAT exemption to intra-Community transactions, enabling companies not established in a Member State to benefit from the exemption on sales of goods and services carried out within that Member State. This Directive must be transposed into national law by 1 January 2025, the date on which the amendments enter into force.

The franchise system is an optional system that allows entrepreneurs or professionals whose volume of operations does not exceed a certain amount, not to charge VAT on their operations, nor to deduct the VAT paid on their acquisitions of goods and services.

Currently, the franchise system applies in all Member States with the exception of Spain and the Netherlands.

For the time being, pending the release of the draft transposition of Directive (EU) 2020/285 of 18 February 2020 into national law, we can highlight the following aspects of this special regime:

• Optional when so decided by a Member State and optional for entrepreneurs or professionals who wish to take advantage of it.
• Voluntary application provided that the entrepreneur or professional has not exceeded a volume of operations determined by the Member State which may not exceed 85,000 euros per year (most Member States have approved a much lower franchise and surely the limit that the Spanish Tax Administration will end up approving will be much lower).
•  Different thresholds may be set for different sectors of activity based on objective criteria, with the stated limit of 85,000 euros.
• They may be exempt from filing a census declaration, simplified declaration, or tax identification number (NIF), unless they carry out intra-Community transactions. They are required to file VAT returns. If there is an obligation, it will be a simplified VAT return covering the calendar year, and they may be exempt from some invoicing, accounting records, and summary statement requirements.

Replacement of the simplified regime and equivalence surcharge with a franchise regime

Several media outlets have commented on the possibility that the introduction of the VAT franchise system could lead to the disappearance of the special equivalence surcharge system, the simplified VAT system, and even the objective estimation method for personal income tax (IRPF), also known as the modules system. The European Directive does not address this issue, so for now we will have to wait to see the content of the draft transposition of Directive (EU) 2020/285 of 18 February 2020, and how the VAT franchise system will be implemented in Spain.

You can contact this professional office for any questions or clarifications you may have.

Warm regards,