Marta collects an invoice of 4,840 € on the 5th and sees the full amount in her account. If she spends 4,000 € thinking it is all hers, she will reach the end of the quarter without the 840 € of VAT and with nothing reserved for income tax (IRPF, the Spanish personal income tax). As a starting point, she should set aside all the VAT she collects and, on top of that, around 20 % of her profit before income tax. It is a cash-management rule, not the final tax calculation: it will have to be adjusted for her expenses, withholdings, autonomous community, other income and personal situation.
The VAT you collect is not your income
If you invoice 1,000 € plus 210 € of VAT, the 210 € is not part of your margin. You collected it in order to pay it to Hacienda, the tax office, after subtracting the deductible VAT on your purchases. Reserving the full 210 € means you do not depend on every expense being deductible or on invoices arriving in time.
You can release the difference when you close the quarter and check the input VAT. Doing it the other way round (spending the VAT and hoping purchases will reduce the Modelo 303, the VAT return) turns any non-deductible expense or defective invoice into a cash problem.
| Monthly collections | Amount |
|---|---|
| Base of the invoices | 4,000 € |
| Output VAT at 21 % | 840 € |
| Total collected | 4,840 € |
| Initial VAT reserve | 840 € |
If that month you have 200 € of properly documented deductible VAT, the return will come to roughly 640 €. The full reserve leaves you a 200 € margin once you have reviewed the books.
If you want to calculate the reserve with real invoices, you can send those figures in advance through the self-employed form. The estimate has to be redone when the mix of clients, expenses or withholdings changes; it is not a figure fixed when you start the activity that works forever.
The 20 % is worked out on profit
For income tax, do not reserve a percentage of everything that lands in the bank. First separate the base of your income and subtract the expenses that are deductible for tax purposes. If you invoice a base of 4,000 € and have 1,500 € of deductible expenses, not counting their VAT, the provisional profit is 2,500 €. 20 % of that is 500 €.
The indicative monthly sum looks like this:
| Item | Reserve |
|---|---|
| Output VAT | 840 € |
| 20 % of the 2,500 € profit | 500 € |
| Total set aside on collection | 1,340 € |
It does not mean you will pay exactly 1,340 €. Input VAT will reduce the 303, and the withholdings your clients deduct reduce the quarterly payment. The rule is there so that a deadline does not depend on whatever balance happens to be left.
Modelo 130 is an advance
Under the direct assessment method, Modelo 130 generally calculates 20 % of the net profit accumulated since January, subtracting earlier quarterly payments and the withholdings you have borne. It is not a separate tax and it does not close your income tax.
The annual return (the "renta") adds together the activity and your other income, applies expenses, reductions, personal allowances and credits, and subtracts the withholdings and payments on account already made. That is why the annual return can show tax to pay even though you filed the 130 every quarter, or a refund if you paid in advance more than the final tax.
Some professionals do not file the 130 when the legal percentage of their income subject to withholding reaches the required threshold. That does not remove income tax: the client has already paid part of it in your name. If your invoices carry withholding, record the gross amount, the withholding and the net amount collected separately.
When 20 % falls short
The reserve should rise if you have other income with no withholding, a high profit that takes you into higher brackets, few deductible expenses or a higher regional share of the tax. It should also rise if you applied the reduced withholding for newly started activities: collecting more net now can increase the result of the annual return.
The reserve may be more than you need if you bear high withholdings, your profit is low or you have significant personal circumstances and credits. The surplus is still your cash; a shortfall, on the other hand, forces you to finance a tax that has already accrued.
Three profiles to calibrate the reserve
The same turnover can produce different needs. Take a monthly base of 5,000 € and compare:
| Profile | Deductible expenses | Profit | Income tax reserve at 20 % |
|---|---|---|---|
| Consultant with few costs | 500 € | 4,500 € | 900 € |
| Designer working with collaborators | 2,000 € | 3,000 € | 600 € |
| Shop with a narrow margin | 3,800 € | 1,200 € | 240 € |
All three may collect the same VAT if they sell at the same rate, but they should not reserve the same income tax. The shop may also be under a different VAT scheme, and the professional may have invoices with withholding. The table illustrates the method; it does not replace the tax classification of each activity.
Collected, invoiced and accrued do not always coincide
A reserve based only on bank movements fails when you issue an invoice in March and collect it in May, receive an advance, or pay for a purchase in a different period from the one in which you deduct it. Under the general scheme, returns follow the accrual rules. The cash accounting scheme, if applied, has its own obligations and limits and must not be assumed just because a client pays late.
Prepare a tax forecast separate from the household budget. One column shows the cash available; another, the VAT already accrued; another, the accumulated profit; and another, withholdings and payments on account. That separation lets you see that a bank account with a high balance may be holding taxes still to be paid.
Deadlines belong in the calculation too
You do not need to wait for filing day to know the figure. Close the month with an estimate, review the quarter with the final invoices and leave a margin for direct debit. If a return shows tax to pay and there is no cash, it is worth looking in good time at payment or at a possible deferral; some debts carry restrictions, and filing late adds costs.
The reserve must also cover obligations that do not come round every month, such as the annual close, withholdings you make on payments to professionals or to the landlord of your premises, and adjustments. That money must never be mixed with the VAT collected: each obligation needs its own reconciliation.
Adjusting each quarter without emptying the account
When you close the quarter, compare the reserve with the returns prepared, but do not immediately withdraw the whole surplus. Keep a cushion until you have checked late invoices, withholdings and possible corrections. If the activity is seasonal, work out the months with few collections as well: the deadlines in January, April, July and October can arrive after a low season.
A simple policy is to release only the excess confirmed after filing and to keep an extra reserve for the annual return. Review the percentage every quarter and whenever prices, margin, clients who withhold or other income change. The 20 % rule is a way to start; the experience of your own returns should refine it.
A weekly routine that works
Use a separate account and move the reserve when you get paid, not at the end of the quarter. Record invoices by accrual date, because the bank does not always match the tax period. An invoice still unpaid can oblige you to pay VAT; if it turns out to be uncollectible, there is a specific procedure to recover the unpaid VAT.
Each month compare four figures: bases invoiced, output VAT, deductible expenses and deductible input VAT. Each quarter reconcile those amounts with the returns. If you are about to file a 303 with no movement, check first when a 303 really is nil.
At Salama Tax we can calculate a reserve percentage with your real figures and check whether the withholdings are covering the expected advance.