It remains a much-discussed subject, the DBA Act. Both in the Tweede Kamer and beyond there is still a lot of discussion about the different facets that are important for this law. Examples of these facets are the opt-out option and the entrepreneurial test that have to be given a concrete form. The enforcement of this law has also been postponed several times. First until July 1, 2018, and subsequently until January 1, 2020. There is still much to be arranged, but is there still a future in this comprehensive law?
To answer that question, a little history first. What law was there in the past to regulate the freelance market? We then look at the current situation. What does the law in its current form mean for intermediaries, freelancers and clients? And finally, we look at the law’s future. Do we expect more changes that can mean that its introduction will be postponed? A very interesting case, so keep reading.
What was there for DBA law?
Before the DBA Act on May 1, 2016, freelancers and clients were able to make use of the Declaration of Employment Relationship (VAR). This was a declaration from the Tax Authorities that the client and the contractor tried to provide certainty about the tax and social security status of income that a freelancer obtains for his/her activities.
Until now, the IRS assessed the fiscal status of freelancers based on an application, on the basis of which, a declaration was issued (VAR) regarding the relationship between freelancers and clients, based on the position in which the applicant (always a natural person) would perform work-related activities. Income sources were divided as follows:
- Profits from enterprise (VAR-wuo);
- Wages from work (VAR-loon);
- Result from other activities (VAR-rwo);
- Income from work for account and risk of a company (VAR-dga).
In many cases, the VAR was applied by the freelancer at the client’s request, because the client wanted to be certain about the fiscal and social security status of the person doing work for him. If the freelancers are employed by the client according to the IRS, that means the client is responsible for deducting income tax and social security from the money he pays to the freelancer. With the VAR-wuo or VAR-dga, the client was certain that was not necessary. Should the IRS believe later on that the freelancer was de facto under the client’s employ, the freelancers, not the client, would have to pay the IRS the income tax and other expenses. In the cases of a VAR-loon, the client did have to deduct income tax and social security. In the case of VAR-row, the client had to find out for himself what he needed to do. As such, that limited the significance of VAR-row.
A VAR declaration had no impact on the taxes that had to be paid. The IRS reassessed in retrospect whether the income was related to profits from enterprise, wages from work or results from other activities. Those findings could be included in the assessment of a new VAR application.
It is clear that the VAR was a fairly easy way to get started as a freelancer. Nowadays it is still easy to start as a freelancer, but more things have to be arranged to be able to show that he/she operates as a self-employed person. For example, it is now expected that, among other things, as a self-employed person:
- Is demonstrably independent (own website, business cards, etc.);
- Has a professional liability insurance;
- Uses an approved model agreement.
The way to this system was pretty difficult, but eventually it has become clearer what the IRS expects from third parties (intermediaries, brokers, etc.), clients and freelancers.
There is still a lot that is unclear, especially regarding the specifications of what it means to be demonstrably independent and what the rate is that the freelancer receives, which is pretty much open to interpretation. Below, an example about that interpretation:
A freelance account manager has landed an assignment at a client and does everything he can to generate new businesses, for which he is paid a handsome rate (€ 75). He is expected to visit potential clients, and to wear the uniform of his client and a company car, with the company logo, to represent the company and generate trust among potential clients. Is this allowed as far as the IRS is concerned?
If we take an extremely black and white approach to this example, it is not allowed according to the IRS, because the uniform and the company logo on the car could give the impression that the account manager is an employee of the client. After having been presented with this example, the IRS indicated that the account manager could wear his own clothes and had a car. This is some pretty twisted logic, but it is today’s reality. So a freelancer is expected not to agree to those requests. This is one example of what the IRS expects from freelancers. There are also other examples, like the one involving Deliveroo:
At the end of 2017, Deliveroo announced it would stop employing people and only work with freelancers. That means all their deliverers are freelancers from then on, but they are still expected to ride around with a Deliveroo bag. Also, they make the same as they did before (€ 15 an hour). Is this allowed by the IRS?
There has been a lot of commotion about this construction. Another example that was mentioned was PostNL, a company that fired all its staff and then rehired them as freelancers. However, the judge ruled that that is not false self-employment and the IRS concurs.
If we compare these two examples, it is pretty clear that the line the IRS has drawn concerning false self-employment is far from clear. So how will they deal with this in the future?
To explain the law as clearly as possible, an updated version of DBA Act has been presented in the Coalition Agreement. The government wants to introduce the following:
- A rate diagram with an opt-out:
- An employer declaration;
- A web module to be filled in by the client;
- Distinction between regular and non-regular business activities.
We know a little more about the opt-out. Organizations no longer run the risk of having to pay income tax etc. at a later date if they agree with freelancers who receive a high rate that they will not deduct and pay their income taxes and social security premiums. This s-called opt-out is included in the 2017 government agreement.
Hiring Independent Professionals (IP’s) with a high rate will be possible without risks. If an organization hires such an expensive freelancer, the opt-out allows them to agree that no income tax etc. will be deducted and paid by the client. Not only does that require a high rate, but they also have to meet one of the following conditions:
- The IP will work for the organization for a maximum of one year (nothing is known yet about long-term assignments);
- The IP does not carry out regular activities (definition as yet unknown).
The ‘high’ rate will probably start at € 75 per hour. If an independent contractor is paid a low rate and is engaged in regular activities or is hired for at least three months, in the future that always means he is employed. That low rate will probably lie between € 15 and € 18 per hour. With this construction, the account manager in the example mentioned earlier is exempt, but the Deliveroo people are not. Because of their hourly rate, it is always employment.
When the hourly rate lies between € 18 and € 75, the government expects the client to fill in a declaration on the website of the IRS. That employer’s declaration guarantees that the freelancer does indeed work for the company as an Independent Professional.
The VAR made it fairly easy to start as a freelancer without too much extra fuss. That is also one of the reasons that this law is still very popular with many freelancers and clients. The DBA Act is a worthy replacement that has, however, been delivered unfinished. This has caused much uncertainty and incomprehension. To turn the tide one is now busy putting all things in order. It will take until 2020 before people want to actively maintain and have implemented all new rules. The question, however, is whether this is timely, given that the current government is active until 2021. A change of government can mean a change in this law. Then we start again from the beginning.