VAT small business exemption: advantages and disadvantages

VAT small business exemption

In recent months the debate on the possible introduction in Spain of the so-called VAT small business exemption scheme (régimen de franquicia de IVA), also known colloquially as «IVA franquiciado» (“franchised VAT”) or «IVA cero» (“zero VAT”), has gained particular prominence. It is an exemption scheme that already operates in the other Member States of the European Union, and whose incorporation into Spanish law is mandatory following Council Directive (EU) 2020/285 of 18 February 2020, the transposition of which should have entered into force on 1 January 2025.

If the debate on this measure has returned to the headlines with particular intensity in recent weeks, it is because of a specific political factor: on 26 March 2026 the Congress of Deputies approved, with 339 votes in favour, a non-legislative motion (proposición no de ley) tabled by Junts urging the Government to introduce franchised VAT, as that party’s condition for supporting the anti-crisis Royal Decree-Law linked to the conflict in the Middle East.

The scheme, provided for in Articles 282 to 292 of VAT Directive 2006/112/EC, would allow certain self-employed individuals (natural persons) to be relieved from charging VAT on their invoices and from filing periodic VAT returns. As a counterpart, however, they will also be unable to deduct the VAT incurred on their purchases of goods and services. This asymmetry is the key to the analysis that every professional should carry out before opting for this scheme.

Regulatory framework: Directive (EU) 2020/285 and its pending transposition

Directive (EU) 2020/285 introduced important changes to the special scheme for small enterprises provided for in Title XII, Chapter 1 of Directive 2006/112/EC. Among its most relevant novelties is the possibility for businesses or professionals established in one Member State to benefit from the exemption scheme in any other EU Member State, provided that their turnover across the Community as a whole does not exceed EUR 100,000 per year, and that the threshold set by the Member State where the exemption applies, which may not exceed EUR 85,000, is also not exceeded.

However, the introduction of the domestic exemption scheme (that is, its application to transactions carried out within Spain) remained blocked until the parliamentary negotiation of the March 2026 anti-crisis Royal Decree-Law forced the Government into a political commitment to move forward with its transposition. The full regulatory development and its effective application are still pending.

What does the exemption scheme mean in practice?

The mechanics of the scheme can be summarised in three fundamental effects:

• No charging of VAT: the business does not include VAT in its invoices.
• Relief from settlement obligations: the quarterly VAT returns (form 303) and the annual summary (form 390) are not filed.
• Loss of the right to deduct: the VAT incurred on purchases, rents, equipment and supplies is not deductible and becomes a net cost of the business.

This structure makes the scheme, a priori, neutral or favourable for those who invoice final consumers and have few expenses subject to VAT, but potentially detrimental for those who bear a significant amount of VAT in their costs or work mainly in the B2B sphere.

Advantages of franchised VAT

• Significant administrative simplification. The obligations to file quarterly self-assessments and the annual VAT summary are removed, reducing the bureaucratic burden and the cost of tax compliance.
• Competitive advantage in the final consumer market (B2C). If the customer is a private individual (who cannot deduct VAT), not charging the tax opens up two equally valid strategic options for the professional. The first is to pass that advantage on to the customer, reducing the final price by an amount equivalent to the VAT that is no longer charged (up to 21%), which improves competitiveness against other suppliers who do apply the tax. The second, equally legitimate, is to keep the selling price and retain the margin: the customer pays the same as before, but that amount now goes entirely to the professional, improving profitability without any loss of clientele. In practice, the decision will depend on each professional’s positioning and on how price-sensitive their market is.
• Improved liquidity. The obligation to advance to the Tax Agency the VAT on invoices that have been issued but not yet paid is removed, a cash-flow strain that is common under the general scheme.
• Suitability for lean business structures. It is particularly attractive for professionals and self-employed individuals with few expenses subject to VAT: consulting services, artistic activities, teaching activities, small shops with little investment in fixed assets, and so on.

Disadvantages of franchised VAT

• Loss of the right to deduct input VAT. This is the main risk of the scheme. For businesses with rents, purchases of equipment, machinery, vehicles or significant refurbishment, the input VAT becomes a net cost, directly reducing profitability.
• Irrelevance or detriment in the business-to-business (B2B) market. When the customer is a business or professional who can deduct VAT, the absence of VAT charged gives him no advantage. On the contrary, it may be perceived as a sign of smaller scale or may generate mistrust in the commercial relationship.
• Risk of discouraging growth. The existence of a threshold (expected to be around EUR 85,000 in the Spanish case) may create incentives not to exceed that limit, conditioning business decisions for tax reasons (for example, ceasing to grow in order not to lose this scheme).
• Exclusion of certain activities and transactions. The Directive provides for certain transactions to be excluded from the scheme, such as certain real estate transactions or certain intra-Community acquisitions, which may complicate management in businesses with mixed activity.

Conclusion: a decision that requires individual analysis

The VAT exemption scheme is by no means an automatic tax cut. Its suitability depends essentially on two factors: the nature of the business’s customers (private individuals or businesses) and the amount of VAT that the business owner bears on current expenses and investments.

In general terms, it can be said that the scheme is more advantageous where income comes from final consumers and expenses bearing VAT are low, and more detrimental where the activity is carried out mainly in B2B environments or where the cost structure includes significant input VAT. Each case requires a prior economic analysis that assesses the real impact on profitability.

At Vicens Advisors, a firm specialising in tax advice in Mallorca, we continuously monitor regulatory developments in tax matters. Once the exemption scheme is formally introduced in Spain, we recommend analysing the particular situation of self-employed individuals to determine whether joining this scheme is really advantageous for their activity.

This article is purely informational and does not constitute individualised legal or tax advice. For any specific query, we recommend that you contact a qualified tax adviser.

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