Direct assessment, simplified, or modules

The three, described honestly

• Normal direct assessment. Income less deductible expenses, with full accounting obligations. It applies where turnover is high, and it is what a serious business ends up in.
• Simplified direct assessment. The same arithmetic with lighter obligations, plus a deduction for expenses that are hard to evidence, calculated as a percentage of the net figure and subject to an annual cap. It applies below a turnover ceiling and it is where most self-employed people in Spain sit.
• Modules — objective assessment. Your profit is estimated from indicators: staff, floor area, power consumption, vehicles. What you actually earned is irrelevant. It is available only for listed activities and below turnover and purchase limits that have been extended repeatedly, so the current year's figures have to be checked rather than remembered.

	Simplified direct	Modules
Basis of tax	What you actually earned	Indicators fixed in advance
A bad year	Less profit, less tax. A loss can be carried forward	The same bill. The indicators did not change
A very good year	More tax	Often strikingly little tax
Bookkeeping	Registers of invoices issued and received, and of capital assets	Lighter, but the indicators must be evidenced
Deductible costs	All of them, properly documented, plus the hard-to-evidence allowance	Largely irrelevant to the calculation
Who can use it	Nearly everyone below the turnover ceiling	Only listed activities, within limits

Holiday lets, since it is the question we are asked most

Letting property to tourists is not a module activity. Owners sometimes arrive convinced that a neighbour pays tax on their flat "by modules"; what the neighbour usually has is a different activity altogether, or a misunderstanding. Rental income is taxed on the real figures, which makes the quality of your cost documentation the whole game.

The decision, framed correctly

The wrong question is which one pays less this year. Modules can look extraordinarily cheap in a strong year and punitive in a weak one, because the bill does not move. The right question is which regime describes your activity, because that is what makes it stable across good years and bad.

Three practical points follow from that.

1. Opting out of modules binds you. A waiver applies for a minimum number of years, not just the one you are in, and it operates by tacit renewal afterwards. It is not a decision to revisit each spring.
2. The limits are checked against the previous year. Exceeding a threshold in one year moves you the following year, whether or not you noticed. Watching the turnover as it approaches a ceiling is part of the job.
3. The regime for income tax and the regime for VAT are connected. They cannot be chosen independently and a change in one has consequences in the other.

What actually moves the number, in any regime

Documentation, not regime choice. In direct assessment the bill falls when every deductible cost is invoiced correctly, in your name, with your tax number, and entered in your registers. We have never taken over a file where the regime was the biggest available improvement; we regularly take over files where ten to twenty per cent of the costs were never invoiced properly. The ranked list of what genuinely helps is in lowering the bill without inventing costs.

The VAT side moves with it

Income tax and VAT are chosen together rather than separately, and an activity in the module system for income tax generally sits in the simplified VAT regime alongside it. That regime computes the VAT due from the same indicators, with its own annual settlement, and waiving one has consequences for the other. Anybody weighing the module system purely on the income tax arithmetic is looking at half the bill, and the half they are ignoring is the one with quarterly deadlines attached.

What changing regime actually involves

1. It is declared on the census, through form 036, and the timing rules are strict: as a general matter, changes are made in the last month of the year for effect in the following one, or at the moment the activity starts.
2. It changes which returns you file, and therefore what the tax authority expects of you each quarter. A regime changed on paper and not reflected in the filings produces reminder letters within a quarter.
3. It changes the registers you must keep. Moving into direct assessment means invoices issued, invoices received and capital assets, from the first day of the year rather than from the day you noticed.
4. It cannot always be reversed next year. Which is the point above, and the reason this is worth ten minutes of thought in November rather than a decision taken under pressure in April.

What tips the balance on your self-employed work

Volatility. If your income swings year to year, modules are a bet you take with your own money: cheap when you are busy, painful when you are not, and you cannot leave without committing for several years. If your income is steady and your costs are real and documented, direct assessment charges you on what happened, which is the only basis that stays fair in both directions.

