Doing business within a supply chain

If you subcontract (part of) the work you have undertaken to a subcontractor, it is possible that this subcontractor may in turn subcontract (part of) the work to another subcontractor. This subcontractor may also subcontract the work further. This creates a chain of contractors and subcontractors.

Chain liability means that if one subcontractor fails to pay payroll taxes on the work undertaken, all contractors in the chain preceding him are jointly and severally liable for these payroll taxes. You may therefore be held liable for the unpaid payroll taxes of each of the subcontractors. This is because the chain of liability only ends with the main contractor.

Note!
A client can only be held liable in one of the following situations:
1. the client is regarded as a contractor because, in the course of his ordinary business and without a commission from another party, he purchases a physical structure (in which case he is a self-builder);
2. clients in the ready-to-wear sector and buyers of garments yet to be manufactured.

Hirer’s liability

Hirer’s liability applies when an employer hires staff from another employer (usually a temporary employment or payroll agency) to work under its direction and supervision. If the actual employer fails to pay, in full or in part, the payroll tax, social security contributions and, where applicable, VAT owed by them, the hirer may be held liable for the unpaid amount under the principle of hirer’s liability. If the hirer also fails to pay, the tax authorities may, through chain liability, also hold the other companies in the chain liable.

Contractors and chain liability

Chain liability only applies if you are classified as a contractor. This may be the case more often than you might think. Chain liability therefore applies not only in the construction industry, but also in other sectors. A contractor is defined as any natural or legal person who, other than in an employment relationship, carries out work of a material nature in return for a fee.

Work of a material nature

Examples of work of a physical nature include: the construction of buildings, the laying of roads, the maintenance of buildings and repair work of all kinds. However, tasks such as typing, packing goods, processing vegetables and cleaning are also classified as work of a physical nature.

Tip
Works or products that are created primarily through mental or intellectual labour are not regarded as works of a material nature. Examples include the work of architects, musicians, authors and consultants. Chain liability does not apply to these works.

Even if the work is carried out by an employee of the person who placed the order, joint and several liability does not apply.

Work for a fair wage

Furthermore, joint and several liability only applies if the work is carried out for a fixed price. This is often the case. Work carried out for a fee includes not only contracts for a fixed price, but also cost-plus contracts, where the price is determined retrospectively on the basis of materials used and hours worked.

No chain liability

Joint and several liability does not apply in the following cases:

• if it transpires that the failure to pay payroll tax is not attributable to your subcontractor, their subcontractor(s) or to you (for example, failure to pay due to a sudden deterioration in economic conditions or exceptionally bad weather);
• if the work is carried out for 50% or more at the premises where the subcontractor’s business is based (this exception does not apply to work in the ready-to-wear sector);
• if the work carried out constitutes a minor part of a concluded contract of sale for an existing item (for example, the assembly of a machine). This will often be evident from the small proportion of the total purchase price accounted for by the work carried out.

Extent of liability

Chain liability applies to payroll deductions. These include income tax, national insurance contributions, employees’ insurance contributions and the income-related ZVW contribution. In addition, you may be held liable for the costs and interest due. However, the Tax and Customs Administration must demonstrate that these costs and interest are partly attributable to you. You may also be held liable for the ‘anonymous rate’ applied (52% withholding and no tax credits or contribution ceilings). This rate applies when employees are not sufficiently identified, for example because a copy of their passport is missing. However, you are not liable for the penalty included in your subcontractor’s additional tax assessment.

Tip
Unlike the liability of the hirer, chain liability does not extend to liability for unpaid VAT.

Limit your liability

As a contractor or subcontractor, you can limit your liability by taking a number of measures, such as requesting a payment history statement, including a chain clause, recording the correct details and making payments into a G-account.

Request a statement of payment history

Your subcontractor can ask the tax authorities to issue a certificate confirming that they have paid all payroll taxes. This certificate gives you, as a contractor, an idea of the risks you face, but does not provide you with any form of indemnity against joint and several liability.

Inclusion of a chain clause

Where possible, always include a non-subcontracting clause in the contract with the subcontractor to ensure that the subcontractor cannot subcontract the work further and/or engage agency workers without your consent.

Note!
A chain clause gives you control over the number of subcontractors in the chain and the risks you face as a result, but it does not provide you with an indemnity against chain liability if the work is subcontracted after all.

Data registration

It is very common for the Tax and Customs Administration to have calculated the payroll taxes for which you, as a contractor, are held liable using the anonymous rate. Your liability for the anonymous rate will be reduced if you can provide evidence of the identity of your subcontractor’s employees and the wages paid per employee and per job, and if you can demonstrate that the employees hold a valid residence or work permit. You will meet these conditions if you record the following details for each temporary staff member:

• Name and address details, date of birth, citizen service number (BSN);
• nationality;
• type of identity document, number and period of validity;
• possession of an A1 certificate, residence permit, work permit or notification; name and address details of the subcontractor;
• a breakdown of the hours worked;
• the subcontractor’s name, address and place of residence.

Note!
Due to privacy regulations, you are not permitted to hold copies of your contractors’ employees’ identity documents, unless the employee is from outside the EU. For these employees, however, you must hold and retain a copy of their identity document in order to prove that they are authorised to work.

Deposit into a G account

A G-account is a blocked account held by the subcontractor. You can limit your liability by paying the portion of your subcontractor’s invoice intended for payroll taxes into the G-account. In the payment reference, you must state the invoice number and any other identifying details of the invoice. This invoice must comply with the legal requirements and must include the contract number or reference, the period and the description or reference of the work. In addition, your records must show the details of the invoice, the work carried out and a record of man-hours worked.

If you meet the conditions, you will no longer be held liable as a contractor for the amount paid. You may, however, still be held liable for any outstanding balance if the payroll taxes exceed the amount you have paid.

Act on Tackling Bogus Schemes

The Act on Combating Bogus Schemes (WAS) combats the exploitation and underpayment of workers, as well as unfair competition. The WAS includes, amongst other things, the requirement for the minimum wage to be paid by bank transfer, the requirement to itemise expense allowances that form part of the wage, and a ban on deductions and set-offs insofar as these result in a payment below the minimum wage. In addition, under the WAS, with effect from 1 July 2015, an employee of a subcontractor may hold you (as the contractor) jointly and severally liable if the subcontractor fails to pay the wages (in full).

Note!
This also involves joint and several liability. This means that the employee can hold the subsequent contractor liable, right up to the end of the chain.

The court will determine whether, as a contractor, you are liable for paying the outstanding wages. There are a number of measures you can take to minimise the risk of being held liable. For example, it is advisable to check that you are working with reliable companies. This includes, for instance, verifying their registration with the Chamber of Commerce and, where temporary workers are involved, checking with the Labour Standards Foundation (www.normeringarbeid.nl), assessment of quality marks (e.g. VCA certification) and the timely payment of payroll tax (Tax and Customs Administration statement of payment history). You should also assess whether the price is fair and ensure that a sound contract is in place with clear agreements on terms and conditions of employment and working conditions. Introduce a requirement that these conditions also apply to companies further down the supply chain.

Note!
The measures taken do not provide a guarantee, but a court will be more inclined not to hold you liable. However, you should always remain vigilant and take action if you receive any indications that the subcontractor is no longer paying their employee (in full).

Chain liability under the WAS, like chain liability for payroll taxes, applies only to clients acting in the course of a profession or business. A private individual cannot therefore be held liable under chain liability.