Independent contractors – new regime affects hirers’ tax liabilities
New legislation came into force on 1 May 2016 that affects the relationship between companies and self-employed contractors.
Before 1 May 2016, it was possible for contractors to obtain a ‘Declaration of Independent Contractor Status’ (”VAR”) from the Tax Administration. The VAR meant that the Tax Administration would not regard the business relationship between the contractor and the principal who hired them as an employment relationship from a tax point of view. Therefore, the hirer could be confident that they would not be held liable for payroll tax and social security contributions.
From 1 May 2016 the VAR has been replaced by a new regime, pursuant to the Assessment of Employment Relationships Deregulation Act (the “Deregulation Act”), under which the principal and the contractor are jointly responsible for correct performance of the consultancy agreement.
Under the Deregulation Act it is still possible for contractors and hirers to obtain some certainty regarding how the relationship will be viewed by the Tax Administration. This can be achieved by either (i) submitting the contract for services to the Tax Administration and asking for a judgment regarding the qualification of the relationship, or (ii) using a template contract drafted and published by the Tax Administration.
Under the new system, if the principal submits a contract for assessment, the Tax Administration will decide whether the principal is liable for payroll tax and social security contributions. If the Tax Administration finds that the agreement presented to it has been drawn up in such a way that the principal can be granted an exemption from payroll tax and social security contributions, it will also state during what period that indemnity will apply, provided that the agreement is concluded in accordance with the approved model and the parties adhere to that agreement in practice.
If it later becomes apparent that the agreement used by the parties (whether a template agreement or one submitted for approval) has not been observed in practice and an employment relationship exists between the parties, the Tax Administration may require the position to be corrected or carry out an additional tax assessment on the principal in respect of the payroll tax and social security contributions due, and could impose a fine.
There is a transitional period of one year (until 1 May 2017). During the transitional period the Tax Administration will not actively enforce the new legislation, but will focus mainly on providing information. The Tax Administration assumes that the new procedure will be observed as from 1 May 2017. From then on a principal will either not have an employment relationship with a contractor or will be liable for the remittance of payroll tax and social security contributions to the Tax Administration. If an employment relationship exists but payroll tax and social security contributions have not been withheld and remitted, the Tax Administration will require the position to be corrected or carry out an additional tax assessment.