The second factor is what you intend to become. A business that will take on staff, buy equipment or seek finance is heading for direct assessment in any case, and arriving there with three years of proper registers is worth a great deal more than a temporary saving.

The regime should be reviewed when the activity changes, when turnover approaches a limit, and when you are deciding whether to incorporate — that last one being a different question, taken up in stay self-employed or set up a company. The forms that follow from it all are on self-employed in Spain, and what it costs to have them handled is on the pricing page.

Rubén the plumber: three years under each regime

Rubén is a plumber in Jaén who works alone with a van. He has been in modules for years because his first adviser set it up that way, and each quarter he pays more or less the same without quite knowing why. This year he has had a great deal of work, and a friend says he did well to stay in modules; another friend, an electrician, left modules two years ago and would not go back. Both can be right. (For a designer, a translator or a consultant the question does not arise: their activities are not in modules, and the only real choice is between simplified and normal direct assessment.)

Suppose that, with his van, no employees and his premises, the year's modules give Rubén a net figure of 16,000 €. That figure is an assumption: the real one comes from each year's modules order and his actual indicators. Suppose also three very different years of real profit, income less documented costs: a very good year of 38,000 €, a normal one of 26,000 € and a bad one, with a month off sick and a broken-down van, of 12,000 €. In simplified direct assessment each figure loses the 5 % hard-to-evidence allowance, capped at 2,000 €: 36,100 €, 24,700 € and 11,400 €. In modules, all three years are taxed on 16,000 €, whatever happens.

Taxable figure	Year 1 (good)	Year 2 (normal)	Year 3 (bad)	Three years
Real profit	38,000 €	26,000 €	12,000 €	76,000 €
Simplified direct assessment	36,100 €	24,700 €	11,400 €	72,200 €
Modules	16,000 €	16,000 €	16,000 €	48,000 €
Difference in favour of modules	20,100 €	8,700 €	−4,600 €	24,200 €

Here modules clearly wins: 24,200 € less taxable income over three years, which depending on the band may mean 6,000 to 8,000 € of tax. The first friend was right. But look at year three: with a real profit of 12,000 €, Rubén is taxed on 16,000 €. In modules there are no bad years and no losses to carry forward. The table turns completely if his real profit sits close to the modules figure: with real profits of 18,000, 15,000 and 10,000 €, simplified direct assessment wins, and it records what actually happened, which matters when applying for a loan or a benefit calculated on declared income.

Costs of modules that never reach the taxable base

Certain module activities invoicing other businesses or professionals must suffer 1 % withholding, an advance on the tax that costs nothing but complicates cash flow and leaves a trail of what you bill to businesses. There is also a ceiling on invoicing to businesses: exceed it and you leave modules the following year, planned or not, and someone growing through work for builders or communities of owners often gets there sooner than expected. The indicators are checked, too: floor area, staff and contracted power must match what was declared, and an extension or a new hire that is not reflected is the classic error.

The three-year commitment, in detail

Waiving modules keeps you in direct assessment for at least three years, and the waiver renews itself unless revoked. It can be made on Modelo 036 in December for the following year, or tacitly by filing the year's first quarterly payment under direct assessment. If you are excluded for exceeding a limit rather than choosing to leave, you also stay in direct assessment for the following three years, and moving from simplified to normal carries the same minimum. So it is a decision for November, with next year in mind, not for April while looking at last year's return.

When not to switch, and how to switch cleanly

Not in your first good year: moving to modules on one exceptional year is a bet that it repeats, with three years of indicators if it does not. Not just before hiring someone or changing premises, because the indicators, and with them the figure, will change. Not if you are about to seek finance or a benefit based on declared income. If you do switch: review the closing year and the next one in November; file the waiver in December or make sure the first quarterly payment goes in under the new regime (see Modelo 130 and Modelo 303); open the registers the new regime needs from 1 January; and diarise the date from which you can choose again. What your Modelo 036 says governs, not what you believe, and a quarterly return filed under the wrong regime can have waiver effects you never intended.