Historically, all foreigners wishing to live in Spain had to apply for a Tarjeta de Residencia, which was often thought of as a residence permit. In fact whilst in the days before Spain became a democracy Residencia was very much a permit, in practice in recent years it became simply an ID card. The Residencia card was an accepted form of identification everywhere in Spain.
From 28th March 2007, UK (and other EU/EEA) nationals were no longer required to obtain a Residencia card. Instead, a new system of registration for Europeans was introduced whereby those wanting to stay in Spain for longer than 3 months needed to personally apply, before the end of their first 3 months of residence, at the local provincial Foreigners’ Office (usually located at the police station) to be registered in the Registro Central de Extranjeros.
After presenting various documents (different locations require different documents) usually including your passport and NIE certificate, you are presented with a certificate to confirm that you are registered. Due to the nature of the beast, unless your spoken Spanish is good, it’s better to pay a third party to go along with you to smooth the process.
The certificate differs from the old card in many ways; it’s bigger and more difficult to carry with you and because it’s a paper document, it’s quite flimsy; it doesn’t have a picture of you, so it’s no use as a form of ID in isolation, which means in certain circumstances that you need to carry a bulky passport with you as well. So, with the introduction of this new certificate we may have gained something, through elimination of the burdensome Residencia card application process, but we’ve lost the flexibility that the old card always gave us.
The British Embassy in Madrid recommends that British citizens in Spain always carry some proof of identity.