Know what you can and cannot reimburse
On the one hand, providing your employees with a fixed monthly allowance for expenses (‘vaste kostenvergoeding’ in Dutch) will spare you a lot of administrative work; but on the other hand, these fixed allowances can only be provided untaxed if various conditions are met. Especially the reimbursement of intermediate costs and expenses on tax-exempt provisions is subject to a number of conditions.
The declaration of small and frequently recurring expenses causes a lot of administrative work. This is one of the reasons employers opt to pay their employees a fixed monthly allowance to cover expenses. Such a fixed monthly allowance can be exempted from taxation, but under which conditions?
- The allowance is declared as part of an employee’s wages subject to a final levy (‘eindheffingsloon’ in Dutch).
- You have drawn up a specification of the nature and size of the expenses covered by the allowance, which is kept in your administration.
- You have looked into the actual expenses made, which can be done through sampling.
Does the allowance also partly cover intermediate costs, such as a company car? Only if you have a specification of the nature and size of the allowance and you have looked into the actual expenses made, is the allowance provided to cover these expenses exempt from taxation.
Before paying out, it is necessary for you to specify the nature and expected size of the expenses per ‘kostencategorie’ (expense category). This way, you will have a clear picture of which expenses are supposed to be covered by the fixed allowance and which expenses can be reimbursed tax free in addition to the allowance. If the specification is not drawn up beforehand, the law states that the allowance must be declared as part of an employee’s wages. Only specifying the nature and expected size of the expenses covered by the allowance is not enough. The ‘Belastingwet’ (Dutch Tax Code) requires you to also ‘prove’ the amount of allowance by examining the actual expenses made (at random moments) by your employees. During such an examination, the employees must keep track of all their work-related expenses during a specific period of time.
If one or more group(s) of employees have comparable work-related expenses, the examination may take place among a representative number of employees. During the examination, they will then keep possession of all receipts showing their work-related expenses. It is important that the expenses made by these employees corresponds to the expected expenses. After the examination, you will therefore check if the employee’s expenses actual correspond to the expected expenses drawn up in the specification. The ‘Belastingdienst’ (Dutch Revenue Service) sets as a minimum requirement that an examination is held over a period of at least three months and among a representative group of employees. The law says nothing about how long ago the examination could have taken place. But if details and circumstances change, a new examination must take place. Often, an inspector agrees with the employer to have an examination into work-related expenses by employees once every five years.
Keep an eye on payments with a company-owned credit card
It follows logically that a tax-free fixed periodic allowance can only be provided for work-related expenses. Private expenses cannot be reimbursed tax free.
Make sure to check that the expenses covered by the fixed allowance are not reimbursed again through a declaration or have been paid for by a company-owned credit card. In practice, the ‘Belastingdienst’ (Dutch Revenue Service) pays a lot of attention to the declarations by employees who also receive a fixed monthly allowance. If mistakes are made, the Revenue Service will regard the allowance as taxable wages, which could result in an additional tax due, a financial penalty and tax collection costs. Because declarations and payments by credit cards are often processed by the financial department, it is important that the employees working in finance and payroll administration work together and communicate.
Working from home
Now that employees (more often) work from home, many employers are unsure what to do with a fixed monthly allowance. Suspending payments may lead to a discussion with employees, because the allowance can be considered a condition of employment. And the latter cannot be changed unilaterally. Fortunately, state secretary Vijlbrief of the Ministry of Finance approved a regulation for 2020 that the details (i.e. nature and size of expenses) on which a(n) reimbursement/allowance is based are still valid. This means a fixed allowance to cover commuting expenses can still be provided tax free, even if your employees have been working from home for the last couple of months. The only condition applicable is that the employee was entitled to the allowance before March 12, 2020. But be careful! On January 1, 2021, the approved regulation for 2020 will expire. This means that the allowance to cover travel expenses provided to employees working from home will no longer be exempt from taxation by rule. However, you can still charged the allowance to the ‘vrije ruimte’ (the scope of tax-free aggregated personnel costs).
In many instances, the details on which the allowance was based have changed due to circumstances. You must therefore check whether or not these details are still adequate for 2021 and if the costs examination is still representative.
The fixed travel expenses allowance for commuting in 2020 and 2021
The rules applicable to the fixed travel expenses allowance (‘vaste reiskostenvergoeding’ in Dutch) in 2020 state that the days an employee is working from home count as days on which (s)he commuted to work. This means that you can continue to pay your employees a tax-free, fixed allowance for commuting expenses for the remainder of 2020.
The only conditions which applies is that the employee who continues to receive the fixed travel expenses allowance was unconditionally entitled to such an allowance on or before March 12, 2020. This will probably be the case if the allowance is paid periodically. But if your organization makes use of a so-called ‘cafetariamodel’, where your employees can choose whether they want to exchange a part of their taxable wages – like an end-of-year bonus – for a higher tax-free travel expenses allowance, the employee must have informed you of his choice on or before March 12, 2020. In case it is commonplace in your organization for employees to wait until November to choose whether or not they want to exchange a part of their taxable wages for a higher tax-free travel expenses allowance, then only the part of the allowance covering the days on which an employee actually traveled (i.e. commuted) is tax-free.
Actual commuting habits
The rules for 2020 expire as of January 1, 2021. This means that you must get to work to map out the actual commuting habits of your employees and check whether the total number of days an employee commutes to work meets the minimum requirement of 36 weeks or 128 day, in which case the employee may still receive a tax-free, fixed travel expenses allowance. If not, there is always the option to reimburse the actual travel expenses incurred by a commuting employee. Such reimbursement is also tax-free.
The increase in videoconferencing means that your clients no longer need to travel to your office for a visit, which also means fewer commuting expenses that need reimbursement. Yet, the money saved here may be spent again on employees demanding a financial compensation for costs incurred by working from home. According to NIBUD (the Netherlands National Institute for Budgetary Advice), employees working from home spend an extra € 2 per day on coffee, electricity, heating and toilet paper. And these costs are not tax-exempt. You can choose to reimburse these costs tax free without the need for an examination of the actual costs incurred, but this means the reimbursement(s) provided must be charged to your own ‘vrije ruimte’. Often, employers also want to reimburse the acquisition of work-related items, such as an office desk, chair and desk lamp. After all, the home office also falls under the responsibility of the employer. Remember that this reimbursement cannot be in the form of a periodic allowance, as it is uncertain (and unlikely) the employee will buy a new office desk, chair and/or desk lamp each period. However, upon providing a receipt, it is possible to reimburse the employee for work-related expenses for their home office in instalments over a specific period.
The costs for internet at home are regarded as ‘computer-related matters’ and are a necessary provision. Make sure to inform your employees that you consider it necessary they have internet access at home and what minimum requirements you set for the subscription. When reimbursing these costs, you have to base the reimbursement on the actual costs incurred. So check in advance with a number of providers what they charge for an internet subscription.
COVID-19 and working from home affect the commuting habits and expenses of your employees, which means you must get to work. Because the approved regulation for the reimbursement of expenses will expire in 2021, you must now look into the actual expenses incurred by employees to check whether or not the details on which the reimbursement/allowance is based are still accurate. The same applies to a fixed allowance for travel expenses.
Dirk van Leeuwerden, ADP Nederland B.V., chairman for a day and speaker at the ‘Regionale Salarisdagen 2020’ (original article is in Dutch).