Discovering the simplified regime: quick guide
Adopting an accounting regime is no joke; applying one is no child's play. When dealing with accounting, it is good to make sure you have all the information you need to make the right choices.
If you are an entrepreneur running a business and cannot decide whether the simplified regime is right for you, then you have come to the right place. In this article you will find detailed information about the simplified regime, its nature, constraints and opportunities.
What is the simplified regime?
The simplified regime is an accounting, or tax, regime with reduced accounting requirements. In fact, it is considered a facilitated regime and is governed by Article 18 of Presidential Decree 600/73.
Advantages of the simplified regime
The adoption of the simplified regime provides considerable advantages for companies that apply it. In fact, the simplified regime, unlike the ordinary regime, is easy to apply, so much so that it does not require extensive accounting knowledge in order to be managed properly. It therefore allows for simpler and less burdensome management.
In addition, the simplified regime entails significant facilities in the keeping of accounting books and records. In fact, the application of the simplified regime exempts from:
- The preparation of financial statements;
- The keeping of accounting records such as: the journal book, inventory book and auxiliary records.
To whom is the simplified regime suitable?
Every business, based on its constituent characteristics and the amount of its income, is required to select and adopt an accounting regime in order to account for its financial operations.
In making the choice, professional stakeholders are required to consider:
- The type of activities carried out;
- The amount of income earned.
Based on this information, one can opt for one of three accounting regimes:
1. The ordinary regime,
2. The flat-rate regime,
3. The simplified regime.
There are several criteria that favor choice, just as there are certain necessary prerequisites and exclusion clauses, which stipulate the possibility or impossibility of joining a particular tax regime.
With regard to the simplified regime, it is usually suitable for smaller businesses, or by individuals engaged in business activities who, for reasons of turnover, cannot access the simplified flat-rate regime.
Simplified regime: when is it mandatory?
Actually, unlike the ordinary regime, the simplified regime is not compulsory, even if the business entities in question meet the prerequisites necessary to access it.
However, if one intends and has the possibility to access this accounting regime, it is necessary to indicate the choice in the VAT return. Otherwise, if the preference is not indicated, an ordinary accounting regime will automatically be assigned to the company.
Normally, the simplified regime turns out to be the "natural" choice for:
- Partnerships,
- Sole proprietorships,
- Assimilated companies,
- Non-commercial entities.
Revenue limit
While the simplified regime is not mandatory for anyone who qualifies for it, it is not, however, the prerogative of every business.
In fact, as expressed in Article 18 of Presidential Decree 600/73, there are turnover limits that determine the exclusion of certain business categories. This means, that business persons who earn revenues in excess of those listed below cannot adopt a simplified-type regime, but will be compulsorily required to assume an ordinary-type regime.
These revenue limits are differentiated according to the type of professional activity carried out. In general, any company that wants to apply a simplified regime must not exceed the limit of:
- 400,000 euros in case of activities carried out in the service sector;
- 700,000 euros for other activities (supply of goods);
Excluded subjects
Therefore, there are categories of subjects excluded a priori from the possibility of accessing a simplified type of regime. These are, therefore, obliged to fall back on an ordinary-type regime. These are:
- Professional subjects who exceed the income threshold;
- S.p.a., S .r. l., S. r.l.s, S.a.p.a., cooperative and mutual insurance companies;
- Public and/or private entities primarily or exclusively engaged in commercial activities;
- Unrecognized associations and consortia that mainly or exclusively engage in commercial activities;
- Established but nonresident entities and organizations of companies.
New activities and simplified regime
Regarding the choice of the simplified regime at the beginning of a new activity, when the actual amount of the company's revenues cannot yet be known, an estimate of the presumed business value must be made.
The estimate should, then, be reported in the application for the allocation of the VAT number.
Multiple activities and simplified regime
In the case of simultaneous operation of activities in the service sector and activities of other nature, reference should be made to the prevailing activity, i.e., the activity with the highest turnover, in determining the turnover.
