Zero VAT: A Direct Blow to the Self-Employed and Microbusinesses

Spain Gives Up on the VAT Exemption: A Missed Opportunity for the Self-Employed and Microbusinesses

1. What EU law allows—and Spain has chosen not to use

Council Directive (EU) 2020/285 reformed the special VAT scheme for small businesses. Since 1 January 2025, it has allowed EU Member States to exempt eligible businesses from VAT, with an annual turnover threshold of up to €85,000 and additional rules for cross-border sales within the EU.

The legal point often missed in the debate is that the directive does not require each country to introduce a domestic VAT exemption. It gives Member States the option and sets limits and conditions if they choose to do so.

Spain has decided not to introduce a domestic “zero VAT” or small-business exemption. The new framework is limited in practice to certain transactions with other Member States. As a result, a self-employed person or microbusiness earning €70,000 or €80,000 a year solely in Spain must continue to charge VAT, file quarterly returns and meet the existing reporting and oversight requirements.

2. What the small-business VAT exemption would mean

The so-called “VAT exemption” or “zero VAT” scheme is technically an exemption for small businesses:

• A qualifying self-employed person or microbusiness would not charge VAT to customers or file periodic VAT returns, provided it stayed below the threshold set by its Member State (up to €85,000 in annual turnover).
• In return, it could not deduct input VAT unless it opted out and moved to the ordinary VAT regime.
• The aim is to reduce administrative burdens and make it easier to start or sustain a small-scale business.

Other countries use versions of this scheme. France has VAT franchise thresholds that in 2025 were around €85,000 for trade and €37,500 for services, with certain higher margins. Germany’s “Kleinunternehmer” scheme exempts small businesses subject to thresholds of €25,000 in the previous year and €100,000 in the current year from 2025. Portugal’s Article 53 CIVA scheme exempts businesses below €15,000 in domestic turnover. Italy’s “regime forfettario” combines a simplified tax arrangement with no VAT charged below €85,000, alongside fewer formal obligations. The European instrument is established and operating across much of the EU.

3. Spain’s decision to do the minimum required

According to the information available when this article was written, the Government decided not to extend the exemption to domestic trade, despite earlier consideration of a gradual introduction from 2026. Spain instead limits its use to certain transactions with other Member States, applying only the part of the directive needed to participate in the EU framework for cross-border sales. Domestic trade remains under the ordinary VAT regime, with the same returns and obligations: quarterly Form 303, annual Form 390 where applicable, and SII reporting where required.

The Tax Agency has cited three main reasons for its decision:

1. Lost revenue: internal estimates put the potential impact above €2 billion a year if businesses below the €85,000 threshold were exempted.
2. Fraud and fragmentation risks: concerns include companies being created or closed, or activities split up, to stay below the threshold, as well as different tax treatment for self-employed people and companies.
3. Administrative adaptation costs: the Tax Agency would need significant changes to its IT and control systems to manage a large-scale exemption.

4. Was the measure really “dangerous and unfair”?

From a technical and critical perspective, there are points to question in the official arguments.

a) “Inequality” between self-employed people and companies

The Tax Agency argues that an exemption would create inequalities between self-employed people and companies, and between businesses above and below the threshold. Yet every special tax regime creates boundaries and differences between taxpayers. That is why regimes use thresholds, exclusions and anti-abuse rules. EU law also allows countries to set a lower threshold than €85,000, or tailor thresholds by sector. Spain could have designed a more cautious scheme—for example, with a €30,000–€40,000 threshold—instead of rejecting the option outright.

In practice, a disparity already exists: a small German, French or Portuguese business may not charge VAT or file periodic returns, while its Spanish equivalent must do so from the start of taxable activity.

b) The revenue argument

A small-business exemption would reduce direct VAT revenue in the short term. However, the net effect is not necessarily linear: some businesses may lower prices when they stop charging VAT, and the directive is also intended to cut compliance costs, encourage self-employment and formalisation, and bring more activity into the declared economy.

From a tax-policy perspective, Spain’s decision can therefore be read as prioritising short-term revenue over medium-term relief and simplification for self-employed people.

c) Fraud and “shell companies”

Any threshold can create incentives to split activities or stay below a limit, as happens with other tax regimes and benefits. Other Member States have managed these risks with cross-checks, additional limits and annual reporting rather than abandoning the scheme. The directive itself strengthens administrative cooperation and information exchange to help supervise small-business exemptions. Fraud risk is real, but it has not proved an insurmountable obstacle for France, Germany, Portugal or Italy.

5. Self-employed organisations and the contrast with Europe

Spain’s main self-employed and business organisations, ATA and CEPYME, have long called for a small-business VAT exemption and criticised the competitive disadvantage faced by Spanish SMEs compared with businesses elsewhere in Europe. Spain is one of the few EU countries that has not introduced a broad domestic VAT exemption for small businesses, despite having the option since 2025. The claim that a Portuguese or French self-employed person can operate with simpler VAT treatment than a Spanish counterpart reflects a real difference in the applicable rules.

The issue has also entered political debate. The leader of the People’s Party (PP) announced that, if elected to government, he would apply a VAT exemption up to €85,000 in annual turnover—placing the question in the arena of political competition as well as tax policy.

6. Practical consequences for self-employed people and microbusinesses

In practical terms, rejecting the exemption means:

1. Administrative work continues: quarterly Form 303 and, where applicable, annual Form 390, VAT books, invoices charging VAT and reconciliations.
2. A price disadvantage: a French or Portuguese hairdresser, designer or consultant using an exemption may offer a VAT-free final price in their domestic market. A comparable Spanish business cannot compete on equal price terms, especially when most customers are consumers.
3. A missed opportunity to encourage business activity: the scheme could have acted as an administrative cushion for new entrepreneurs and low-turnover businesses, easing the fear of tax paperwork. Keeping the current system reinforces the view that starting a business in Spain is tax-heavy compared with neighbouring countries.
4. A gap between political messaging and practice: calls to support SMEs and the self-employed sit alongside a decision not to use an EU tool specifically designed to simplify their obligations.

7. Final assessment

From a technical tax perspective, not introducing a domestic small-business VAT exemption is consistent with a conservative revenue strategy and a preference for intensive administrative control.

From the perspective of economic policy and competitiveness, however, it preserves a clear disadvantage against microbusinesses in other Member States, misses an opportunity to align Spain with the EU’s simplification agenda for small businesses, and sends the message that preserving revenue and the status quo takes priority over reducing administrative burdens.

With narrow margins, rising costs and growing regulatory pressure, a VAT exemption could have provided breathing room for the most fragile businesses, even with a lower threshold and strict anti-abuse rules. Spain’s decision to give up that option while other EU countries use it hardly looks like a strong commitment to small businesses. It reinforces the sense that self-employed people remain “captive” taxpayers: asked to do a great deal, while receiving little in return in the form of genuine simplification.

Read the original article in Spanish.