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Simplified regime or organised accounting: 5 rules to choose the right regime
Step Inside Accounting · Practical guide
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1. Know which regime you are in
When you open your activity, you are automatically placed under the simplified regime, as long as, in the previous year, you did not exceed €200,000 of self-employed income. If you go over that amount in one year, the following year you must move to organised accounting.
Below €200,000, the choice is yours: you can stay under the simplified regime or opt for organised accounting. The regime you are in is shown in your registration details (situação cadastral) on the Portal das Finanças.
2. Under the simplified regime, IRS is charged on a percentage of what you invoice
Under the simplified regime you hardly have to prove any expenses. The Tax Authority applies a coefficient to what you invoice and treats the rest as expenses:
- 0.75 for the professional activities in the IRS activity table (architects, engineers, lawyers, consultants, programmers, designers, translators, among others): 75% of what you invoice is taxed;
- 0.35 for other services: 35% is taxed;
- 0.15 for sales of goods and for restaurants and hotels: 15% is taxed.
There is a catch: for services, you have to justify expenses equal to 15% of what you invoice, otherwise the difference is added to your taxable income. We explain how in our article on the 15% rule. And in your first two years of activity the coefficient may be reduced – see the benefits of the 1st and 2nd year.
3. Under organised accounting, you pay on your real profit
Under organised accounting, IRS is charged on what you invoice minus the actual expenses of your activity: office rent, staff salaries, equipment (written off over several years), software, insurance, travel, training. If you make a loss in one year, you can deduct it from the profits of the following years.
In return, you have more work and more costs:
- you must have a certified accountant;
- every expense must have an invoice with your NIF and be linked to your activity;
- some expenses only count in part and others pay a tax of their own (for example, cars and entertainment expenses).
4. Do the maths: it pays off when your real expenses exceed the coefficient’s margin
The question is simple: are your real expenses higher or lower than the share the simplified regime already gives you as expenses?
- for an activity in the table (coefficient 0.75), the simplified regime assumes 25% of expenses: if you spend more than that, organised accounting may pay off;
- for other services (coefficient 0.35), it assumes 65%: only very high expenses make it worth switching.
There is also a difference in Social Security. Under the simplified regime, contributions are calculated on 70% of what you invoice for services. Under organised accounting, they are calculated on the previous year’s taxable profit – which, with high expenses, can lower your contributions considerably. Include the accountant’s fees in your calculations.
5. Switch in time and for several years
To move to organised accounting, you file a declaration of changes of activity on the Portal das Finanças by the end of March. The option takes effect that same year and stays in place for at least three years. If you later want to go back to the simplified regime, the request is made the same way, also by the end of March.
As the choice ties you in for several years, do not decide based on one good or bad year: think about the expenses you will have over the next three.
Example
Rui is an architect (an activity in the table, coefficient 0.75). He invoices €80,000 a year and has €30,000 of real expenses: studio rent, an assistant, software, equipment, travel and his accountant.
- simplified regime: taxable income of €60,000 (75% of €80,000);
- organised accounting: taxable income of €50,000 (€80,000 − €30,000).
Under organised accounting, Rui is taxed on €10,000 less. As his expenses are 37.5% of what he invoices, above the 25% the simplified regime assumes, switching pays off.
- Joana is a designer, also with a 0.75 coefficient. She invoices €30,000 and spends €3,000 a year. Under the simplified regime she is taxed on €22,500; under organised accounting it would be on €27,000, plus the accountant’s fees. For her, the simplified regime is clearly better.
Team tip
Before you decide, gather a whole year’s expense invoices and work out what percentage they represent of what you invoiced. If you are close to your coefficient’s margin, we will run the full simulation with you – IRS and Social Security – for the next three years. And remember the deadline: the change only applies to this year if it is requested by the end of March.
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This article is for information only and does not replace professional advice. Figures and rules are those in force at the date of publication and may change.
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