By Patrick de Loof, Van Doorne NV
Under current Dutch tax law, self-employed workers - also known as independent contractors - can apply for a Declaration of Independent Contractor Status (Verklaring Arbeidsrelatie, "VAR"). When contractors provide a VAR to their client, that client can assume that the relationship with the contractor does not qualify as an employment relationship for taxation purposes. Consequently, payroll taxes do not need to be withheld from payments to the contractor and the business engaging the contractor cannot be held liable for not withholding payroll taxes. Service agreements between businesses and contractors often include a clause providing that payroll taxes will be withheld if the contractor fails to provide a VAR. This system will soon be replaced by a significantly stricter regime, requiring businesses engaging contractors to pay much more attention to their contractual arrangements in order to avoid tax liabilities.
Fight against "bogus" self-employment
For several years, the Dutch government has been seeking alternatives for the VAR. The main reason for this is that the VAR can be obtained fairly easily, by filing a standard request form with the tax authorities, while it is difficult for the tax authorities to verify whether the contractor is in fact sufficiently independent in order not to be considered an employee for taxation purposes. But even if a contractor is in fact insufficiently independent, the client of the contractor may still rely on the VAR and can generally not be held liable for the payroll taxes which should have been withheld. In lack of a system to accurately verify whether a contractor meets the requirements of independence, the government is potentially missing out on substantial tax income.
In 2014 an attempt was made to replace the VAR-system by a new system in which the businesses engaging contractors would have an increased responsibility in verifying if the contractual relationship qualifies as an employment relationship. Both contractors and clients opposed this proposal, due to the administrative burden and the related expenses. Following fierce criticism, the Ministry of Finance drastically changed this proposal at the beginning of this year.
The amended proposal has been adopted by parliament and is expected to be adopted by the senate soon. If adopted, the proposed new system is likely to replace the VAR regime as early as 1 January 2016.
Model contracts vs. assessments of contracts upon request
In the new system, the tax authorities will publish model contracts which - if used - guarantee a sufficient degree of independency of the contractor. If the contractor and the client make use of a published model contract and provided that they act strictly in accordance with the provisions of the model contract, no payroll taxes need to be withheld and paid. The tax authorities have announced that the first model contracts will be published on their website mid-October 2015.
As an alternative, a contractor and a client can choose to use their own contract and have it assessed by the tax authorities. The tax authorities will then confirm in writing whether or not payroll taxes must be withheld. This confirmation can be relied upon as long as the parties act in accordance with the contract. This option will be available for both existing and new contracts. The tax authorities expect that average processing time of a request for assessment will be approximately six weeks.
When assessing a contract, the tax authorities will focus on elements which typically make the difference between an employment relationship and an independent contractor relationship. If too many elements of the arrangement between the contractor and the client point towards an employment relationship, the tax authorities will draw the conclusion that the contractor must be considered an employee for taxation purposes. Several elements which the tax authorities will look at have already been identified in the legislative process. These include arrangements on holiday entitlements and entitlements to payment during sickness, whether or not the contractor has contractually agreed to take out liability insurance, and whether or not the contractor will make use of company property of the client in the execution of the agreed work.
What should independent contractors and their clients do now?
If the contract used by a contractor and a client is not a contract approved by the tax authorities, then the tax authorities may take the view that the relationship qualifies as an employment relationship and hold the client liable for the payroll taxes. The same can happen if the contract itself is approved, but the parties do not in fact act in accordance with the contract.
Depending on the provisions of current contracts with independent contractors and the manner in which the contracts are carried out, it can be useful to already have these contracts assessed by the tax authorities in order to ensure that it will not be necessary to withhold payroll taxes as of 1 January 2016. Should the tax authorities rule that the relationship between the contractor and the client does not qualify as an independent contractor relationship, then payroll taxes should be withheld or the contract terms will need to be renegotiated prior to 1 January 2016.
Most template contracts that we currently see include an obligation for the contractor to provide the client with a VAR. Since the VAR can no longer be obtained from 2016, this wording needs to be replaced by wording suited to the new system. In addition, the contract should overall sufficiently reflect that the relationship between the contractor and the client is not in fact an employment relationship. Depending on the circumstances, it may be possible to make use of one of the model contracts to be published soon by the tax authorities.
If it is decided that a contract will be assessed by the tax authorities then we advise not entering into the contract until the outcome of the assessment is clear. If this is not feasible, the client could retain part of the fees payable to the contractor to cover for payroll taxes if it turns out that these must be withheld. If the contract is approved, it will be important - more than now - to strictly comply with the terms and conditions of the contract in order to avoid the risk that the approval may not be relied upon in a later stage.