February is the month in which the work-related expenses scheme (WKR) is finalised. If payroll tax is payable under the WKR, this is included in the return for January (for employers who report payroll tax on a four-week basis: in the first four-week period of the new year). See also our article Settling the 2017 Work-Related Expenses Scheme.
WKR
Under the WKR, those elements of remuneration that have been designated as final levy components are subject to tax. Such designation as a final levy component must take place before the remuneration is received.
As long as, in a calendar year, the total of these designated salary components amounts to less than 1.2% of the total wage bill, no payroll taxes are due on them. This is also known as the “tax-free allowance” or the “work-related expenses allowance”. Payroll taxes are payable on the amount by which the tax-free allowance is exceeded. These payroll taxes are payable by the employer. This is known as the ‘final levy’. The rate is proportional and amounts to 80%.
Discount
A rate of 80% seems high. But if the wage is paid net, the rate rises to 108.3%. That is the grossed-up rate for wages paid to employees whose income falls within the highest income tax bracket.
BV X took advantage of this tax benefit, having a share scheme in place for its management. Under this scheme, members of the management were granted bonus shares free of charge. Naturally, the value of the bonus shares is regarded as taxable remuneration. BV X paid the payroll tax itself. This cost the company 108.3% in payroll tax up to and including 2011.
From 2012 onwards, BV X applied the WKR scheme, designated this remuneration as ‘final levy remuneration’ for the purposes of the WKR, and paid payroll taxes amounting to 80% of the value of the bonus shares.
Customary Practice Test
The Tax and Customs Administration did not agree with this. In order to designate a salary component for the WKR, the customary practice test must be met. The salary component must not be significantly (30% or more) higher than the allowances and benefits in kind designated in otherwise comparable circumstances.
With effect from 1 January 2016, the customary practice test has been tightened. It is not only the amount of the designated wage component that must be customary; it must also be customary for the employer to bear the payroll taxes on that wage component as a final levy.
Up to €2,400 in designated wage components, there is no problem. The Tax and Customs Administration has been setting out this efficiency test for some time now in the Payroll tax handbook.
Amsterdam Court of Appeal
The case will be heard Amsterdam Court of Appeal Quite rightly. And that Court has ruled in favour of the Tax and Customs Administration. The Court is of the view that the following principles apply when applying the WKR:
- The WKR does not differ fundamentally from the old system;
- The WKR is not intended to represent a broadening of the scope of the former exempt allowances and benefits in kind;
- The WKR does not apply to allowances and benefits in kind that are not purely business-related or that are of a mixed nature (the Court of Appeal also refers to these as “implicit remuneration”).
The Court finds that this constitutes a substantial component of remuneration. It is remuneration in its own right. Furthermore, it is of an individual nature (only the seven members of the management board of BV X received this remuneration). It was therefore not permissible to classify it as a final levy component under the WKR.
On the face of it, that doesn’t sound entirely unreasonable. However, it does not seem to be entirely consistent with the parliamentary explanatory notes on the WKR. We therefore believe it would be appropriate for the matter to be referred to the Supreme Court. Until then, the Tax and Customs Administration will no doubt welcome the Amsterdam Court of Appeal’s ruling and use it to challenge any designations under the WKR that it does not wish to accept.