The Tax and Customs Administration has published the first version of the Payroll Tax Handbook for 2016 on its website. The handbook contains information on payroll deductions. It is published four times a year. What is striking this time is, once again, the wording of the term relevant to the work-related expenses scheme habitual use criterion.
Interpretation by the Tax and Customs Administration
The handbook sets out the Tax and Customs Administration’s interpretation of the legislation and regulations. Ultimately, only a court can determine whether this interpretation is fully in line with the applicable legislation and regulations. After all, the Tax and Customs Administration is not the maker of the rules (that is the role of the legislature), but merely the enforcer of the law. However, anyone wishing to avoid having to go before the tax court would be well advised to follow the guidance set out in the Handbook. Naturally, the handbook can be relied upon in dealings with the Tax and Customs Administration.
Customary practice criterion
Naturally, every new edition of the Handbook contains changes compared with the previous edition. Most of these changes are textual in nature. However, the version for the first quarter of 2016 contains a notable tightening of the ‘customary practice’ criterion relevant to the work-related expenses scheme. This criterion had already been tightened by the legislator with effect from 1 January 2015. Please see our article on this subject WKR 2015 – developments (2). But now the €2,400 rule is also being tightened.
The €2,400 rule is not set out in the legislation or implementing regulations. The rule was introduced at the end of 2014 in the Payroll Tax Handbook and, at that time, meant that the Tax and Customs Administration did not regard allowances and benefits in kind under the work-related expenses scheme as unusual, provided that the total per employee per year does not exceed €2,400. In practice, this means that €2,400 worth of (general) allowances and benefits in kind can be designated for each employee, without any assessment, as a final levy component within the discretionary allowance of the work-related expenses scheme (WKR) (not taxed provided that the discretionary allowance of 1.2% of the wage bill is not exceeded; amounts exceeding the discretionary allowance are subject to final levy at a rate of 80%).
The arm’s length principle is further subject to the condition that payments and benefits in kind not to any significant extent may be considered unusual. To a large extent, this is equivalent, for tax purposes, to 30% or more. The €2,400 rule, in combination with the 30%rule, means that not an allowance of €2,400, but of €3,428 can be classified as a final levy component without the Tax and Customs Administration being able to invoke the ‘customary’ criterion. After deducting 30%, €2,400 remains, meaning that the allowance is not significantly unusual.
The latest version of the Payroll Tax Handbook explicitly states, in relation to the €2,400 rule, that the 30% exemption does not apply to it. Nevertheless, anyone providing allowances or benefits in kind worth more than €2,400 may still demonstrate that the customary practice criterion is met.
Gross or net
Apart from the €2,400 rule described above, the customary practice test is also met when a company has been paying a particular allowance or providing a particular benefit for many years. This is the case, for example, when employees receive an annual bonus of €6,000. Assuming this is customary, such a bonus could be designated as a final levy component under the WKR.
However, a new example in the Payroll Tax Handbook shows that the Tax and Customs Administration takes the view that, where a gross bonus of €6,000 is customary and that bonus resulted in a net payment of €3,000 to the employee, the latter amount is the decisive factor. According to the Tax and Customs Administration, it is therefore not customary to designate the gross bonus as a component subject to final levy, meaning that the employee receives this gross amount net within the WKR allowance (whether or not subject to 80% final levy).