Capital goods and VAT: how should they be declared?

Knowing the relationship between capital goods and VAT is essential to avoid making mistakes when declaring them and to avoid possible penalties

Companies acquire goods constantly. Products that are essential for the development of their activities. A construction company needs excavators. A law firm needs computers. A bakery needs ovens. And all these companies need to understand the relationship between capital goods and VAT.

If they are unaware of the taxation of these goods, they could face penalties for misdeclaration. In addition, they are depreciated over a certain period. Therefore, businesses should be familiar with these concepts in advance to plan their expenses and optimize their investment strategies.

Ultimately, not all of your purchases fall into the investment goods category. Depending on several variables, the goods you buy or rent may be considered an investment or an expense. For this reason, to understand the relationship between capital goods and VAT, you must first understand the difference between expenditure and investment.

What are the differences between expenditure and investment?

Four factors mark the dividing line and help businesses understand whether their acquisitions are considered an investment or an expense:

• The useful life of the asset: investment is more durable since it generates profits regularly over a period of more than one year. On the other hand, an expense only contributes to income for fewer than 365 days.
• Documents: investments are part of the organization's assets and must be shown in the balance sheet, whereas expenses are liabilities and must be shown in the income statement.
• The decrease in equity: an expense directly reduces the company's equity, unlike an investment, which simply implies a change in the nature of the assets.
• The business sector: the same asset can be an expense and an investment in two companies, depending on their activity. If the firm puts it up for sale, it would be considered an expense, but if used to generate more business, it will fall into the investment category.

There are also big differences at the tax level, hence the importance of knowing the relationship between investment goods and VAT.

What does the law say?

When talking about capital goods and VAT, it is essential to pay attention to the guidelines imposed by the authorities. And the fact is that not all goods that meet the above conditions are considered investment goods by the Tax Agency.

Article 108 of Law 37/1992, of December 28, 1992, on Value Added Tax regulates this issue. Although they are used for more than one year, four types of goods would not fall into this category:

• Spare parts, accessories and work performed to repair other capital goods.
• Containers and packaging, even if they can be reused.
• Clothing used for work by taxpayers or their personnel.
• Goods with a value of fewer than 3,005.06 euros.

However, it should be borne in mind that this last figure only includes the taxable base. In other words, VAT must be subtracted from the original amount. Why is this?

Taxation of capital goods and VAT

As we have seen above, there are multiple differences between expenses and investments. Consequently, each of them is deducted differently. Therefore, taxation is a central issue when discussing capital goods and VAT.

Expenses can be deducted in the same fiscal year in which they were acquired, as can all investments with a value of fewer than 300 euros. However, the Treasury prohibits the deduction of the rest of the investments all at once and establishes a series of deadlines during which they are amortized in parts. Likewise, not all of them are deducted at the same time. Depending on each item's useful life and depreciation, they may be depreciated earlier or later.

But what about VAT? In this case, it does not matter whether it is an expense or an investment. The Tax Agency allows this tax to be deducted in the same quarter in which the product was acquired, which is why capital goods and VAT are closely related concepts.

Returning to the beginning example, let us suppose that a bakery acquires an industrial oven for 7,260 euros. It would be considered an investment as it allows it to generate income for more than one year. Once the 21% VAT has been deducted, the taxable base would be reduced to 6,000 euros. Therefore, it is not one of the exceptions contemplated by Article 108 of the LIVA either, given that its value exceeds 3,005.06 euros.

We are dealing with a capital good. And, as it happens with the expenses, its VAT, that is to say, the 1,260 euros, will be able to be deducted in the same quarter of acquisition.

Model 303 enters the scene

To understand in depth all the aspects that influence capital goods and VAT, it is essential to emphasize model 303.

In this document, the self-employed pay VAT to the Treasury every quarter, compiling all their purchases to deduct this tax. But, depending on whether it is an expense or an investment, it has to be filled in differently.

When the acquisition is considered an expense, the business person must write down the VAT base and rate in boxes 28 and 29. However, if it is an investment, he must fill boxes 30 and 31 with this information.

In addition, it is necessary to bear in mind that the capital goods, having a longer useful life, have what is known as a period of use, a conditio sine qua non for the self-employed to be able to deduct the input VAT. Therefore, if the assignment ends before the dates set by the authority, they would be obliged to reimburse the amount deducted at the beginning.

This knowledge is vital for any business owner who acquires goods regularly. However, everyone involved in the economy should be familiar with these concepts, regardless of whether they are business owners or individuals investing in alternative financing platforms.