Frequently asked questions and answers about VAT and income tax invoices

Aug 17, 2022 | Accounting and tax services

Financial education in much of the world is scarce. There is no need to go to third world nations. And we do not say so ourselves, but the numbers reflect it. When it comes, for example, to talking about taxes or creating invoices, many people are faced with really new and unfamiliar concepts. Terms that are basic to manage any financial process of a company. In this article we deal precisely with one of those basic topics that are not usually explained in schools: the invoice with VAT and Personal Income Tax. Do both taxes have to be included, and can they be done digitally? Do both taxes affect the invoices of any company? Typical questions and answers to clarify all your doubts.

The invoice with VAT and Personal Income Tax: should it include both taxes? 

Assuming that there is very little financial culture, it is best to start by defining the different concepts that we are going to discuss in the article on invoices with VAT and income tax. invoices with VAT and income tax.

In the same way, we understand by invoice the file in which a commercial transaction between two parties is recorded. It must show the details of both the seller and the buyer, the amount paid for the product or service, the description of the product or service and the taxes involved in the transaction.

However, it is important to know how to differentiate between the different taxes and know in which types of and know in which types of invoices each one should be included and in which not. To be clear, you should know that in an invoice with VAT and Personal Income Tax these two terms are key, as well as the taxable base:

  • The taxable income is the gross income you will receive for providing a service or selling a product. It is on this basis that the corresponding taxes will be applied.
  • The VAT is the Value Added Tax on any good or service that is traded in a transaction.
  • The IRPF is a basic tax for individuals and self-employed professionals that is levied on income. In other words, it is a withholding on your income that is included in an invoice when you provide professional services to other companies.

At this point, if we talk about invoices with VAT and IRPF, you must be clear that these are not the same type of invoices as those issued by SMEs or large companies. The reason is that the taxes to which it is necessary to face are different depending on the legal form of your business. For example, being constituted as a company (S.L., S.A., etc...) your company will have to pay Corporate Tax instead of Personal Income Tax.

So, to conclude with this first big question about VAT and personal income tax invoices, the answer is no.. Not all invoices have to include VAT and IRPF. It will depend on your legal form and only self-employed professionals are obliged to include both taxes.

How is VAT and Personal Income Tax applied to an invoice?

As with the question of what taxes to include on an invoice what taxes to include on an invoice, how or what percentage to apply is also variable. The activity you are engaged in, the age of your business, the legal form of the other party... These are all factors that will determine what your invoice will look like and efficient management of these is essential. efficient management of these is fundamental for any business. for any business.

However, following the line of this article, if we focus on what would be an invoice with VAT and Personal Income Tax, both taxes must be applied in the following way: 

VAT and its different rates

To the taxable base of your invoice you add the VAT, which you will then deduct. The VAT is not yours, but you will act as a "withholder" of it and at the end of the quarter you will always have to settle it with the Tax Authorities. That is to say, at the end of the period, you will present the VAT you have collected and the VAT you have paid. 

In this regard, it should also be taken into account that VAT is not always the same percentage. This will be determined by the type of product or service you sell. Likewise, in Spain at present, an invoice with VAT and IRPF may include the following:

  • The general rate of 21%, applicable to the vast majority of goods and services.
  • The reduced rate of 10%, which is very common for very common goods, such as foodstuffs.
  • The super-reduced tax of 4%, which is applied to products or basic necessities, such as medicines.

So, let's take the example that you charge 100 euros for your product, which is a common good. This product, because it is a general good, is subject to 21% VAT, so you issue an invoice to your customer for 121 euros. At the end of the quarter, you will declare these 21 euros as output VATwhile your customer will declare it as input VAT.

Personal Income Tax and its application

On the other hand, the IRPF is the tax that self-employed professionals pay when declaring their income. It is a withholding tax that is applied to each and every invoice they issue. However, only those who However, only those professionals who are engaged in professionals who are engaged in activities included in the IAE (Economic Activities Tax). (Economic Activities Tax).

Thus, in Spain, in accordance with the law, self-employed workers must withhold 15% of their withhold 15% of income tax as personal income tax. This 15%, however, may vary for certain sectors (farmers and ranchers, for example, who only withhold 1 or 2%).. At the same time, to encourage entrepreneurship, another measure related to Personal Income Tax is that the self-employed, during the first 3 years of activity, will only be taxed on their income tax. first 3 years of activity, only withhold 7% on their invoices. on their invoices.

What is the difference between VAT and personal income tax?

As we mentioned at the beginning of this article, financial education in many countries is practically non-existent. This is worrying, given the importance of mastering certain basic economic notions and principles. In fact, the EU itself agrees with this idea and this can be seen in the recent policies and studies it is promoting to encourage better financial education. to promote better financial education.

That is why we consider important to make articles like this one in which we explain how is an invoice with VAT and IRPF. And the fact is that many professionals face this kind of doubts from scratch when they start their professional life. There are even those who, due to lack of knowledge, even having explained how to apply each one, have problems in practice to distinguish between VAT and IRPF in an invoice.

Therefore, we make it clear below. Both are taxes in invoicingbut visually they are very easy to differentiate. In an invoice with VAT and IRPF you will detect them because:

  • The VAT will add the percentage to the taxable amount you have given to the customer. Following the example we have used above, you will add 21 euros to the 100 euros of your income.
  • The IRPF, being a withholding tax, it will be a subtraction from the taxable base that you have charged to the client. That is to say, also continuing with the example, you will subtract 15% from the total invoice. In other words, you will subtract 15 euros from the 100 euros, so the total invoice with VAT and income tax that you will receive will be 106 euros.

There is also another clear aspect that differentiates the two taxes: who pays them to the Treasury. The VAT you charge your clients will have to be paid by you, while the IRPF you apply will be paid by your client to the Treasury on your behalf.

The usefulness of electronic invoicing

And if you still have problems, doubts and questions about your invoices, don't worry. You always have the option of resorting to the thousands of consultancies that exist. However, we recommend a more modern, efficient, convenient and efficient, convenient and economical solution: electronic invoicing.

Thanks to automatic billing solutions solutions such as those developed by easyapyou have the possibility to control everything related to your invoices. No matter what type of invoices they are, you will have a cloud system that offers you a comprehensive management. From the electronic generation and issuance of your invoices to the receipt of the same, as well as the status of each one in the different points of the process.

At the same time, with a software like easyap's you will also be up to date with the relevant tax legislations. Therefore, you can forget about having to manually calculate and add your taxes and report them to the relevant authorities. You will also avoid non-compliance with the Anti-Fraud Law or committing VAT fraud or other tax offenses or other tax crimes, voluntarily or involuntarily.

Although our solution can be adapted to all types of companies, it is especially designed for SMEs or large companies (regardless of turnover). Get in touch with us so that we can show you how much we can contribute to your business and your accounting. We will be happy to help you with your tax and any other questions you may have. Welcome to the new digital era of the business world.

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