Financial education is scarce in much of the world. You don't have to go to third world countries to see this. And it's not just us saying this, the numbers reflect it too. When it comes to talking about taxes or creating invoices, for example, many people encounter concepts that are completely new and unfamiliar to them. These are terms that are basic to managing any financial process in a company. In this article, we discuss one of those basic topics that are not usually explained in schools: invoices with VAT and income tax. Do you have to include both taxes? Can they be done digitally? Do both taxes affect the invoices of any company? Typical questions and answers to clear up all your doubts.
Invoices with VAT and income tax: should they include both taxes?
Given that there is very little financial literacy, it is best to start by defining the different concepts that we will cover in this article on invoices with VAT and income tax.
Likewise, we understand an invoice to be the file that records a commercial transaction between two parties. It must show the details of both the seller and the buyer, the amount paid for the product or service, a description of the product or service, and the taxes associated with the transaction.
However, it is important to know distinguish clearly between the different taxes and know which types of invoices each one should be included in and which ones it should not. To be clear, you should know that on an invoice with VAT and income tax, these two terms are key, as well as the taxable base:
- The tax base is the gross income you will receive for providing a service or selling a product. This is the basis on which the corresponding taxes will be applied.
- The VAT is the Value Added Tax on any goods or services sold in a transaction.
- The IRPF is a basic tax for individuals and self-employed professionals that is applied to income. In other words, it is a withholding on your income that is included in an invoice when you provide professional services to other companies.
At this point, when discussing invoices with VAT and income tax, you should be aware that these are not the same type of invoices that SMEs or large companies issue. The reason is that the taxes you have to pay are different depending on the legal form of your business. For example, if you are incorporated as a company (LLC, corporation, etc.), your company will have to pay corporate income tax instead of income tax.
So, to conclude this first major question about invoices with VAT and income tax, the answer is no. Not all invoices have to include VAT and income tax. It will depend on your legal form, and only self-employed professionals are required to include both taxes.
How are VAT and income tax applied to an invoice?
As with the question of which taxes to include on an invoice, how or what percentage to apply is also variable. The activity you are engaged in, the age of your business, the legal form of the other party... These are factors that will determine what your invoice will look like, and efficient management of these is essential for any business.
However, in line with this article, if we focus on what would be an invoice with VAT and income tax, both taxes must be applied as follows:
VAT and its different rates
You add VAT to the taxable amount on your invoice, which you will then deduct. The VAT does not belong to you; you are acting as a "withholder" and at the end of the quarter you will have to settle it with the tax authorities. In other words, at the end of the period, you will submit the VAT you have collected and the VAT you have paid.
In this regard, it should also be noted that VAT is not always the same percentage. This will be determined by the type of product or service you sell. Likewise, in Spain at present, an invoice with VAT and income tax may include:
- The general rate of 21%, applicable to the vast majority of goods and services.
- The 10% reduction, which is very common for everyday goods, such as food.
- The super-reduced rate of 4%, applied to essential products, such as medicines.
So, let's take the example that you charge €100 for your product, which is a common good. This product, being general, has 21% VAT, so you issue your customer an invoice for €121. At the end of the quarter, you will declare those €21 as VAT charged, while your customer will declare it as input VAT.
Income tax and its application
For their part, IRPF is the tax paid by self-employed professionals when they declare their income. It is a withholding tax that is applied to each and every invoice they issue. However, only those professionals who engage in activities covered by the IAE (Economic Activities Tax).
Thus, in Spain, in accordance with the law, self-employed workers must withhold 15% for income tax. However, this 15% may vary for certain sectors (livestock farmers and agricultural workers, for example, who only withhold 1 or 2%). In turn, to encourage entrepreneurship, another measure relating to income tax is that self-employed workers, during the first 3 years of activity, only withhold 7% from their invoices.
What is the difference between VAT and income tax?
As we mentioned at the beginning of this article, financial education is practically non-existent in many countries. This is worrying, given the importance of mastering certain basic economic concepts and principles. In fact, the EU itself agrees with this idea, as can be seen in the recent policies and studies it is promoting to promote better financial education.
That is why we believe it is important to write articles like this one, in which we explain what an invoice with VAT and income tax looks like. Many professionals face these kinds of questions from scratch when they start their professional lives. There are even those who, due to a lack of knowledge, even after having been explained how to apply each one, still have problems in practice distinguish between VAT and income tax on an invoice.
Therefore, we will clarify this below. Both are taxes on invoices, but visually they are very easy to differentiate. On an invoice with VAT and income tax, you will detect them because:
- The VAT will add the applicable percentage in question to the taxable amount that you have given to the customer. Following the example we used above, you will add 21 euros to your 100 euros of income.
- Income tax, being a withholding, will be a deduction from the taxable base that you have charged the customer. In other words, continuing with the example, it will subtract 15% from the total invoice. In other words, you will deduct 15 euros from the 100 euros, so the total invoice amount including VAT and income tax that you will receive will be 106 euros.
There is also another clear difference between the two taxes: who pays them to the tax authorities. You will have to pay the VAT you charge your customers, while your customer will pay the income tax you apply to the tax authorities on your behalf.
The usefulness of electronic invoicing
And if you still have problems, doubts, or questions about your invoices, don't worry. You always have the option of turning to one of the thousands of consulting firms out there. However, we recommend a more up-to-date, efficient, convenient, and economical solution: electronic invoicing.
Thanks to automatic billing solutions such as those we develop at easyap, you can control everything related to your invoices. Whatever type they may be, you will have a cloud-based system that offers comprehensive management. From generating and issuing your invoices electronically to receiving them, as well as the status of each one at different points in the process.
In turn, with software such as easyap, you will also be up to date with the relevant tax legislation. Therefore, you can forget about having to manually calculate and add your taxes and report them to the relevant authorities. You will also avoid breaching the Anti-Fraud Law or committing VAT fraud or other tax offenses , whether intentionally or unintentionally.
Of course, although our solution is suitable for all types of companies, it is especially designed for SMEs or large companies (regardless of turnover). Get in touch with us so we can show you how much we can contribute to your business and your accounting. We will be happy to help you with your tax matters and any other questions you may have. Welcome to the new digital era of the business world.
