Flat-Rate Scheme or Simplified Scheme?
A professional, about to start his own business, will be faced with the choice of adopting one of the following tax regimes:
- flat-rate scheme (currently the only advantageous tax regime);
- Simplified scheme..
At first glance, the advantage falls on the flat-rate scheme as the taxation is extremely low: the rate is 5% in the case of a start-up for the first 4 years and 15% thereafter. Tax rates under the simplified scheme instead range from a minimum of 23% to a maximum of 43% with the progressive bracket system established by IRPEF regulations.
However, it is important to know the fundamental characteristics of the flat-rate scheme to make an informed choice between this regime and the simplified regime.
In the flat-rate scheme, unlike the simplified scheme, taxable income is not determined based on the usual difference between revenues (receipts) and costs but through the application of a flat-rate percentage to the revenues. Therefore, in the flat-rate scheme, it is not possible to deduct costs. For example, a professional who applies the flat-rate scheme will determine their taxable income as follows: €10,000 (assumed annual revenue) * 78% (flat-rate percentage) = €7,800 (income on which the 5% or 15% rate will be applied).
This method of determining income will certainly work well for all those professionals who do not have many costs to deduct; however, this particular aspect of the flat-rate scheme must be taken into consideration by professionals who expect to incur higher costs—perhaps especially in the initial phase—which could reduce their income to a level lower than what would result from applying the flat-rate percentage.
Another feature of the flat-rate scheme is that it does not allow the deduction of expenses (except for social security contributions paid to INPS or to one’s own professional fund) and/or the deduction of additional expenses otherwise allowed under IRPEF regulations.
Therefore, those who apply the flat-rate scheme will be able to deduct only social security contributions and will not be able to deduct medical expenses, building renovations, insurance, etc.. Deductions and tax credits are very important because, at times, they significantly reduce the IRPEF to be paid. The only case in which a professional under the flat-rate scheme can deduct/claim these expenses is if they also have another source of income, for example employment income.
Naturally, it is important to take into account the additional advantages that the flat-rate scheme offers compared to the simplified scheme, going beyond the lower tax rates:
– No application of IRAP or VATthis latter advantage is particularly important for those who provide professional services to private individuals. A professional under the flat-rate scheme will be preferred over competitors because they will not have to increase their fees by applying the 22% VAT.
– No application of withholding tax: the professional’s payment will not be reduced by the 20% withholding tax, and compared to professionals who apply the simplified scheme, they will be able to receive the full amount of the invoice issued.
– No application of Sector Studiesthis feature is extremely important, especially for those starting their business and who cannot reach the level of revenue required by the presumptive tool of sector studies.
– No submission of the spesometro, no submission of periodic VAT filings, and no annual VAT return. and compared to taxpayers who apply the simplified scheme, taxpayers under the flat-rate scheme will not be required, from January 1st, 2019, to issue electronic invoices to other businesses or private individuals.
In conclusion, the flat-rate scheme offers significant advantages and ensures tax savings, especially for those starting their business; however, it is always necessary to simulate and examine each individual case to determine its actual convenience.
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