Home > Organised or Simplified Accounting: Which One to Choose?
Organised or Simplified Accounting: Which One to Choose?
Published at 30 September 2023
In Portugal, self-employed workers and sole proprietors (Empresário em Nome Individual - ENI) have the freedom to choose between organised and simplified accounting for their businesses. These two income tax regimes have their own requirements, and your choice should depend on various factors such as the nature of your products or services, business expenses, and revenue.
Rauva's Tip: To determine the best-fit regime for your business, consider hiring a certified accountant. This ensures compliance with all legal requirements set by the Tax Authority (AT).
In this article, we will explain what organised and simplified accounting entail, highlight the main differences between them, and help you decide which tax regime suits your needs. Read on to learn more!
The simplified regime simplifies accounting and tax procedures for freelancers and sole proprietors (ENI). According to the Tax Authority:
> "At the start of an activity, all taxpayers fall under the simplified regime, provided their estimated annual gross income in category B does not exceed €200.000, and they do not opt for organised accounting.
> The simplified regime also applies to taxpayers whose annual gross income in category B for the previous taxation period did not exceed €200.000 and who did not choose organised accounting, i.e., income determination based on accounting."
In the simplified regime, taxable income is calculated using predefined coefficients outlined in Article 31 of the CIRS, which applies to the income from your professional activity. This regime benefits freelancers and sole proprietors (ENI) with low turnover and minimal deductible expenses, as such expenses are not considered.
Organised accounting is a more complex tax regime that demands detailed and rigorous accounting practices. It is primarily intended for freelancers and sole proprietors with annual revenues exceeding €200.000, and for freelancers and sole proprietors engaged in commercial or industrial activities.
If you operate a company, organised accounting is mandatory. This applies to all self-employed professionals or sole proprietors with annual gross incomes exceeding €200,000 from their activities.
Rauva's Tip: Consider opening a separate business account to distinguish personal and business finances.
Under organised accounting, you can deduct expenses such as travel (own vehicle, fuel, meals, accommodations), bank loans, certified accountants, and depreciation and amortization of computer equipment, among others.
The primary distinctions between organised and simplified accounting involve profit calculation methods and accounting complexity. In the simplified regime, profit is determined in a straightforward manner based on a predefined percentage, while organised accounting considers revenue and expenses.
Another significant difference is that the simplified regime has an annual revenue limit of €200,000, and businesses cannot engage in commercial or industrial activities. In contrast, organised accounting has no revenue limit, and freelancers/sole proprietors can operate in any economic sector.
It's important to note that organised accounting mandates the use of a certified accountant.
To choose the appropriate tax regime (organised or simplified accounting), consider factors such as your business type, annual revenue, profit margin, deductible expenses, and accounting complexity.
As a rule of thumb, larger businesses tend to benefit from organised accounting. Freelancers and sole proprietors with annual revenues up to €200,000 and lower profit margins may find the simplified regime advantageous as it simplifies accounting and reduces the tax burden.
For freelancers and sole proprietors with annual revenues exceeding €200,000 and higher profit margins, organised accounting is mandatory. This regime allows for more detailed and rigorous accounting, facilitating efficient financial control and strategic management.
Keep in mind that the choice of the tax regime should be based on a careful analysis of your business's characteristics. Therefore, it is advisable to seek advice from a certified accountant to make an informed decision.
Yes, you can switch tax regimes at any time, provided you meet certain conditions outlined by the law. According to Article 28(5) of the IRS Code, as per Law 82-E/2014 of December 31, there are no longer minimum stay requirements in organised or simplified accounting.
In this case, you will remain in your chosen regime until you decide to make a change. For example, if you initially opt for the simplified regime, you can switch to organised accounting in any subsequent year. This flexibility allows you to assess the advantages and disadvantages of organised accounting as your business evolves.
Please note that if you wish to transition to organised accounting, you must submit a change of activity declaration by the end of March, which will take effect from January of the following year. However, this transition is automatic if your gross income exceeds €200,000 for two consecutive years or surpasses €250,000 in a single year.
Conversely, if you are already under the organised accounting regime and want to switch to the simplified regime, no action is required. The Tax Authority will automatically make this change if the gross annual income from category B of IRS falls below €200,000.
The Tax Authority's website offers a wealth of questions and answers related to VAT/IRS/IRC classification, which can be useful for resolving any doubts you may have.
In summary, selecting the right tax regime is crucial for your business's success. Therefore, carefully consider your business's characteristics to determine whether organised or simplified accounting is the best fit.
Remember that you can change your tax regime at any time, but certain legal conditions must be met. To make this decision, seek assistance from a certified accountant who can conduct a thorough analysis of your business and recommend the most suitable tax regime for your situation.