One client is no client – Dutch income tax legislation
Friday, October 14th, 2016 by Arnold Waal
One client is no client implies you have employment, you are not an entrepreneur.
What is the case with one client is no client?
Often we are approached by individuals that would like to set up their company. The thought is then to invoice one client only, the company they were employed with before. The advantage of the former employer is, that this construction will save the company employers costs. The advantage of the entrepreneur is that entrepreneurs benefits can be used. This obvious and outdated fiscal route has been fought and is being attacked by the Dutch tax office, successfully.
Cheap break up employment
However, it is not only the Dutch tax office you need to be afraid for. You also need to second guess the reasons why your former employer supports you in setting up the company. If the employer would like to terminate your employment, this is rather expensive. How much cheaper can it be done when you are encouraged to set up your company, you voluntarily end the employment, start your company and after six months the former employer states to you that your services are no longer desired. The former employer is laughing on the floor that you fell for the trap. He does not need to pay you any severance payment and you are out of a job.
One client is no client – the dentist – court case
A dentist registered himself as entrepreneur. He worked in an existing dental practice where he used the chair of that practice. This dentist serviced the clients of that practice. At the end of the month he send an invoice to this practice for the work done. As the practice invoiced the clients and insurance companies, this entrepreneur was being paid without any risk of not getting paid.
The Dutch tax office challenged that he was not an entrepreneur, but an employee. He had not made any investments, he had no debtor risk, did not need to find clients and only invoiced one organization for his services. Neither was he responsible for the employees of that practice, the policy, the planning, monitoring the client base or anything else. He simply had to arrive in the morning, service the clients and send an invoice at the end of the month.
The court agreed with the Dutch tax office that this dentist was not an entrepreneur, but an employee. The fact that he had a professional risk insurance, had an agreement in his name with the dental practice where he worked, was responsible himself for repair work of his faults and the fact that he was member of a dental organization did not make him an entrepreneur.
The dentist was denied the entrepreneurs discounts such as the start entrepreneurs discount (EUR 2.123), the entrepreneurs discount (EUR 7.280) and the small business discount (14%) over a three year period.
One client is no client – client consequences
In this court case was not mentioned how the payment of the dental practice of the invoices was treated. The dental practice paid the invoices, but now it turns out the person was not an entrepreneur but a deemed employee, the payments are regarded net salary payments.
Obviously no payroll administration was ran for these payments, hence the payments are grossed up with social premiums and wage tax. As this employee was not identified as such in the administration of the dental practice, the anonymous wage tax rate (52%) is the only applicable tax rate for this calculation.
This calculation is made for a 3 year period and the penalty can be 25% if the dental practice could not have known this was incorrect, or 50% if the dental practice should have known, or 100% if the dental practice had known due to for instance a similar situation of the past.
That implies one client is no client can make bankrupt your client as well, as many ‘clients’ cannot pay for the tax charged over the net invoice amounts paid.
One client is no client – starting entrepreneur
The next question is the concern of most genuine entrepreneurs who are very happy they finally obtained one client. These persons are concerned they are not respected as being an entrepreneur because of the fact they only scored one client so far.
What about one client is no client now? That is a different story. The tax office gives you a three year holiday to proof that you are able to obtain more than one client. And invoicing two organizations in the same group is again only one client. The tax office might ring the doorbell for a friendly visit, we know they do, but do not agree with them that you are not an entrepreneur when you are not yet able to provide them with more than one client information.
If everybody could present a couple of clients like rabbit from the high hat, everybody could become an entrepreneur. But entrepreneurship is not for everybody.
Orange Tax Services
We do encounter the one client is not client situations and we do address the topic. Often the situation is fixed, however, as the Dutch tax office is actively investigating this matter, all parties are informed of the risks, hence this is the time to discuss the matter and become an employee again.
For the genuine entrepreneurs we would like to offer our services. Our fees you find on the website. You might be able to get lower quotes, but then again, what you pay is what you get. That said, what we offer is what we offer, no sneaky additional charges on hourly basis. We try to use fixed fees. Only for bookkeeping that is not possible. The extra hours can be charged by us, that is the case when you ask us for advise, or we need to solve an issue you have with the Dutch tax office or the Dutch tax office announces they want to audit your administration.