A recent ruling by the Central Economic-Administrative Court (TEAC) dated 19 July 2023 has brought about a significant change in VAT deduction and has ruled in favour of two self-employed professionals, allowing them to deduct the tax on electricity, water and gas expenses by 20% corresponding to the proportion of the home in which they had their office.
This ruling could transform the way in which the self-employed declare and deduct Value Added Tax (VAT) related to the electricity, water and gas costs of their usual dwellings used as work spaces.
A paradigm shift in the interpretation of the VAT Law
Until now, the Spanish Revenue had a strict interpretation of the VAT Law regarding the tax deduction for self-employed persons who made partial use of their dwellings as a place of work. In order to apply the VAT deduction on real estate linked to professional activity, the rule required its use to be fully related to the business activity. This excluded dwellings that were only partially used as offices.
However, the recent TEAC ruling has changed this paradigm. This ruling, which can still be appealed in court, has adopted a broader and novel interpretation. The TEAC has argued that, although Spanish VAT law does not explicitly mention the deduction of electricity, water and gas expenses in these cases, they are deductible. This interpretation is based on the European VAT Directive, which provides for the possibility of such deductions. Therefore, the TEAC considers that, even before Spanish legislation is adapted to the EU regime, it is possible to make the existing terms more flexible in order to consider these expenses as investment goods. This means that, even if the use of the property is partial for business purposes, the deduction of VAT is feasible.
The TEAC ruling on the deduction of VAT on electricity, gas and water for self-employed homeworkers: A new perspective
Although this ruling represents a positive progress and has marked a new perspective, it cannot be overlooked that there is still the possibility of appeal and that the TEAC’s interpretation may face administrative objections. It is therefore essential that the self-employed operating from home fully understand the implications of this new regulation and prepare themselves to manage it properly.
Given this change in the current landscape, having the support of a law firm specialising in tax matters can be essential, as they can provide expert guidance on how to apply the new regulations effectively and ensure that all legal requirements relating to the deduction of VAT on electricity, gas and water for home-based self-employed workers are met.