However, in the case of services and other unavoidable activities, i.e., activities in the service sector involving revenues that cannot be separately recorded, the revenue limit for activities other than the provision of services (700,000 euros) should be considered.
Simplified regime: how the taxation system is organized
As already mentioned, the simplified regime, as the name suggests, is a more agile regime than other accounting regimes. The facilities, which we will see in detail below, mainly concern the taxes to be paid.
The way the taxation is applied underwent changes with Decree Law 193/2016, which came into effect as of 2017.
Updates as of 2017
Starting in 2017, some changes were introduced on the determination of income compared to the previous year and in relation to mandatory accounting records.
As a result of the entry into force of the new corrections of Decree Law 193/2016, income is now determined on the basis of the cash principle, whereas, until the end of 2016, the accrual basis, i.e., the same as the one that characterizes the ordinary regime, was applied.
The cash principle
The introduction of the cash principle rectifies, modifies and expands Article 18 600/73.
Specifically, while the accrual principle provided for the calculation of income regardless of when the invoice was received, the cash principle requires that the calculation and payment of taxes be determined on actual receipts.
In practice, this means that accounting entries should be made according to the following parameters:
- Chronological criterion, i.e., according to the date of actual realization of receipts and/or payments, whether received or made.
In this context, the available date is considered, i.e., the day from which the amount collected or paid is usable.
☝ There is no obligation to apply the chronological criterion in case the same data on income and expenses are also reported on VAT records.
- Indication of the amount of collection;
- Provide the particulars of the person who made or benefited from the payment;
- Extremes of the document collected or paid.
Determination of income
Once we have clarified how the cash principle works and what it provides for, it is good to make a mention of how to determine business income. There are three methods, namely through:
- The register of receipts and payments (RIP): this is particularly complex,but it allows a high degree of control over financial movements. It is a type of accounting similar to that of the ordinary regime.
- The integrated VAT registers (RII): in which, in addition to invoices issued and received, transactions subject to VAT and those outside its scope must be recorded separately. In addition, you must also separately enter the total amounts of uncollected and/or unpaid invoices (already recorded for VAT purposes).
- VAT registers with option paragraph 5: offer the possibility, for at least three years, to keep VAT registers without noting information on receipts and payments. In this way, you will also automatically have the date of accounting entry of the document, since it will coincide with the date of its collection or payment.
There remains, however, the obligation to record transactions that are not subject to VAT restrictions.
Taxation, the steps
Once the above concepts of: cash principle and income determination methods have been clarified, let's move on to indicate the stages to be followed to calculate, in practice, taxes in the simplified regime.
- Calculation of income (according to the cash principle);
- Application of employee deductions and IRPEF rates on the excess part according to the relevant income bracket.
- Calculation of VAT (value added tax) as follows:
Debit VAT derived from invoices issued - Credit VAT derived from purchase invoices
- Payment or settlement of VAT, executable at the following intervals:
- Monthly, by the 16th day of the following month;
- Quarterly , by : May 16, August 16, November 16 and February 16.
- Application of ISAs(synthetic indices of reliability), i.e., indices useful for verifying business reliability on a scale of 1 to 10.
Accounting records
The simplified regime provides for accounting books that must be kept. These are:
- VAT registers, in which entries that are not useful for tax purposes must also be reported;
- Register of Depreciable Assets (not necessary if the same data are provided directly to the Tax Administration);
- Single Labor Book, in case of the presence of employees;
- Register of Receipts and Payments ( these provide for the annotation of information always within 60 days of receipt or payment).
☝ It is no longer obligatory to report the stamping of VAT and depreciable assets registers, however, the obligation of progressive numbering remains.
There is, then, the possibility of reporting cumulative employee service expenses in the VAT purchase register by the deadline for the submission of the tax return, if these are also noted on a regular basis in the Single Labor Book.
Article translated from Italian