How to avoid the freelance tax risk in the Netherlands

The rapid rise in self-employment is transforming the world of work. According to the Dutch national statistics agency (CBS), some 3.1 million people are now working on flexible contracts or as freelancers in the Netherlands. That’s a significant increase from the 1.7 million registered freelancers in 2003.

This rise in short-term contracts and self-employment has pros and cons for both individuals and businesses. For example, self-employed people have tax advantages which employees don’t get. Many freelancers also value their flexibility and autonomy. They like the idea of being location independent and working from home, a local café or co-working space, maybe even a beach in Bali.

That sounds idyllic, but it isn’t the reality for everyone. Many contractors are actually working for just one client on a long contract of six months or more. And, they’re often working alongside company employees doing a similar job.

Expect a crack down on tax avoidance

This has led to concerns that some employers are forcing people into flexible contracts. That could undermine the Dutch social security system because fewer people are contributing pension and benefit premiums. But, there is another risk that is often overlooked by many employers and recruiters of freelancers, contractors, consultants and self-employed professionals.

Under Dutch law, the tax authorities can rule that an individual is not actually a self-employed sole trader but is in fact an employee. In this scenario, they can re-qualify the contract and levy additional payroll taxes on everyone in the chain. That can come as a huge financial shock to companies, recruitment agencies and contractors.

The rules on who qualifies as a sole trader are not always clear. But there are certain factors that increase the risk of a contractor being re-qualified as an employee. These include, contractors working for just one client, doing a similar job to the clients’ employees; and those with no liability or debt risk insurance and no evidence they are actively marketing their services to secure future work.

There is a significant risk of the tax authorities auditing companies or recruitment agencies who hire sole traders on this basis and deeming their contractors to be employees. The additional payroll tax can fall on the end client, the recruitment agency and the individual.

Another risk is that these rules are always subject to change. We are currently in a period of uncertainty, where many of our employment laws are likely to be updated to reflect changing work patterns. Sometimes ‘grandfather’ clauses apply where existing arrangements are exempt from new laws – but that doesn’t always happen.

How to avoid the freelance tax risk

The easiest and most popular way employers and recruitment agencies avoid this risk is by using an Employer of Record (EOR) service. Effectively, the EOR is the legal employer of the contractor and manages all payroll and deductions. That way, you enjoy the benefits of employing key people on a flexible basis but without the risk of finding yourself on the wrong side of the Dutch employment laws. Additionally, your contractors gain the security of benefits for unemployment, long-term sickness and disability.

If you’re hiring or recruiting members of this growing army of self-employed freelancers and contractors, it’s important to do so with your eyes wide open. Assessing whether someone will be deemed employed or self-employed by the tax authorities is not always straightforward. Remember, the rules are subject to change and the tax liability can fall not just on the contractor but also the hiring client and recruitment agency.

If you need the flexibility of contract workers but don’t want the risk and hassle of complying with ever-changing interpretations of employment legislation, think about using an EOR service. We are always happy to advise employers and recruitment agencies on the best options for their Dutch employment contracts. If you have any questions, please get in touch.