It is no surprise to anyone that the economic climate has had a terrible effect on the amount of revenue collected by our government via the different taxes.
Our economy is suffering as unemployment continues to rise and businesses struggle to make ends meet. VAT is going up in July.
The good news for small companies is that provided you maintain your staff you can benefit from reductions in corporation tax. However, be warned as the government struggles to make ends meet, we are going to be subjected to both more compliance obligations with regards to reporting and an increase in the amount of tax enquiries.
To top it all, the inspectors now have increased pressure by means of potential pay reductions should they fail to achieve the government targets for revenue collection.
Last year the Government started a fiscal reform with the underlying intention of tackling tax fraud. There have been many different measures but in particular this has meant that businesses, and us poor accountants have to comply with yet more informative tax returns to allow the tax office to identify and target tax evaders.
Traditional methods of identifying potential tax irregularites
Many of you may be familiar with the annual Modelo 347, where businesses have to disclose to the tax office the total annual volume of transactions with certain clients and suppliers.
Of course what the tax office does is, for instance, to compare what you declare about your suppliers with what they declared that they sold to you, hence potentially catching fraudsters that are falling short of their VAT and business profits tax.
In an ideal world this seems quite reasonable. However in practice this methodology can lead to innocent tax payers suffering the brunt of the government's rage even when they did not do anything wrong.
In my own experience, in 2008 when I was requesting a certificate from the tax office to apply for some grants, it surfaced that my file was on record for a potential enquiry for under-declaring my business turnover by 80,000. Luckly in my case, because I was alerted of the problem very early on, I was able to relatively quickly and inexpensively resolve the situation.
In fact I had done absolutely no such thing. The problem was that another tax payer, or should I say their accountant, had wrongly included my company's CIF number on their return instead of their main supplier's CIF number.
Had I not noticed the problem before the dreaded tax office letter arrived, I would have one day out of the blue received a VAT enquiry requesting that I immediately pay around 13,000. Together with the fines for non compliance for eye watering amounts.
Later of course a similar bill would have arrived for unpaid corporation tax.
The lesson to be learned from this is that the tax office usually starts tax enquiries as a result of data being submitted to tax returns which is not consistent with expectations.
- You may declare different trading totals to your clients and suppliers
- The total staff costs declared in your corporation tax return is not the same as the total amounts declared via the PAYE returns
Businesses sometimes declare the same data in a number of different ways therefore it is essential that such data is consistent. Of course, unless your accounting records are in good order it is actually quite easy to report data which does not meet expectations, thus dramatically increasing your chances of receiving a tax enquiry.
International transactions can lead to headaches if not reported properly
Unfortunately, even if you think you are ok, you may be vulnerable to this risk. If you are dealing with international transactions it is actually very important that you follow the correct procedures when accounting for and reporting on your business transactions.
When you are trading within the EU make sure you familiarize yourself with the implications.
Let's consider some examples:
If you are selling goods within the EU you should always check that your client is registered in the VIES before making a supply without VAT.
If you are acquiring goods you should apply to be registered in this database before making purchases in Europe and when you do you must take care of those invoices as merely reporting them late could lead to considerable fines.
If you are acquiring services from a supplier from country without a double taxation treaty with Spain, especially a tax haven such as Gibraltar, you need to be careful on two fronts:
- The burden of proof with regards to the tax allowability of the expense rests on you as the tax payer and in an inspection you may need to provide additional proof to support the expense
- You should withhold tax from your supplier's invoice at the rate of 24% and then pay that amount over to the tax office on behalf of the foreign company as a Spanish corporation tax charge
Many people are not aware of these rules and potential problems, and unless you take care with these items you could be the one facing the penalties.
Recent developments to assist the tax office's fight against tax evaders
It is no surprise that the black economy was mainly fueled by the use of cash rather than using say cheques or transfers for the movement of funds.
At the moment, every time someone deposits more than 3,000? worth of notes in a bank account the bank actually reports the transaction to the relevant body thus it has become very easy for the tax office to identify tax payers that deal with large amounts of cash.
Furthermore, there is now a new disclosure tax return in place for banks whereby they need to report the total collections by credit and debit card machines into a particular bank account. This is actually vital information as they are effectively receiving a glimpse of your turnover and of course there will be expectations about what additional sales your type of business should have in cash thus building a clear picture of what the totals declared in your returns should be.
We do recommend that you avoid dealing with cash as a matter of habit. Many businesses have traditionally dealt in cash but in fact if these people sit down and work out the numbers, by doing this they may not be as well of as they thought.
It is clear that the risk of being caught is growing every day therefore it may be a good time to re-think your business strategy and adapt to these changes.
Watch out those of you trading here under UK address
There have been recent changes in VAT legislation which will change the way in which we apply VAT to services rendered within the European Union and furthermore the way in which we report these types of transactions to the tax office.
Up until December 2009 only companies exchanging goods within Europe were obliged to file a return called 349. In this return we used to declare clients and suppliers within Europe. Similar to what the tax office achieves with modelo 347 but for European instead of national transactions.
As from January 2010 we now need to include in this modelo for services as well, not just purchase of goods. Consequently the potential for identifying service providers throughout Europe not following legislation appropriately is considerable.
I recently received an invoice from a new supplier who did some work for us, without VAT and with a UK address on it. The service was actually rendered in here in Spain to my Spanish company. I almost felt like refusing to pay as in the event of an inspection I would be the one having to prove that this is indeed a tax allowable expense and that this supplier is properly registered. However, after some consideration I decided not to make a fuss and just not use that supplier again. The ability to carry out business in Spain by avoiding the Spanish system will be considerably reduced over the coming months as more and more businesses find increased compliance obligations with regards to this type of transaction.
Impact on our businesses
I am not suggesting that only businesses that don't declare everything will get in to trouble, quite the opposite, unfortunately these "fishing nets" that the tax office has put into place affect all of us in a number of ways.
Unfortunately, the bureaucracy and minimum compliance obligations continue to rise which inevitably lead to further costs for companies just to keep up with the system.
The most effective way to ensure you do not have these fines is to ensure that your tax returns are correct, and for this you will need not just a good accountant but also internal organization and controls.
Other potential sources of exorbitant fines
Filing poor tax returns is not the only way you can be fined quite heavily in Spain. There are other areas which are sometimes overlooked that can lead to crippling fines.
For example, Spain has one of the most comprehensive and hard legislation with regards to data protection in Europe. If during the course of your business you maintain a database with sensitive information, you are obliged to register both your business and the databases you use within it with the Spanish Data Protection Agency.
Many businesses in Spain do not comply with these regulations, partly because they are unaware of this need and partly because it is just one more hurdle in the long list of things to comply with here.
Bear in mind that there are inspections in place to catch people who are not complying with data protection and the fines can be very high indeed from just a few hundred euros to many thousands depending on the nature of your business.
Once again we tried to give you an overview of the key ideas to bear in mind to help you avoid unnecessary and potentially considerable fines. Ultimately when it comes to business survival every little counts and sometimes, cutting a few corners here and there can actually lead to greater problems in the long term.
My advice to you is don't take any chances and don't compromise, just make sure all of the items covered are properly addressed within your business.