2021 flat-rate regime: continuity and a deadline

On 4 December 2020 the Official State Gazette published Order HAC/1155/2020 of 25 November, which sets out for 2021 the objective-estimation method for personal income tax, known as “módulos” (flat-rate), and the simplified special VAT regime. The order came into force the following day and keeps, in essence, the structure and figures applied in 2020, so it introduces no major novelties for most of those taxed under this system.

For self-employed people and small business owners taxed under the flat-rate system, the news is one of continuity, but it comes with a clock running: the deadline to opt out of or revoke the method for 2021 ends on 31 December 2020. There is less than a month left to decide whether to stay or move to direct estimation, knowing that the decision to opt out usually binds for several tax years and is not easily reversed.

What the order keeps

For income tax, the order retains the amounts of the 2020 signs, indices or flat-rate figures and their application instructions; for VAT it likewise keeps the flat-rate figures and instructions of the previous year. It also keeps the 5% reduction on the net income of flat-rate activities and the 20% reduction for activities under the second annex in the municipality of Lorca. These are figures that the taxpayer multiplies by specific units, such as employees, square metres or power, to obtain their income.

It sets some specific values for 2021, such as certain indices in farming and livestock activities, and keeps the exclusion limits by activity, expressed in number of employees or other measures, such as the maximum number of people in bars, cafés or restaurants. Exceeding the limits in one year excludes a taxpayer from the method in the following year.

To opt out or not

The flat-rate system simplifies administration, because income is calculated from objective data such as the number of employees or floor space and not from real income and expenses. That is an advantage when the business is stable. In 2020, with closures and falls in activity, many self-employed people were taxed under the flat-rate system on an activity that had barely operated, and direct estimation might have suited them better. Direct estimation, by contrast, taxes the real result, which favours those who have had losses or low margins.

Opting out can be done until 31 December 2020, and is also deemed made if the first-quarter instalment payment for 2021 is filed on time under direct estimation or the first-quarter VAT return under the general regime. Moving to direct estimation requires keeping accounts or record books and binds for several tax years, so it is worth doing the numbers first.

What to review

Before year-end, the self-employed person should compare with their adviser the tax they would pay under flat rates and the tax that would result from direct estimation, using their real income and expenses for 2020 and the forecast for 2021. They should also consider invoicing and record-keeping obligations and the effects on VAT, which are not identical in one regime and the other.

Those unsure whether they exceed the exclusion limits or meet the requirements of the activity should settle the matter as soon as possible. This note is general information: choosing the taxation method is a personal decision that should be taken with tax advice and with the real figures in hand, not with generalities. The sooner it is decided, the more room there is to adjust invoicing and the first quarter’s books.

Choosing the taxation method before 31 December avoids paying for a year that does not resemble the real one.

This article is general information. It is not legal, tax or investment advice, and it does not take anyone’s particular circumstances into account.