Update: False Self-Employment And Taxation

False self-employment can result in serious tax consequences for companies and organizations that hire self-employed individuals. False self-employment refers to a situation where a contractor hires someone who is officially engaged as self-employed but in practice functions as an employee.

In the alert of 19 September 2024, we provided a legal update on legislation for self-employed individuals. This alert provides a fiscal update on false self-employment, a summary of the tax aspects thereof and potential solutions.

False self-employment & fiscal update

As from 1 January 2025, the Dutch tax authorities will fully enforce regulations against false self-employment. Companies and organizations that hire individuals as self-employed professionals for work that they do not perform independently may immediately face obligations to make corrections, fines and additional tax assessments, without prior warnings or instructions. Corrections can be applied retroactively but only until the date of the moratorium's end i.e. 1 January 2025. Errors made before this date are therefore less likely to lead to fines unless there is evidence of malice or in case previous warnings have not been followed up.

On 1 January 2026, the Act on the clarification assessment of employment relationships and legal presumption' (VBAR) is envisaged to enter into force. This law aims to clarify the status of employment relationships, i.e. determining when someone is working as an employee and when they can work as a self-employed professional. This classification is crucial for determining whether wage tax and social security contributions need to be withheld. The VBAR was announced on 11 June 2024 though internet consultation. More information on the VBAR can be found in the alert of 19 September 2024.

Tax consequences of false self-employment

The tax consequences of false self-employment are significant. The company or organization that hires a false self-employed professional may face additional tax assessments or social security contributions, payroll taxes, and fines. In 2024, regular wage tax rates, including social insurance premiums, are 36.97% (for taxable wage up to €75,518) and 49.5% (for taxable wage exceeding €75,518). Employee insurance premiums amount to approximately 18.5% in 2024.

The non-filing of required wage tax returns and non-payment of wage tax can result in fines, for instance, fines for non-filing of €68 for first-time filing failures and fines for payment failures of up to €5,514. Substantial fines (in Dutch: 'vergrijpboetes') can be imposed of 50% of the unpaid amount in case of intent and of 25% of the unpaid amount in case of serious negligence. In the year 2025 the Dutch tax authorities will be lenient in imposing substantial fines on employers and workers who can demonstrate that they are actively working to reduce fake self-employment.

For VAT purposes, false self-employment may result in a repayment obligation of earlier deducted VAT. The contractor may try to recover withheld wage tax and VAT from the self-employed professional, but, for instance, certain employee insurance premiums cannot be recovered.

In addition to the above tax consequences, other issues may arise. For example, if self-employed professionals are hired through third parties or in connection with completing a project, the contractor may be held liable for unpaid wage tax and VAT by the third party or the self-employed professional based on a secondary tax liability. Also, there may be labour law consequences.

Solutions & tips

The adverse tax consequences of false self-employment can for instance be mitigated by:

• Assessing which contracts with self-employed professionals may qualify as false self-employment.
• Creating a procedure for hiring self-employed professionals, including identification and keeping records of the days and hours worked in a timesheet.
• Drafting contracts based on a model agreement published by the Dutch tax authorities. Although model agreements will be phased out as of 1 January 2025, ongoing model agreements will be honoured until the end of their approval period. The last model agreement expires in 2029. In addition, the actual working relationship between the contractor and the self-employed professional should be aligned with the terms and conditions of the contract.
• Including provisions in contracts with fiscal indemnities for the contractor.
• Verifying risks of chain or hiring liability when hiring though third parties or taking on a project.
• Consider mitigating measures, such as depositing funds in blocked bank accounts (G-accounts), working with certified employment agencies or requesting a statement regarding payment behaviour from the Dutch tax authorities.