Withholding taxes in Xero: how to deal with them in Spain

Withholding taxes in Xero: how to deal with them in Spain

The use of Xero Accounting in Spain is scarce. Xero cloud accounting software is truly a beautiful accounting tool for small and medium size companies. However, not many companies use it in Spain for several reasons: it is not translated into Spanish, it is not adapted to the Spanish Chart of Accounts (“CoA”) and the tax compliance based on this software is not particularly agile. Retrieving the info from Xero for tax purposes takes some time in Spain. In this post we will refer to one particular issue:  how to post  withholding taxes in Xero.

We are frequently asked by our clients how to deal with  withholding taxes in Xero. This happens very often in Spain on payments of rents or to professionals (lawyers, accountants, notaries…).  Any business receiving an invoice from a professional, or renting a property, is obliged to withhold the statutory amount. But Xero does not allow to create “negative “taxes. Therefore, recording the liability to the Tax Office for these payments is a bit tricky.

Imaging that your company rents an office and pays a gross rental of EUR 1,000. The landlord issues an invoice for 1,000 plus VAT (21 % or 210 EUR). Then he applies a withholding tax of 19 % (190 EUR). The net payable would be 1,000 + 210 -190 = 1,020.

When this invoice is posted into Xero, the system should show that the correct payable to the landlord is 1,020 and that 190 are payable to the Tax Office. But since you cannot assing a negative tax to this item, it seems imposible to register the correct payables.

There are probably several ways to deal with withholding taxes in Xero. At Tax Partners we instruct our clients to follow this path:

  1. Create a liability account called “WT payable on rents (19 %)”
  2. Post the bill normally, as if the Withholding Tax was not there (therefore, the A/P to landlord will show 1,210).
  3. Then (with the same date) apply a credit note to the bill for 190. When you create the credit note you will allocate the credit to the account: “WT payable on rents (19 %)”. Now this account shows a credit balance of 190 and the payable to the Landlord the right figure of 1,020.
  4. Finally, the Withholding Tax payable on rents (19 %) will be canceled when Tax form 115 (Withholding Tax on rents) is paid each quarter.

Xero Certified Advisor in Spain

Emilio Alvarez, Head of Tax Partners, is a Xero Certified Advisor. Tax Partners provides accounting and tax services to business using Xero in Spain. Contact us for further information.



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