Spanish lavenders tend to sprawl rather than forming rounded mounds so don't need or benefit from the kind of tight shearing English lavenders do. A light trimming should be fine and March is a good time.

Taking a lavender that is now 2' tall down to 5" is a bit severe. You never want to cut back beyond the foliage into the woody portions, You can remove any old flower stalks now and a couple of inches of the foliage beneath. Next March you can shear it back a bit tighter, but generally do not remove more than a third of the topgrowth.

English and hybrid lavenders (X intermedia cultivars) should be pruned back this way (lightly in fall and more tightly in spring) every year beginning their first season. This will keep the plants well-formed and dense and increase flowering and prevent them from developing that gnarly, woody interior and begin splaying. When they start doing that, it's best just to replace.

Yes: stay out of old wood, same as with brooms, ceanothus and heathers. If plants have become leggy looking it may already be too late to get the same appearance as if they had been sheared from the first year.