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The State Budget for 2018 introduces important revisions to the Simplified Regime. The Secretary of State for Fiscal Affairs, António Mendonça Mendes, declared that the measures “do not impact” taxpayers on low and middle incomes. At the same time, the changes “do not allow wealthier service providers to manipulate the existing system to simplify, rather than lower taxes”. “Who truly must justify expenses are those who, earning more than €100,000, have chosen not to apply standard accounting”.

The Secretary of State recalled that the Simplified Regime dates back to 2001, a time when the State did not have the current technology to determine what the necessary costs were for constituting certain forms incomes and therefore established coefficients to presume these expenses.

“These coefficients have been adjusted and adjusted without criteria”, recalling that in 2014, a new coefficient was introduced for a category that “should be residual” but is now abused. This new coefficient allowed some taxpayers to “not even need to indicate their “CAE” (Economic Activity Classification)” in order to reclassify income “from being taxed based on 75% to being assessed on 35%”.

Rule changes under the Simplified Regime

Liberal professionals and other service providers – in particular, local lodging – will have to be vigilant because of the new rules from January 2018. The coefficients currently available – 25%/75% for liberal professions or 65%/35% for other service providers (including local lodging) – will continue as before. The presumption of deductions underlying the Simplified Regime will be limited by a justification of 15% of qualifying expenditures. This outlay becomes dependent on recorded ‘e-invoices’. The remaining expenses continue to have a guaranteed automatic exclusion from taxable income. Since sole traders already document allowable activity overhead when reporting VAT, ongoing Simplified Regime accounting should mirror existing “IVA” declarations.

When covering the 15%, a standard deduction of €4,104 (the same as that allowed for salaried workers and pensioners) applies automatically along with necessary operating expenses: consumables, utilities, staffing, transportation, communications, rentals and insurance among others. The reform only impacts freelancers grossing over €27,360. Small farmers and merchants are also exempt from these changes.

Some changes for the better

Hidden by the controversy surrounding the Simplified Regime, there is some good news for the self-employed. For the first time, there will be a minimum level of subsistence applied to sole traders. On an annual basis, the minimum untaxed level of income will be €8,980. About 54,000 families will no longer pay IRS, and another 3,000 will see their taxes go down. For example, a freelancer, earning €650 per month and paying €700 per annum in IRS in 2017, will no longer pay income tax in 2018. Also, adjustments to IRS tax bands will favour the majority of sole traders. For many freelancers, this could mean significant relief.

Sole Traders indebtedness

Beginning in 2018, income from green receipts will have a threshold free from liens on debts to the Tax Authority or Social Security. No longer will the rule be “anything goes” in the collection of outstanding liabilities. In general terms, two-thirds of a worker’s income is protected.

The Government has also committed to approving a revised Social Security contributions scheme before the end of 2017. The promise is that contributions will be adjusted to income and provide better social protection.