Discovering the simplified regime: a 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 on the simplified regime, its nature, constraints and opportunities.

See all software Accounting & Finance

What is the simplified regime?

The simplified regime is an accounting, or tax, regime with reduced accounting obligations. 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 the companies that apply it. Indeed, the simplified regime, unlike the ordinary regime, is easy to apply, so much so that it does not require in-depth accounting knowledge in order to be properly managed. It therefore allows for simpler and less burdensome management.

In addition, the simplified regime entails significant facilitations 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, the inventory book and auxiliary records.

To whom is the simplified regime suitable?

Every company, depending 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 transactions.

In making their choice, the professionals concerned are required to take into consideration

• The type of activities carried out;
• The amount of earnings obtained.

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 various criteria that favour choice, as well as certain necessary prerequisites and exclusion clauses, which stipulate the possibility or impossibility of joining a certain tax regime.

As far as the simplified regime is concerned, it is usually suitable for smaller companies, or by persons engaged in business activities who, for turnover reasons, cannot access the simplified flat-rate scheme.

Simplified regime: when is it mandatory?

In reality, unlike the ordinary regime, the simplified regime is not mandatory, even if the business entities in question meet the prerequisites necessary to access it.

However, if you intend to and are able to access this accounting regime, you must indicate your choice in your VAT declaration. Otherwise, if no preference is indicated, the company will automatically be assigned an ordinary accounting regime.

Normally, the simplified regime is the 'natural' choice for:

• Partnerships,
• Sole proprietorships,
• Companies treated as such,
• Non-commercial entities.

Revenue limit

While the simplified regime is not mandatory for anyone who meets the necessary requirements to access it, it is not 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 whose revenues exceed those listed below cannot adopt a simplified-type regime, but will be obliged to adopt an ordinary-type regime.

These turnover limits are differentiated according to the type of professional activity carried out. In general, any company wishing to apply a simplified regime must not exceed the limit of:

• EUR 400,000 in the case of activities carried out in the service sector;
• EUR 700,000 for other activities (supply of goods);

Excluded subjects

Therefore, there are categories of persons excluded a priori from the possibility of accessing a simplified regime. They are therefore obliged to fall back on an ordinary regime. These are:

• Professional persons exceeding 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;
• Unrecognised associations and consortia that engage primarily or exclusively in commercial activities;
• Established but non-resident entities and organisations.

New activities and simplified regime

As regards 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 turnover must be made.

This estimate must then be included in the application for a VAT number.

Multiple activities and simplified regime

In the case of the simultaneous exercise of activities in the service sector and activities of another nature, the prevailing activity, i.e. the activity with the highest turnover, must be used to determine the turnover.

However, in the case of services and other activities that are inseparable, i.e. activities in the service sector with revenue that cannot be booked separately, the revenue limit for activities other than the provision of services (EUR 700,000) must be taken into account.

See all software Accounting & Finance

Simplified regime: how the taxation system is organised

As already mentioned, the simplified regime, as its 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 in which 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-based regime was applied, i.e. the same as the one that characterises the ordinary regime.

The cash principle

The introduction of the cash principle rectifies, modifies and expands Article 18 600/73.

In particular, whereas the accrual principle provided for the calculation of income irrespective of the time of receipt of the invoice, the cash principle provides for the calculation and payment of taxes to be determined on actual receipts.

In practice, this means that accounting entries must be made according to the following parameters:

• Chronological criterion, i.e. based on the actual date of realisation of receipts and/or payments, whether received or made.

  In this context, the available date is considered, i.e. the day from which the sum collected or paid is accrued.

  ☝ There is no obligation to apply the chronological criterion in the event that the same data on income and expenses are also reported on VAT records.

• Indication of the amount of the receipt;
• Provide the particulars of the person who made or received the payment;
• Details of the document collected or paid.

Determination of income

Once it has been clarified how the cash principle works and what it provides for, it is worth mentioning how to determine business income. There are three methods, namely through:

1. The register of receipts and payments (RIP): this is particularly complex, but allows a high degree of control over financial movements. It is a type of accounting similar to that of the ordinary regime.
2. The integrated VAT register (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 enter separately the total amounts of invoices not collected and/or not paid (already registered for VAT purposes).
3. VAT registers with option paragraph 5: offer the possibility, for at least three years, to keep VAT registers without recording information on receipts and payments. In this way, you will also automatically have the date of the accounting entry of the document, since it will coincide with the date of its receipt or payment.

The obligation to record transactions not subject to VAT restrictions remains, however.

Taxation, the stages

Having clarified the above concepts of the cash principle and methods of determining income, let us now indicate the steps to follow in order to calculate tax in practice under the simplified regime.

1. Calculation of income (according to the cash principle);
2. Application of employment deductions and IRPEF rates on the excess part according to the relevant income bracket.
3. Calculation of VAT (value added tax) as follows:

   Debit VAT derived from invoices issued - Credit VAT derived from purchase invoices

4. Payment or settlement of VAT, payable at the following intervals

   - Monthly, by the 16th day of the following month;

   - Quarterly, by: 16 May, 16 August, 16 November and 16 February.

5. Application of ISAs(synthetic indices of reliability), i.e. indices useful for verifying business reliability on a scale of 1 to 10.

Accounting registers

The simplified regime provides for accounting books to be kept compulsorily. These are:

• VAT registers, in which non-taxable entries must also be entered;
• Register of depreciable assets (not necessary if the same data is provided directly to the tax authorities);
• Single labour register, if there are employees;
• Register of Receipts and Payments (these always require the information to be entered within 60 days of receipt or payment).

☝ It is no longer compulsory to stamp VAT and depreciable assets registers, however, the obligation to number them progressively remains.

There is also the possibility of reporting cumulative employee expenses in the VAT purchase register within the deadline for submitting the tax return, if these are also entered regularly in the single labour book.