Is it possible to apply targeted exemptions under the work-related expenses scheme (such as the 30% facility) without designation as a final levy component?
In order to apply targeted exemptions under the work-related expenses scheme (WKR), it is required that the employer designates the relevant payments and provisions as wages for final levy purposes. A recent amendment to the Payroll Taxes Manual raises the question of whether designation is still required in order to apply for a targeted exemption.
However, this seems to contrast with the much more formal approach of the courts and the state secretary, as recently evidenced by rulings from the Court of Appeal of 's-Hertogenbosch and the Court of Appeal of The Hague, as well as a report from the Petitions and Citizens' Initiatives Committee (the Committee). We will explain this below.
Payroll taxes manual
The Revenue Services Payroll Taxes Manual (Handboek Loonheffingen) describes the steps for applying targeted exemptions and the discretionary margin under the WKR. Designation of the relevant wage components as wages for final levy purposes is one of the requirements for application of an exemption. The employer generally has the choice of whether or not to designate a wage component as wages for final levy purposes. The designation must be evident from the administration.
However, it has been added in the July 2021 version of the Payroll Taxes Manual that if the employer meets the conditions and the limit amounts of the targeted exemptions, the Revenue Service will assume that the employer has designated these payments, provisions and disbursements as wages for final levy purposes. With this addition, the necessity of designation seems to have effectively disappeared with regard to the application of targeted exemptions.
Court of Appeal of 's-Hertogenbosch
In a ruling dated 10 June 2021, the Court of Appeal of 's-Hertogenbosch ruled that the exemption for extraterritorial costs (the 30% facility) cannot be applied due to the lack of designation of the payment as a final levy component.
It could be deduced from the settlement agreement between the employer and employee that the withholding of wage tax was based on a conscious choice of the employer, since the settlement agreement included the fact that the employer was of the opinion that the 30% facility could no longer be applied during the period of inactivity. Based on these circumstances, the Court of Appeal did not consider it plausible that the employer had designated the reimbursement for extraterritorial costs as a final levy component from that moment onwards. As the employer had not designated the salary as a final levy component, the court ruled that the exemption does not apply. This does not alter the fact that the tax inspector, at the joint request of the employee and employer, decided by order that the interested party was eligible for application of the 30% facility. The decision does not oblige the employer to designate the relevant wage component.
Court of Appeal of The Hague
In a ruling dated 30 June 2021, the Court of Appeal of The Hague also came to the conclusion that the 30% facility cannot be applied due to the lack of designation of the payment as a final levy component.
The court ruled that the employee had not made it plausible that the employer had designated the wage as a final levy component. According to the Court of Appeal, it was not sufficient that the employment contract with the employer included written agreements on the application of the 30% facility and that the employer also had a decision on the 30% facility. According to the Court of Appeal, the designation of a targeted exemption as a final levy component was only complete if it was taken into account when paying the wage and if it was processed as such on an individual level in the payroll administration. Only then did the nature and scope of the targeted exemption, the amount of the wage and the tax owed thereon become clear.
Petitions and Citizens' Initiatives Committee
This Committee recently ruled on a complaint concerning the rejection by the tax inspector of the request for an ex officio reduction in relation to the provision of meals to employees.
The applicants had included the meals in their individual wages in the payroll administration and therefore did not treat them as wages for final levy purposes. Under these circumstances, the state secretary does not consider it plausible that the applicants have designated the meals as final levy components. The state secretary also pointed out that, partly as a result of the evaluation of the functioning of the work-related expenses scheme, the Revenue Service has adopted a lenient attitude towards the obligation to designate in the case of a targeted exemption. Nevertheless, a formal line will be followed for the years 2014 through 2017. The Committee agrees with the state secretary's assessment.
The rulings of the Courts of Appeal of 's-Hertogenbosch and The Hague, as well as the conclusion of the Committee, are in line with previous case law and make the following clear.
- The designation as wages for final levy purposes remains essential to be able to apply an exemption from wage tax and must be explicitly recorded in the payroll administration in advance and per payment or provision. This applies, for example, to travel allowances, hotel costs and meals during business trips, study costs, outplacement, moving expenses, tools and communication devices such as mobile phones.
- With regard to the application of the 30% facility, the issuing of the decision for the application of the 30% facility by the Revenue Service cannot be seen as a designation as wages for final levy purposes.
In the Payroll Taxes Manual for 2021, the Revenue Service approves that, if the withholding agent meets the conditions and limit amounts (if applicable) for targeted exemptions, the Revenue Service fictitiously assumes that wages have been designated for final levy purposes. This can be a welcome tool in discussions with the Revenue Service regarding the application of targeted exemptions.
However, in view of the formal approach of the Courts of Appeal and the position of the state secretary (as followed by the Committee), our advice remains to carefully record the designation as wages for final levy purposes in the payroll administration when appropriate, in order to avoid ambiguity regarding the employer's choice on whether or not to designate.
We are happy to assist you in recording the designation of the 30% facility and other targeted exemptions. For the 30% facility it is customary to do this in an addendum to the employment contract. If you use our format for an addendum to the employment contract, the designation is properly regulated. In all other cases, we can help you with the assessment of the text of the addendum to the employment contract.