Self-employed or deemed employment, the one is desired, the other can be a fact you were not aware of, or were you?
Self-employment or deemed employment
On a daily basis we have existing clients, new clients or questions via the contact form about starting a new company. That new company has then one client. Our initial response, like a Pavlov response, is to warn about employment. And like a boomerang we are replied that more clients will eventually be found, no worries.
And often, that never happens.
When Self-employment or deemed employment?
Self-employment is you staring your business offering your services. It is a service issue, not a product selling issue. You offer your services and obviously you start a new business with the first client. The Dutch tax office gives you roughly three years’ time to proof you are a true business.
During that three year period you need to be able to show you made an effort to obtain clients, make business. Not every person starting a business is successful as entrepreneur. That is a reality. That reality can also be fed by your first client simply being too good for you. The hourly rate is good, you can make a lot of hours. So many hours, you no longer see the urge to find other clients. And suddenly, you are in deemed employment.
Deemed employment for whom is that a problem?
Deemed employment is a problem mainly for the client. The moment employment is determined, based on facts and circumstances and only the employment agreement is missing, then the problems start. The payments made by the client, who has been determined now as employer, are regarded net salary.
The client paid the invoice including VAT, and that full amount is the net salary and will be grossed up. On top of the grossed up net salary a 25% penalty is put in case the parties were truly unaware. However, in case they were aware the penalty can go up, even to 100%.
An audit by the Dutch tax office is for a 5 year period. Bankruptcy of the client, now employer, is part of this audit. As the client, now employer, did not anticipate such amounts to be paid and sometimes cannot pay these amounts.
Self-employment or deemed employment: court case
Three entrepreneurs had an assignment with a Game company to develop games. The court case shows with what names there were registered at the Chambers of Commerce. The Game company decided to terminate its business and therefore terminated the assign agreement with the three entrepreneurs.
The three entrepreneurs disagreed with the termination of the assign agreement, as they had the opinion they have an employment situation. The court determined that the work done by the entrepreneurs was indeed the core business of the Game company. The entrepreneurs were not free to schedule their work time, nor free to develop as they saw fit. The Game company determined the working hours, guidelines. Checks and balances were executed by the Game company to see if their rules were followed.
Moreover the entrepreneurs were to personally perform the work, they could not be replaced. The invoicing was of their hours was not actually done by their own company, but by using an in between company. That in between company was to process the hours, process the only accepted costs. The invoicing and the VAT reporting was all done by the in between company.
In case of holiday and sickness hours were still being paid. No economic risk for the entrepreneurs, no entrepreneur behavior by the entrepreneurs. The assignment was an employment agreement, and can only be terminated if rules are followed that apply to those of employment. That was the court verdict.
Court case aftermath
The above specified court case situation is one you find a lot, especially with the in between companies that connect entrepreneurs with client and take a margin.
The consequence of the assignment actually being an employment situation involves the net amounts being paid to be grossed up plus penalty. That is costly, but if the deemed employer also provides pension facilities to its direct employees, these premiums now also need to be paid for these deemed employees. Retroactively.
If you think these employees can claim back the VAT charged over their services, you are wrong. Any charged VAT is to be paid to the tax office. However, the reclaimed VAT can be an issue for these deemed entrepreneurs.
Tax is exciting
We think tax is exciting. Starting your business is exciting, having one big client is exciting. Regardless of deemed employment or not. In case of one big client you always need to realize that the day this one big client goes away, you have issues. The true entrepreneur is aware of that and acts on it. The less true entrepreneur is maybe indeed a well-paid deemed employee.
