Year-End Tips 2021: 6 Tips for Business Owners subject to income tax rules
1. Wait until 2022 before paying a co-working partner
If your partner has worked at least 525 hours in your company this year and you would like to start compensating him or her for their work, then it may be more advantageous to do so only from 2022. That way you can still use the co-working partner’s tax deduction this year.
The co-working partner’s tax deduction is a facility by which a fixed percentage, ranging from 1.25% up to a maximum of 4%, can be deducted from the profits if your partner works with you in your business. If the co-working partner’s tax deduction is applied your co-working partner will not be taxed independently. You can apply the co-working partner’s tax deduction if as a business owner you make a profit, you meet the hours criterion and your partner has worked in your business for at least 525 hours in the calendar year without receiving any remuneration for that, which can then be deducted from your profit. The co-working partner’s tax deduction will generally be more advantageous where the remuneration is more modest.
The small projects investment credit (KIA) is intended as a tax incentive to encourage business owners to invest. A business owner who invests more than €2,400 in business assets receives a tax credit of 28% of the investment amount up to a maximum of €16,568. For investments in excess of €109,574 the credit is gradually reduced, with no further deduction given for investments of more than €328,721.
Business owners who run their business in the form of a firm or partnership need to be aware that for the KIA the total investment by the firm or partnership in the year is what counts, and not the investment per partner. This does not require that the firm or partnership must have had the same partners throughout the year. If a partner co-invests in the firm and in that same year invests in non-company business premises, for example, the KIA will be based on the total investment amount. This soon leads to a lower KIA on the share of the investments in the firm and on the investments in non-company or non-partnership assets. In which event it would be better to avoid such a combination of investments in the firm and in your non-company or non-partnership assets in the same year. Spreading such investments will result in more KIA tax credit.
3. Start on re-investment before 2022
Did you sell an asset in 2018 with a book profit and then transfer this profit to a re-investment reserve (HIR)? In connection with the re-investment period of three calendar years you must make sure that you use this reserve before 1 January 2022. If the HIR could be released as a result of the pandemic situation, a request may be submitted to extend the three year period. However, you need to make a start on the re-investment process for this. It would be wise to set out the investment intention in a written document.
4. Switch to a B.V.?
Business owners operating as a sole trader or proprietor should actually ask themselves every year whether it would be worthwhile to convert their business into a private limited company (B.V.). Because the difference between a B.V. and a sole proprietorship in terms of the tax burden is becoming increasingly wider. The corporation tax payable on the first €245,000 profit in the B.V. amounts to 15% in 2021 and in 2022 it will be 15% on the first €395,000 profit. In the case of a sole proprietorship subject to income tax, a similar profit would be taxed in all tax bands. To start with a levy in the first band of 37.10% (37.07% in 2022) rising to 49.5%. That difference compared to corporation tax cannot be compensated for with tax facilities, such as the SME profit exemption and the self-employed person’s deduction. For example, from 1 January 2022 the maximum deduction rate for these tax facilities (box 1) will be reduced from 43% to 40%. Added to which the self-employed person’s deduction in 2022 will be only €6,310.
Our advice would be to check what would be more advantageous from a tax point of view (or have that checked). Certainly if you expect to see good profits in the coming years. Plus a B.V. offers more flexibility in tax matters.
5. Small businesses scheme (KOR)
As a business owner/natural person you can apply the small businesses scheme (KOR) for VAT purposes. The benefit of this is that you no longer have to charge VAT to your customers. You also do not have to make any VAT returns. The decision to apply the KOR scheme applies for a minimum of three years, or until a threshold of €20,000 turnover is passed. Please note, however, that if you apply this scheme then you can no longer reclaim the VAT on expenses (input tax). The KOR scheme is related to turnover. B.V.s, foundations (stichtingen) and societies can also all make use of the KOR!
To be eligible for the KOR scheme the following conditions must be met:
- You must be a business owner for VAT purposes;
- You must be based in the Netherlands as a business owner; and
- Your turnover is no more than €20,000 per calendar year.
Not all the turnover counts towards this threshold however (see the tool on the website of the Tax and Customs Administration for further details). If you wish to make use of the KOR, you must apply with the tax authorities.
6. Provisional assessment
At the end of last year you probably received a provisional assessment for income tax for 2021. The amount of the assessment is based on assessments from previous years and information known to the Tax and Customs Administration. If your situation changes during the year, it is wise to have your provisional assessment revised. If you are threatened with a loss in 2021 you can prevent liquidity ebbing away by setting the provisional assessment for 2021 at zero. Added to which, when you submit your income tax return for 2021, you can make a written request for a provisional loss setoff. The tax authorities will then grant a provisional loss setoff by issuing a decision. You can setoff up to 80% of the reported loss. The full setoff takes place later when an income tax assessment is issued.