How much of an expense do you actually deduct?

The two percentages that decide what you deduct

An expense is rarely just “deductible” or “not deductible”. Usually it's deductible in part, and that part is decided by two different percentages that people mix up constantly:

• Business use is how much of the expense belongs to your work. It affects your income tax. If you use the car half the time for work, its business use is 50 %.
• Reclaimable VAT is how much of the VAT you can subtract on form 303. It doesn't have to match the business use, and for some expenses the law fixes it on its own.

The bit almost nobody calculates

When part of the VAT is not reclaimable, that money doesn't vanish: it becomes part of the cost of the expense. And because it's cost, it goes into the base you deduct on your income tax, in proportion to the business use.

Take an expense of €1,000 plus €210 of VAT, with 50 % business use and 50 % reclaimable VAT: you reclaim €105 of VAT on form 303, and on your income tax you deduct not €500 but €552.50 — half of the €1,000 plus half of the €105 of VAT you couldn't reclaim. It sounds small; multiplied across a year of car expenses, it isn't.

The cases people ask about most

• Mixed-use car. The Spanish VAT Act presumes 50 % business use for passenger cars (article 95), so reclaiming half the VAT is the norm. You can reclaim more if you can prove it.
• Business meals. Not an automatic 0 %: VAT on restaurants and hospitality is reclaimable if the expense itself is deductible on your income tax (article 96.One.6 of the Spanish VAT Act).
• Client entertaining. Hospitality and corporate gifts carry no right to reclaim their VAT (article 96.One.5), and that VAT becomes extra cost.
• Home utilities. If you work from home, the deductible share depends on the square metres used for work and on a rule specific to income tax. Worth looking at properly before applying a percentage off the cuff.

The three mixed-use ones —the car, the phone and the home— are the ones that trigger the most tax adjustments, and the criterion changes depending on whether you look at VAT or income tax. We cover them in what the tax office accepts when you deduct the car, the phone and the home.

And first of all: do you have the right invoice?

None of the above matters if the receipt doesn't qualify. An ordinary till receipt — a simplified invoice — is enough to justify the expense on your income tax, but to reclaim the VAT it has to carry your tax number, your address and the VAT shown separately. You ask for it when you pay; it takes two seconds, and afterwards it's too late. The whole story is in a till receipt is not an invoice.

Frequently asked questions