The cash criterion, also known as the special cash criterion regime (RECC) is, as its name suggests, a special voluntary VAT regime, which can be used by freelancers or entrepreneurs in Spain.
The cash criterion, therefore, is a special regime that establishes the legislation on tax matters in Spain. Thus, we are talking about a special VAT regime, which can be used by freelancers or entrepreneurs who meet certain requirements. Thanks to the cash criterion, companies and freelancers who want to take advantage of it are not obliged to pay VAT on invoices not collected from the Treasury.
As we know, when we charge a client for a good or a service, we must include the VAT to this that, later, this must be paid to us to deliver it later to the Tax Agency. In the same way, when we buy a good, the VAT that we pay is deducted, later, in the declaration. The existence of the RECC has allowed those who take advantage of this system not to have the obligation to pay the VAT that they have not yet collected, in the same way that they accept not to deduct the VAT that, to date, they have not paid to their suppliers .
According to the Spanish Tax Agency, dependent on the Ministry of Finance, «This regime delays the accrual and with it the declaration and entry of the VAT charged until the moment of collection from the taxpayer’s clients, although the deduction of the tax will be delayed. VAT paid on your purchases until the moment you make the payment to your suppliers (double cash criterion); all this with the deadline of December 31 of the year immediately after the one in which the operations were carried out. "
What the Spanish Tax Agency wants to tell us in this convoluted paragraph is that we should not pay VAT to the Treasury until it has been charged to the client. In the same way, we cannot deduct the VAT paid to suppliers until we have made the payment to these suppliers.
Characteristics of the cash criterion
Among the characteristics of this system, the following should be highlighted:
- It is a special VAT regime.
- Freelancers and companies can freely benefit from it. Of course, as long as they meet a series of requirements.
- It is a voluntary regime, as we said.
- We do not have the obligation to pay the VAT on those invoices that have not been collected.
- In the same way, we waive to deduct VAT on those products for which we have not yet paid suppliers.
- This law was approved in 2013, in Spain.
Requirements to qualify for the RECC
The RECC, as we have mentioned, is a voluntary regime to which the self-employed and entrepreneurs can freely avail themselves.
However, this must meet a series of requirements, among which the following stand out:
- It must not exceed an annual turnover in the previous year of 2 million euros.
- If it is the first year of activity, this can be freely accepted.
- Within the cash criterion, operations such as the following are excluded:
- Operations influenced by another special VAT regime.
- Intra-community operations.
- Delivery of goods not subject to VAT.
- Imports and operations related to foreign trade.
- Operations subject to investment by the taxpayer.
Some aspects to mention about the cash criterion
To apply for the RECC, you must request it through models such as 036 or 037.
Having signed up for this special regime, we must take into account some aspects such as those mentioned below:
- The double cash criterion establishes that, in the same way that we are exempted from paying uncollected VAT to the Treasury, we also waive the VAT deduction of those products that, to date, have not yet been paid to our suppliers.
- When we collect the invoice, it is the individual who must request the Treasury to settle the invoice within 4 years.
- If it reaches December 31 of the year following the issuance of the invoice, the employer must advance the value of VAT and pay it to the Treasury.
- These invoices must be declared, declaring the collection when it is made.
- In the same way, to deduct VAT, the payment must be declared when, as in the previous case, it is made.
Cash criterion example
To finish understanding this concept, let’s look at an example:
Let’s imagine that we are a company that sells furniture and, as of July 30, 2050, we sell 15 pieces of furniture, worth $ 20,000, which we do not intend to collect until the following year. In this way, we have not collected VAT, so, using the cash criterion, we do not have to pay the 4,200 euros of VAT that we should pay to the Tax Agency.
Likewise, and since we are not going to charge for the furniture, we negotiate with the supplier that we will not pay for the raw material used in that furniture until two months before the customer is charged, since we do not have resources for daily operations. Thus, once the supplier accepts it, we cannot deduct the VAT paid to the supplier until we have paid the invoice. This is what we know as the double box criterion.
Finally, let’s imagine that December 31 of the following year arrives and our client has not paid us the money he owes us for the furniture purchased a year earlier. Even so, we must anticipate the money and hand it over to the Tax Agency. Meanwhile, we must contact the customer to collect the invoice later.