If you already have assignees working in the Netherlands or, are proposing to send employees to work either offshore or onshore in the Netherlands you should be aware of potential additional employment tax costs. The additional taxes if not anticipated, can negate any expected profit margin on a project and so forward planning is critical.
If it is established that your employees (or sub-contractors) are liable to pay Dutch income tax on the earnings paid to them for their duties in the Netherlands, employers will have an obligation to set up a Dutch shadow payroll and to deduct Dutch wage tax from each employee. Operating a Dutch shadow payroll does not remove the obligation from running a UK payroll and so both will have to run in parallel.
Special payrolling arrangements must be agreed with both HMRC and the Dutch tax authorities in order to streamline the process and to deal with the requirement to deduct both Dutch tax and UK PAYE from the same earnings.
Employers should apply to HMRC for an Appendix 5 Net of Tax Credit Scheme. At the same time, permission should be sought from a Dutch tax inspector to operate a simplified Dutch payrolling arrangement.
There are various special Dutch payrolling arrangements. Different arrangements can be applied for depending on the employer’s exact situation. However, in practice these arrangements often come with stringent reporting requirements and are not always granted.
Although tax and National Insurance are two different matters, without A1 certificates in place to exempt employees from Dutch National Insurance, it is even more difficult to get a simplified payrolling arrangement agreed by the Dutch tax authorities. We recommend applying to HMRC for A1’s as soon as you know your employees are going to the Netherlands.
Provided the payroll arrangements are agreed in both the UK and the Netherlands, at the end of Dutch tax year (ending 31 December) an annual reconciliation of Dutch tax can be carried out. This means that the final/correct amount of Dutch income tax can be computed and then offset against UK PAYE. There then should also be no need for employees to file either Dutch or UK income tax returns (UK tax returns may be required for other reasons).
A critical consideration for UK employers, with employees working in the Netherlands is the high cost of Dutch tax. Dutch tax rates are progressive and they quickly rise to as much as 52%. Once these rates are reached, the Dutch tax can be higher than the UK income tax on the same income. Consensus must be reached between employer and employees as to who is going to meet any Dutch tax over and above the UK tax.
If the employee’s net pay is to be impacted by higher rates of Dutch tax, they are normally dissatisfied, however, with the correct conversation up front, this can be workable. If the employer chooses to meets the cost of Dutch income tax over the UK tax this can quickly prove to be expensive again negating the profitability of the project. Any foreign tax paid by an employer on behalf of an employee is treated as extra income by HM Revenue & Customs. The true cost of an employer meeting £100 of Dutch tax on behalf of an employee is on average about £250.
For advice and assistance if you are considering working in the Netherlands, or already have work there, please get in touch with Carol Sim (Carol.Sim@aab.uk) or Kris Walker (Kris.Walker@aab.uk) or your usual AAB contact.