A company is a source of income, not loss. If the company is a source of loss the phrase company should be replaced by hobby.
A company is a source of income
It does happen that a new client arrives at our office. This client is proud to state they have a company. A healing company, part time piano teacher, yoga enterprise, homework assistant, doggy doggy walky walky and more creative types of companies.
With the aforementioned examples of companies the previous income tax returns contain cost deductions that exceed what is possible. Part of the home rent costs, electricity, new stairs, house extension. Strangely enough, the tax office never inquired about that.
The explanation for the tax office not to respond was also at hand. The income of the company was far exceeded by all the costs of the company. Actually, if all the costs would have been deleted that are not accepted, the company still had a loss. This was the case for a couple of years already.
Response tax office to company that is in fact a hobby
Upon our findings the new client always responds that this is how they have done it for many years. No issues with the tax office. That is true, but that is not the same as a correct income tax return. The fact that the tax office did not respond had to do with no other source of income.
The moment you have employment income next to this hobby, then the hobby creates a loss. This loss is set off against the positive employment income resulting in a tax refund. Then the Dutch tax office is going to respond quickly.
Most clients with a hobby have no other source of income, it is the partner who funds it basically.
What is the difference between a hobby and a company?
An activity is a company when it participates in the economic traffic. In other words, there are sales and purchases. Commitments. The activity is a company when the aim is to make an income, a profit. And finally, from an objective standpoint a profit is likely to be made.
The moment these three criteria are met, you have a company. And ofcourse nobody expect you to be profitable instantly. That said, if from an objective standpoint no profit is to be expected. Then the activity is labelled as hobby. An hobby is often an activity with costs and pleasure, where the income is often less important than the pleasure.
What to do when you are told your company is a hobby
The moment the conclusion is drawn that your activity is a hobby. The first step is to terminate the registration of the company with the KVK (Chamber of Commerce). That will also stop the request to file an entrepreneurs income tax return.
Explain to the tax office that the VAT numbers should be cancelled.
Hobby – court case
A nail polish BV company has not made a profit since 2013. Due to a transfer of shares the tax payer claimed a loss in his income tax return. This loss was denied by the Dutch tax office.
The case went to court and in court it was determined that the BV company did take part in the economic traffic. A profit was the goal of the company. But the objective eye quickly came to the conclusion a profit was never going to be possible. Hence the court ruled indeed that the BV company loss was not to be deducted in the income tax return.
The tax payer did proof the turnover was increasing, but the turnover could not keep up with the costs. Also the argument that companies such as Rituals, McDonalds and Amazon were loss making in the startup years did not stand. This argument did not stand as it was not made clear how the situation of those companies reflected on this case.
A BV company can ofcourse not be allocated as a hobby company. That said, the execution of the tax return is done as if it were a hobby. No tax base, no tax deduction.
Tax is exciting
We think tax is exciting. Challenging is to explain to a new client that their activity is in fact not a company, but a hobby. This is never digested well and takes some time for the client to accept. Plus, the client finds it very strange no longer to report the company tax wise. Despite we are excited about tax, a hobby is a hobby.