Deductible Expenses for the Self-Employed in Spain: A Guide

The three requirements every expense must meet

Under direct assessment, standard or simplified, business profit is income minus the expenses needed to earn it. For the Tax Agency to accept an expense, three conditions must all be met, and failing any one of them is enough for it to be disallowed in an audit.

The first is business use: the cost must be linked to and necessary for the activity. The second is documentary evidence, usually a full invoice in your name showing your tax ID. The third is record-keeping: the expense must be entered in the expenses or capital assets ledger and, where applicable, allocated to the year in which it accrues.

• Business use: a direct link to the activity declared on form 036.
• Evidence: a full invoice with your details; an unidentified till receipt is weak evidence.
• Records: entered in your ledgers and in the correct period.
• Traceable payment: cash payments to businesses or professionals are limited to under €1,000 per transaction.

Expenses that are almost always deductible

Some expenses rarely raise questions if properly documented. Your own Social Security contribution, including the flat rate, is fully deductible for income tax. So are rent for business premises or an office, accountant or adviser fees, bank charges on the account used for the business, software and professional subscriptions, advertising, office supplies and stock purchases.

Capital assets such as a computer, a vehicle or furniture are not deducted in one go but depreciated over their useful life. Under the simplified table, for example, IT equipment allows a maximum rate of 26% a year and furniture 10%. As a small business you can freely depreciate new items worth up to €300 each, up to €25,000 a year.

Those under simplified direct assessment can also deduct 5% of positive net profit for provisions and hard-to-evidence expenses, up to €2,000 a year. No invoice is needed, but it is calculated on profit after all other expenses.

Working from home: property and utilities

If you work from home and have declared the business-use portion on form 036, you can deduct the corresponding share of property costs: rent, council tax (IBI), community fees, home insurance or, if you own it, depreciation of the building. The share is normally calculated by floor area. An 18 m² study in a 90 m² home means 20% business use.

Utilities, meaning water, gas, electricity, telephone and internet, follow a specific rule in Article 30 of the Income Tax Act: you deduct 30% of the business-use share. Using the example above with €1,800 of annual utilities, the deductible amount would be €1,800 × 20% × 30% = €108. If you pay €900 a month in rent, you could also deduct 20% of the annual rent, €2,160.

VAT is treated differently. Residential rent is VAT-exempt, so there is no VAT to recover. VAT on utilities for a partly used home is more contentious, and the authorities require evidence of actual use; review your specific case before claiming it.

Vehicles: the big difference between income tax and VAT

The vehicle is the most contentious expense. For income tax, cars are only treated as business assets if used exclusively for the activity. Any private use, even occasionally driving to the supermarket on a Saturday, rules out the deduction. The regulations provide exceptions where some private use is tolerated, such as goods or passenger transport, driving instruction, travel by sales representatives or agents, and hire vehicles.

VAT is more flexible. The law presumes cars are 50% business use, so most self-employed people can recover half the VAT on the purchase or lease, fuel and maintenance, even if they can deduct nothing for income tax. Claiming a higher percentage requires proof of greater business use, and the burden of proof lies with the taxpayer.

Example: a plumber pays €450 plus VAT a month to lease a branded van used only for work. If he can prove that use, he deducts the €5,400 of annual payments for income tax and all the VAT on form 303. If it were a car used for both private and business purposes, in practice he could only recover 50% of the VAT.

Meals and travel expenses

Your own meal expenses are deductible for income tax if incurred in restaurants or hospitality venues, paid electronically and in a municipality other than your home and your usual place of work. The daily limits match the tax-free allowances for employees: €26.67 in Spain and €48.08 abroad, or €53.34 and €91.35 if the trip includes an overnight stay.

For instance, if a consultant based in Madrid has lunch in Toledo costing €35 paid by card, he can deduct €26.67. If he eats in Madrid, even with a client, it is not a travel meal; it would have to be assessed as client entertainment, which has an overall cap of 1% of net turnover.

Accommodation, tickets, tolls and parking on business trips are deductible at actual cost if backed by an invoice and the purpose of the trip can be shown. Keep a note of the client or event with each invoice.

Insurance, training and other frequent cases

Health insurance premiums for the self-employed person, their spouse and children under 25 living with them are deductible up to €500 per person per year, or €1,500 in the case of disability. Business-related insurance, such as professional indemnity, premises or equipment cover, is deductible without that limit.

Training is deductible when related to the activity: a digital taxation course for an adviser or new design software training for an architect fits, but a master's degree unrelated to your work is unlikely to be accepted. The same applies to books, conferences and professional association fees.

Everyday clothing, personal gifts, fines and penalties, and income tax itself are never deductible. Nor are home costs if you have not declared the business use on the census.

VAT and income tax: two taxes, two sets of rules

A common mistake is assuming everything deductible for income tax is also deductible for VAT. For income tax you deduct the net amount of the expense, and VAT is only added as a cost when you cannot recover it on form 303, for instance if your activity is VAT-exempt, as with many medical or accredited training services. In that case the input VAT becomes part of the cost.

To recover VAT on form 303 you also need a full invoice with your details and VAT shown separately, and the goods or services must be used for operations that carry the right to deduct. A simplified invoice only qualifies if it includes your tax ID, your address and the VAT amount shown separately. You have four years from when the right arises to claim VAT you forgot to include.

Example: you buy a laptop for €1,200 plus €252 VAT. You recover the €252 on that quarter's form 303 and depreciate the €1,200 for income tax at up to 26% a year, that is €312 in the first full year.

How to be ready for a tax review

The Tax Agency can review your expenses for four years from the end of the filing period. Keep invoices in digital form, organised by quarter, record each expense in the ledger with its business-use percentage and keep evidence of business use: contracts, client emails, visit diaries or photos of your workspace.

Review each quarter which expenses you have recorded and compare them with the previous quarter. If an expense is doubtful, it is better not to claim it or to check first than to have to correct it later with interest and possibly a penalty. The deductible expenses calculator helps you estimate the saving, and your tax adviser can confirm borderline cases.