VAT: "Your" money that isn't yours

[versión en Español]

Congratulations!! On top of being a freelancer, you've just become a tax collector

People in regular employment don't usually think much about taxes and how the government collects them. You know (or don't) that you pay a little more when you buy something, or take home a little less from your salary, and that's that.

As a freelancer, things change. You've just become a tax collector, whether you wanted to or not. This post is your introduction to VAT (value added tax), starting at the national level. We'll get to intra-EU sales and exports (sales to clients outside Europe, even if they're services) in a later post.

VAT doesn't reduce your earnings

When you decide what to charge for your services, you do it without thinking about taxes. Then you add the applicable VAT on top — normally 21% (as of June 2026). This is called the output VAT.

So if you want to earn €1,000 for a service, your invoice looks like this:

• Net amount: €1,000
• VAT (21%): €210
• Invoice total: €1,210

Those €210 aren't yours. They're a tax your client owes Hacienda. You are just collecting it on Hacienda's behalf (mostly for their convenience). You charge it to your client, and then periodically you settle up with Hacienda.

If your clients are businesses or professionals, they generally don't mind this, because they also charge VAT to their own clients and can offset what they paid you.

If your clients are private individuals, though, they can't reclaim VAT. Which means what feels like €1,000 in income to you is €1,210 of real expenditure for them. Worth keeping in mind when thinking about your pricing and positioning.

How to handle output VAT in your finances

VAT declarations are generally filed quarterly. In the meantime, you can do whatever you like with the money you've collected, theoretically. Just remember that in a few months, you'll need to hand it over to Hacienda. Our advice: leave it in your business account and don't touch it. No surprises that way.

From output VAT to deductible VAT

Just as you're collecting VAT from your clients, your suppliers collect it from you when you buy their services. The VAT you pay on goods and services purchased for your professional activity is called input VAT . This is VAT you're entitled to recover.

One important catch: only VAT on expenses related to your professional activity is deductible. Let's look at the fine print.

For VAT to be legally deductible, you need to meet these requirements:

It must be linked to your professional or economic activity. The expense has to be necessary for your work as a freelancer.
Office supplies for your workspace? Yes. Buying a yacht with last year's earnings? No. Unless you organise events on yachts, then maybe.

You need a complete, correct invoice. To deduct VAT you need an invoice made out to you, clearly stating your tax details, the supplier's details, and itemised amounts.
The VAT on a restaurant receipt or a petrol station ticket doesn't count.

How do I recover the VAT I've paid , and pay what I've collected?

Every quarter, you (or your advisor) will file Modelo 303, which offsets your output VAT against your input VAT. That's why we ask for all your invoices each quarter. We verify they're correct and report to Hacienda whether they owe you or you owe them.

In the 303, you declare what you've invoiced and your output VAT, plus what you've been invoiced and your input VAT. Then comes the calculation: if you've collected more VAT than you've paid out, the result is a payment to Hacienda. If you've paid more in supplier invoices than you've collected from clients, you have a credit to carry forward.

One thing to note: if you want a VAT refund paid back to you in cash, you can only request that in Q4 (in the January declaration). Keep that in mind if you're planning any significant purchases or investments.

What if I can't pay my VAT bill right now?

Sometimes costs spike, and your business account might not cover what's due. Hacienda allows you to request a payment deferral or instalment plan. This is usually cheaper than taking out a bank loan.

If you have clients who pay late (60-day payment terms or more), you might also consider applying for what's called the cash accounting scheme (criterio de caja). There are eligibility requirements, but it allows you to file VAT based on when you actually receive or make payments, rather than invoice dates. If that might be relevant for you, let's talk it through on a call.

The short version (print it out and stick it on the fridge)

• VAT isn't something "taken" from your income. It's a tax you collect from your clients on behalf of Hacienda. Keep it separate.
• Make sure you're applying the correct rate for your activity. Usually this is 21%, but there are exceptions (which is exactly why we review your invoices before signing off on them).
• The VAT you pay on your expenses is deductible, as long as it's linked to your activity and you have a proper, correctly addressed invoice.
• You file Modelo 303 every quarter, even in quarters where you have no invoices.

If you have questions about VAT, or about a specific situation that applies to you, don't hesitate to get in touch.