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If a company fails to pay the tax it owes, its director(s) may be held jointly and severally liable for this: directors’ liability[1].
This applies to the following taxes:
- payroll tax;
- value added tax (VAT);
- excise duty;
- excise duties on non-alcoholic drinks, smoking tobacco and snuff;
- environmental taxes;
Body
It must relate to:
- a body with legal personality as referred to in the AWR[2];
- which has full legal capacity[3];
- in so far as it is subject to corporation tax[4].
Directors’ liability therefore does not apply to a fiscal unit. A notice of inability to pay (see below) cannot be filed in the name of a fiscal unit.
All members of a VAT group are, however, jointly and severally liable for the VAT debts of the group. Once this liability has been established, the individual company or companies concerned may be declared insolvent.
Joint and several
Joint and several liability means that the director may be held personally liable by the tax authorities to pay the full amount of tax outstanding by the organisation.
Director
A director is, of course, anyone who official director of the company, namely those persons who are registered as directors in the commercial register.
But he is also the one who has (helped to) determine the organisation’s policy, as if he were its director; the equipment operator.
Burden of proof
A director may only be held jointly and severally liable for tax remaining unpaid by the company if the non-payment was caused by improper management during the preceding three years. As a general rule, the burden of proof in this regard rests with the Tax and Customs Administration.
Notification of inability to pay
The burden of proof shifts when the body (or the director acting on its behalf) has failed to notify the Tax and Customs Administration in a legally valid manner that (one of) the aforementioned tax(es) cannot be paid, or cannot be paid on time. In such cases, it is assumed that there has been improper management, and the director held liable may attempt to rebut this.
Written
A declaration of inability to pay must be submitted in writing to the Tax and Customs Administration. This may be done using the form provided for this purpose (www.belastingdienst.nl), but also by letter.
The report should provide an insight into:
- the tax return(s) and/or additional tax assessment(s) in question;
- the person making the report
- the circumstances which have resulted in the tax due being unable to be paid.
PLEASE NOTE (1): a request for a deferral of payment (whether or not as part of a notice of objection or appeal) or for a payment plan does not in itself/automatically constitute a declaration of inability to pay! A declaration of inability to pay must be made separately.
PLEASE NOTE (2): Conversely, a notification of inability to pay does not constitute a request for a deferral of payment or for a payment arrangement, nor does it constitute a notice of objection or an appeal against the tax return(s) or assessment(s). A request for a deferral of payment, for a payment plan, or a notice of objection or appeal must be submitted separately.
Term
The Recovery Act stipulates that the notification must be made without delay once it has become apparent that the body is unable to pay (one of) the tax(es) mentioned above.
A report is considered to have been made without delay if it is submitted within two weeks of the date on which the tax was due. For example, payroll tax for January 2020 must be paid by 29 February 2020 at the latest. The report of inability to pay must then by 14 March 2020 at the latest have been done.
If the notification relates to a supplementary tax assessment, it must be received by the Tax and Customs Administration within two weeks of the due date of that assessment.
Reception Theory
The decisive factor is the moment at which the Tax and Customs Administration receives the notification of inability to pay receives (When sending by post, please note the processing time at the post office); this does not refer to the time at which the organisation or the director sends the notification.).
Decision
Within 8 weeks of receiving the request, the Tax and Customs Administration will issue a decision stating whether the notification is valid.
If the notification is submitted on time but is incomplete, the Tax and Customs Administration will request further information. The Tax and Customs Administration does not send an acknowledgement of receipt for the notification.
Bankruptcy and suspension of payments
If the organisation has been granted a moratorium on payments, the obligation to report remains in full force. The administrator may then make a legally valid report.
If the reporting period expires on or after the date on which the organisation is declared bankrupt, the inability to pay no longer needs to be reported.
Validity period
Once a legally valid notification of inability to pay has been submitted, it remains valid for as long as there are outstanding payments. It is not necessary to submit a new notification for new tax return periods and/or additional tax assessments, although you are, of course, free to do so. For example, because the Tax and Customs Administration offsets refunds against outstanding tax returns, it is not always possible to determine with certainty whether a payment arrears still exists.
The ongoing notification of inability to pay does not apply to tax that has not been included in a tax return. If such tax is assessed retrospectively, a notification of inability to pay must always be submitted in good time.
Pension contributions
A similar[5] There is a reporting obligation for employers who are unable to pay pension contributions to a mandatory industry-wide pension fund[6].
Employers who do not have legal personality or who do not have full legal capacity are exempt from the obligation to provide information. However, they are jointly and severally liable for any pension contributions that have not been paid.[7], regardless of whether a timely notification of insolvency has been made and regardless of whether there has been mismanagement(!).
Criminal prosecution
Notifying the authorities of an inability to pay may also be important in order to avoid criminal prosecution. Article 69a of the General Tax Act makes it a criminal offence to (deliberately) fail to pay tax due on a tax return, or to fail to pay it on time. The maximum penalty is a prison sentence of 6 months or a fine of 5e category (€103,000).
A person shall not be liable to prosecution if they:
- has applied in good time for a deferral of payment;
- immediately after it became apparent that the body was unable to pay the tax, it gave written notice of its inability to pay.
The purpose of this note is to outline a scheme in broad terms. For the sake of clarity, matters have therefore been presented in a simplified manner. VWG Accountancy and Tax Consultancy is therefore not liable for the consequences of any actions taken or not taken as a result of this note.
[1] Section 36 of the Recovery Act 1990.
[2] Article 2(1), introductory wording and point (b) of the AWR: “For the purposes of this Act, the following definitions apply: a. …; b. associations and other legal entities, partnerships and companies, undertakings of legal entities governed by public law, and special-purpose funds”.
[3] Directors of a body that does not have full legal capacity are subject to the liability provisions of Section 33 of the 1990 Recovery Act (which does not provide for the option of declaring insolvency).
[4] Directors of foundations and associations that are not liable for corporation tax are therefore not liable under Section 36 of the Recovery Act 1990. The same applies to directors of religious communities and legal entities governed by public law.
[5] The rules governing pension contributions differ in detail from those governing taxation. These differences are not discussed in further detail in this memorandum.
[6] This obligation is laid down in Article 23(2) of the Compulsory Membership of an Industry-Wide Pension Fund Act 2000 (Bpf Act 2000) and is further elaborated in the Bpf Act 2000 Notification Scheme Decree.
[7] Article 22(1)(c) of the Bpf Act 2000.