Measures for entrepreneurs - 2021 Tax Plan

28 september 2020 | Door:  Matthijs van Dorssen

The government will lower the difference in taxation between employees and self-employed people. The allowance for self-employed people will be lowered, the tax credit for working will be higher. The small scale tax credit will be adjusted and for some Corona related measurements a tax exemption is announced.

Gradual reduction in self-employed person’s allowance

The self-employed person’s allowance is being reduced further. This will be compensated for by an increase in the employed person’s tax credit and a cut in income tax.

In 2021 the maximum self-employed person’s allowance will be € 6,670 (2020: € 7,030). From 2021 onwards this allowance will be reduced more quickly than had been announced in the 2020 Tax Plan. It will be lowered in eight steps of € 360, one step of € 390 and eight steps of € 110 to ultimately stand at € 3,240 in 2036.

The self-employed person’s allowance is an amount that entrepreneurs can deduct from their profit for income tax purposes, provided that they have worked as an entrepreneur for at least 1,225 hours in a calendar year and have dedicated 50% of their working time to the business. It reduces the amount on which you have to pay income tax. This means that, on balance, you need to pay over less income tax to the Tax and Customs Administration.

Clarification of method used to calculate small-scale investment tax credit (KIA)

The small-scale investment tax credit (KIA or investment tax credit) is intended to promote investments that are relatively small in scale. The level of the investment tax credit depends on the annual investment amount. Since 2010 this tax credit has not always been a percentage of the investment amount; a fixed ceiling has applied for some investment amounts. At present, the text of the Act incorporating the investment tax credit does not make sufficiently clear how it should be calculated in the case of a business that is run by means of a collaborative arrangement, such as a partnership or general partnership.

This lack of clarity resulted in legal proceedings, in which the Supreme Court ultimately delivered a ruling. The Supreme Court ruled that, first of all, the amount of the investment tax credit must be calculated on the basis of the total amount of the investments. The entrepreneur is then entitled to a share of this investment tax credit in proportion to his/her share in the total investment amount.

However, the Supreme Court highlighted one exception to this calculation method. If the investment tax credit calculated on the basis of the total amount of the investments equals the fixed ceiling, the entrepreneur is entitled to this maximum amount. In such a case, therefore, there is no pro-rata recalculation of the investment tax credit. The government considers this to be undesirable and is changing the investment tax credit in such a way that the pro-rata recalculation will still take place. This is worked out in figures in the example below.

An entrepreneur belongs to a general partnership and is entitled to 50% of the surplus profit. He also has non-partnership assets. Over the course of a year the general partnership invested € 40,000. The entrepreneur therefore invested € 20,000 (50% of € 40,000) in the business. In addition, the entrepreneur invested € 60,000 in his non-partnership assets. The total investment amount is therefore € 100,000. The fixed ceiling of € 16,307 of investment tax credit applies. According to the Supreme Court’s ruling, the entrepreneur would be able to claim this amount in the form of investment tax credit. On the basis of the proposed change to the law, this amount will be recalculated as follows: (50% x € 40,000 + € 60,000) / € 100,000 x € 16,307 = € 13,046

Lastly, the legislator has made clear that – contrary to the Supreme Court’s view – the investment tax credit must be calculated per business and not per entrepreneur. This has consequences for an entrepreneur who runs more than one business. In figures, the proposed change to the law works out as follows:

An entrepreneur runs two businesses: a bicycle shop and a horse riding centre. Over the course of a year he invests € 40,000 in both businesses, resulting in a total investment amount of € 80,000. In this case, in the Supreme Court’s view, the investment tax credit would amount to the set ceiling of € 16,307. According to the legislator, the investment tax credit has to be determined per business. The investment tax credit per business is 28% x € 40,000 = € 11,200. In total, the entrepreneur can therefore claim 2 x € 11,200 = € 22,400 in the form of investment tax credit.

Exemption from profit of compensation received under TOGS and TVL schemes

Until 15 June 2020 entrepreneurs in certain sectors who suffered losses as a result of coronavirus measures were able to make a claim under the Contribution for Entrepreneurs in Sectors Affected by COVID-19 scheme (TOGS or € 4,000 scheme). This scheme was succeeded by the Reimbursement of Fixed Costs for SMEs Affected by COVID-19 scheme (TVL).

In principle, the compensation received on the basis of these schemes is part of the company’s profit. This is not a desirable situation. For this reason an earlier decision stipulated that such compensation will not be regarded as profit and this is now being laid down in a legislative proposal.

Tax treatment of bonuses paid under COVID-19 Bonus for Healthcare Professionals Subsidy Scheme

Healthcare institutions can award employees and non-employees (e.g. self-employed persons and external cleaning staff who are hired in) a tax-free bonus of € 1,000.

The healthcare institutions must include this bonus in the fixed budget under the work-related expenses scheme and it is regarded as a final-levy component. As a result, no tax is levied on the employee and the payment is made net. This also means that the bonus does not reduce the employee’s entitlement to allowances.

In the case of non-employees, however, this approach was not possible. Consequently, under the Tax Plan this option has now been made available to non-employees too. The final-levy rate has been set at 75%. This is the same rate applicable to benefits in kind with a value of more than € 136 granted to non-employees. 

The healthcare institution can submit an application for the bonus to the Minister of Health, Welfare and Sport. The bonus, including the final levy payable, will then be refunded to the healthcare institution.