Example
Bill set up in Marbella as a plumber on 1st January 2012. He earns fees of 3.000€ on average each month (before IVA which is out of the scope of this example). He doesn't have an office but does have a van which he runs exclusively for the business, has various tools and materials to buy and advertises online and in the press: in total, and again excluding IVA, he has allowable expenses of 500€ a month. He pays Advoco 59€ to do his books and taxes for him, and 80€ to set him up as autonomo. He lives with his wife who doesn't work and a 13 year old son.
Social security
His first expense of a tax nature at least will be social security payable at the end of January. Currently the minimum social security is 254€ a month but it can be more if you take optional cover (e.g. for unemployment) or because you opt to pay more to increase the size of your state pension.
While exemption from social security is very rare, there are some autonomos who pay less than the normal minimum. At present newly registering autonomos who are less than 30 years old in the case of men and 35 in the case of women, get an automatic discount of 30% on their contributions for the first thirty months. They don't need to apply, it is given to them at the point of signing up for social security.
Quarterly income tax
His second tax expense would be in April when his first quarterly autonomo tax bill comes due. This is a form of advance income tax on his earnings. His total billings were 9.000€ (3 x 3.000). His costs every month are 500€, plus Advoco fees of 59€, thus in total 559€. However he can also claim the cost of his social security, increasing the allowable expenses to around 800€ a month, or 2.400€ for the quarter. This gives a net income of 6.600€ (9.000 - 2.400). In addition Advoco advise him to file a "simplified" autonomo declaration (modelo 130) which is an option available to all businesses with a turnover less than 600.000€ annually and which allows the business to claim a 5% allowance for "difficult to justify" expenses. Bill can deduct 5% of his net income (6.600 x 0.05 = 330€) automatically and without producing invoices to prove the expense. The taxable income for the quarter is thus 6.270€ (6.600-330). The tax rate is 20% giving a bill of 1,254€ on top of the 762€ social security he has paid out. The tax is paid directly from his bank account on the 20th of the month following the quarter end (although extensions can be obtained relatively easily).
Annual taxes
in January 2013 Bill will pay his final quarterly tax demand of 1,254€ In May 2013 Advoco will begin preparing his annual tax return (La Renta modelo 100). This is where the tax rates and allowances mentioned earlier come into play. Bill must declare his autonomo income for 2012 at this time, which was 6.270€ per quarter so 25,080€ for the year. He has to add any other income from other sources e.g. bank interest or capital gains. Assuming he has no such income (and nor does his wife) he will pay tax on 25.080€ less personal allowances. He can claim the basic allowance 5.151€ and - assuming his wife has no income - file a joint declaration with an additional allowance for her. In simple terms this is 3.400€ but see Taxation of married couples in Spain for more details, because the calculation of taxes for couples is a bit more nuanced than this implies.
Their child also attracts an allowance of 1.836€. In addition Bill may be able to deduct some of his housing costs whether that be rent or mortgage payments. We will assume no claim for the purpose of this exercise. You may have noticed an "earned income" allowance of between 2.040€ and 4.080€ on the tax rates page. Unfortunately this applies only to income from employment and not self-employment so Bill would not be able to claim it.
His net income after allowances then would be 25.080 less 5.151€ and 1.836€ = 18.093€. The first 17,707 of this is taxed at 24,75% and the remainder (386€) at 30% giving a tax bill of 4,382€ + 116€= 4.498. However his wife's allowance has to be factored in (3.400€ at the basic rate of 24,75% = 842€), which reduces this further to 3.656€.
But Bill does not actually pay over this amount to the tax office. This is because his quarterly payments during the year totalled 5.016€. Since this is more than his liability, he will receive a refund equal to the amounts paid quarterly less the actual tax amount. 5.016 - 3.656 = 1.360€.
In essence the quarterly autonomo bills have done their job of paying Bill's tax liability for the year in advance so when he comes to submit his annual tax (in May/June of the following year) he gets a refund. For autonomos with higher earnings that take them into the higher tax brackets (see the rates table) or who have less in the way of personal allowances, this will not always be the case and they will have more tax to pay.
Effective tax rate
If you count monthly social security as a tax then the total tax paid by Bill has been 3.048€ (social security) plus 5.016€ (quarterly tax) less 1,360€ (renta refund). That is 6.704€ in total from a gross income of 36.000€ less expenses of 6.000€ (excluding social security and accountancy fees) or 30.000€ giving an effective rate of 22%.
Most people starting a small business or setting themselves up in private practice opt to go autonomo because it is the quickest, simplest and cheapest way of making a business legal. The most common alternative is the limited company ("Sociedad Limitada" or SL).
A less common alternative is a "CB" or "Comunidad de Bienes" which is similar legally to autonomo but is a partnership of more than one individual. Like autonomo the CB is not a legal entity separate from the participants i.e. the owners are fully liable for its debts.
If a profesional autonomo invoices a
business for their services then that business must retain 21% of the
invoice value to pay to the Agencia Tributaria as advance income tax on
behalf of the autonomo. Note that trading autonomos (empresarios individuales)
don't have retentions. Also, if the autonomo is invoicing an private
customer (not a company or an autonomo) then no retention is applicable.
The retention rate is reduced to 9% for autonomos in their first three
calendar years.
Note that
these retained amounts are not "lost" to the autonomo forever. They are
credited when the quarterly returns of income tax are made: 20% of an
autonomo's net income for the quarter must be paid to the Agencia
Tributaria but credit is given for retentions suffered.
In
fact, if an autonomo's income is mainly (70%+) made up of sources which
are subject to retention payments, they may choose not to report their
profits quarterly and pay the 20% income tax on them.
IVA/VAT on crossborder purchases and sales is quite a large and complex topic and the rules for cross-border VAT on services within the EU have changed over recent years (see HM Revenue & Customs guide here). As a rough rule of thumb you don't charge VAT on exports of goods and shouldn't be charged it on imports. In terms of services you will mostly not put VAT on services if the customer is a VAT-registered business in another country in Europe, but you will if the service is provided to a consumer or a non-VAT-registered business. If you buy a service from a European business and have not been charged VAT you may still have to account for IVA on it under the "reverse charge" mechanism. There are special rules for certain types of service like hotels, transport and communications.
The golden rule is KEEP YOUR INVOICES.
This might seem patronising particularly if you are not new to
business but it is worth emphasising. Even if you are not sure whether
something is allowable or not it is worth retaining an invoice and
asking.
Nothing can be claimed
without a proper VAT invoice with your name and NIE on it. A shop
receipt or a delivery note, even if it has the correct amount on it and
VAT will not do, it has to have your details and NIE on it. If you are
buying from a shop such as IKEA or Carrefour it is necessary to take
your till receipt to Customer Service and ask for a proper invoice in
your name.
http://www.expatforum.com/expats/spain-expat-forum-expats-living-spain/57279-how-much-income-tax-pay-autonomo.html
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