Labour Cost Arrangement: update as per July 2014
On 3 July 2014, the Undersecretary of Finance informed the Lower House of Parliament of changes to improve the Labour Cost Arrangement (LCA). These measures will be included in the 2015 Tax plan which will be presented in the middle of September. The LCA will replace the current scheme of tax-free allowances. Based on the LCA, all allowances will be fully subject to wage tax. An exemption applies to all allowances within 1.5% (for 2014) of the total fiscal wage per employer. This is the so-called discretionary margin. As per January 2015, the discretionary margin will be reduced to 1.2%.
The Undersecretary of Finance is proposing to change the LCA with respect to:
- Limited introduction of necessity criterion
The necessity criterion will be introduced for tools, computers, mobile communication devices and similar equipment. Due to this amendment, problems will be solved regarding employees who need such equipment to exercise their employment (e.g. use of a tablet). Therefore it is no longer required to differentiate when providing telephones and a computer (diameter of screen exceeding 7 inches).
- Annual payment system
For the future, employers will only have to determine how much wage tax is due under the LCA (for remunerations provided) once per year. The final levy must be paid during the first period of the following calendar year.
- Group scheme
There will be a group scheme where the discretionary margin of the parent company and (sub-)subsidiary company/companies will be combined. In order to benefit from this, the parent company has to own at least 95% of the shares of the (sub-)subsidiary company/companies.
- Exemption for sector-specific products
There will be a targeted exemption for sector-specific products. The exemption will be similar to the present scheme for personnel discounts.
- Removal of distinction between items “made available”, “allowances” and “benefits”
Under the current LCA (applicable until the end of 2014) a differentiation is made between “to make available” and “to reimburse or to issue” . In his letter of 3 July 2014, the Undersecretary of Finance indicates that this differentiation will no longer be made for certain workplace-related provisions. We hope that these will at least include work clothing, telephones, computers, equipment and health and safety provisions.
Discretionary margin will decrease
In order to ensure budget neutral effect, the discretionary margin will decrease from 1.5% to 1.2% of the fiscal wage.
Limited preparation time
Karin Herman, wage tax specialist at Baker Tilly Berk: “As of 1 January 2015, the LCA will be the only option to pay amounts free of tax to the employees. The Undersecretary of Finance indicated that based on a consultation held, employers want clarity from when the LCA will be compulsory and that they are in favour of an introduction as per 1 January 2015. However, it is unfortunate that the Undersecretary of Finance has not yet published the proposed legislation, which will only be provided in the middle of September. Consequently employers will only have 3 months’ time to prepare.”
Including or excluding VAT
The fact that the LCA is based on amounts including VAT can be difficult, as companies record amounts in their administration excluding VAT. The Undersecretary of Finance does not consider it necessary to amend this. He indicates that in practice an agreement can be made with the tax inspectorate to apply an average VAT percentage.
Though the actual legislation regarding the LCA will only be presented in September, we advise you to start your LCA preparations as soon as possible. This will enable you to understand the effects of the LCA on your company. If you require help with this, your advisers within Baker Tilly Berk will be pleased to assist. Alternatively you can also contact our wage tax specialists: Karin Herman or Piet van Loon.
Find out more about the Work-related Expenses Scheme
Download the flyer with an explanation of the Labour Cost Arrangement and tips for the preparation.