A dual-track system (flat tax and VAT) for those exceeding the first threshold

A two-tier flat-rate scheme for VAT and income tax. Those whose turnover or earnings exceed 85,000 euros, but do not exceed 100,000 euros, may remain on the flat-rate scheme for the time being, but from the following year they will have to comply with VAT obligations.

According to the provisions of the Budget Bill, if, for example, remuneration of 95,000 euros is received in 2027, that amount (exceeding 85,000 but not 100,000 euros) will not trigger any tax liability for income tax purposes, either in the year of receipt or in the following financial year, provided that the other required conditions continue to be met. Termination during the year – that is, with immediate effect – occurs only when the threshold of 100,000 euros is exceeded for VAT purposes and 115,000 euros for income tax purposes.

Consequently, throughout 2027, the taxpayer in our example may continue to issue invoices without charging VAT and to subject their income to the 15 per cent flat tax (or 5 per cent for new businesses). From the following year, however, whilst continuing to benefit from the substitute tax on flat-rate income, they will be obliged to charge VAT for the entire financial year, having exceeded the threshold of 85,000 euros. In practice, unless an exemption is granted by the EU, from 2028 they will have to issue invoices with VAT charged at the rates applicable to individual transactions; exercise the right to deduct input VAT; make periodic VAT returns; and submit the annual VAT return.

One particularly interesting aspect is the different treatment of costs for the purposes of VAT and income tax.

VAT shown on suppliers’ invoices becomes deductible, provided that the relevance requirements and the standard conditions typical of the scheme (Presidential Decree 633/72) are met. However, whilst purchase invoices are taken into account for the purposes of VAT deduction, they do not allow for any itemised deduction of the related cost.