Spanish court limits outsourcing of tax inspections to private companies by local governments

Catalonia’s High Court has ruled against the Barcelona City Council for improperly outsourcing its tax inspections to a private company. The court decided that the council had acted unlawfully by allowing the private firm to handle tasks that should have been done by public officials.

This decision could lead to thousands of similar tax fines being overturned. The case started when Hágalo S.A., a hardware company in Barcelona, challenged tax penalties imposed on them by the city council. They argued that the inspection, which resulted in the penalties, was conducted by a private company, Colaboración Tributaria S.L., rather than by the city’s official tax inspectors. The council defended itself by saying that it managed the inspection process, while the private company was only hired to assist with certain tasks. However, the court found that the private company did far more than just assist.

Illegal outsourcing of public duties

The court criticised the extent of the private company’s involvement in the inspection process, calling it a “complete privatisation of public inspection duties.” The company carried out key tasks like visiting the company’s premises, measuring the space, gathering relevant tax information, and even drafting the reports that led to the penalties. The official city tax inspectors simply signed off on the final paperwork without carrying out the core duties themselves, which the court found unacceptable.

The court also pointed out that the private firm was paid both a fixed fee of €200,000 and a percentage of the tax fines they helped impose. This arrangement, according to the court, clearly showed that the private company was handling tasks that should have been reserved for public officials.

Implications for local governments

This ruling follows similar decisions made in the Basque Country in 2015 and Madrid in 2020, where courts also opposed the outsourcing of tax inspections. The practice is common in smaller towns and local governments that often lack the resources to carry out inspections independently.

The National Association of Local Tax Inspectors welcomed the decision, stressing that while collaboration with private companies can be useful, it must never replace the role of public officials in important matters like tax inspections. The association believes this ruling protects the rights of taxpayers and prevents the misuse of private firms in public functions.

This court decision could have widespread effects across Spain, as many municipalities may need to reconsider how they conduct tax inspections. Courts could potentially overturn thousands of fines if similar outsourcing practices are found to be unlawful.

Also read: Tax inspections on landlords in Spain increase: Empty properties still taxable